The Right Coast

Editor: Thomas A. Smith
University of San Diego
School of Law

Saturday, November 4, 2006

Marshall Field's--The Moment of Truth?
Gail Heriot

Last summer, on a telephone conference, Federated Department Store's CFO reportedly urged anxious retail analysts to "wait until September" to evaluate Macy's strategy to convert eighty profitable Marshall Field's stores (and more than 300 other profitable regional department stores across the country)  into Macy's.  Despite the protests over Marshall Field's, shoppers really don't care about these things--or so he argued.  Well, it's November now ...

For the past few weeks I've been hearing rumors that sales have dropped precipitously since the September 9th conversion.  I've heard that sales have dropped 30% from several sources, and I've heard they've dropped 36%.  And yes, some of these rumors have come from people within Federated.  But I have no idea if the rumors are true.  As far as I can see 30% would be catastrophic, so it's a little hard to believe.   

On Thursday, however, Federated had its first opportunity to quell the rumors.  And they conspicuously failed to do so.  As a result, Federated's stock has fallen by about 10% in the last few days.  Put differently, the Federated empire lost about $2 billion dollars worth of value in a week.  Poof! That's about the value of Marshall Field's, which accounts for roughly 10% of Federated's stores. 

Despite the upbeat headline of its press release, "Federated's Same-Store Sales Up 7.7% in October," the document was thinly-disguised bad news for Federated. First, the headline is deliberately misleading. If one reads down six paragraphs, one learns that the 7.7% same-store increase applies only to what Federated calls "legacy Macy's and Bloomingdale's (those operating as Macy's or Bloomingdale's prior to September 2006)." For reasons it did not disclose, Federated declined to say how the 400 or so recently converted stores (including Marshall Field's, Hecht's, Famous-Barr, Robinsons-May, Foley's and others) are doing except to mention that sales "lag."

But there are hints in the rest of the press release that suggest that the decline for Marshall Field's may indeed be large--perhaps even as catastrophic as the "36%" rumors. If so, this would explain Federated's otherwise baffling decision to withhold the information that everyone had been waiting for. It seems that the CFO's statement that retail analysts should "wait until September" to judge Federated's strategy is ... uh ... inoperative ... to put it delicately

Early on in the press release, Federated admits that its total sales for October 2006 are down 7.9% from the same period last year. It claims, however, sales have been "impacted by the closing of 78 duplicative store locations over the past year."

Let's think about that. Federated says it operates a little more than 850 stores today. Last October, then, when it was operating Marshall Field's and the other recent converts under their original names, it must have been operating a little more than 928 stores. By closing down 78 stores, it was closing down around 8.4% of its stores.

I can't be certain of the average size of the closed stores, but it would surprise me if they were larger than average stores. More likely they were average or smaller than average. If so, it looks like sales from October 2005 to October 2006 (including both old and recently-converted stores) were basically a wash. The number of stores went down by a little over 8% and sales went down by a little under 8%. In other words, sales pretty much stood still.

But we know that same store sales at the old Macy's and Bloomingdales went up by 7.7%. If overall sales nevertheless stood still, that means that sales at the recent converts must have gone down by a comparable amount. Since there are more old Macy's and Bloomingdale's than there are recently converted ones, assuming the average store size in both categories is about the same, same store sales at the recent converts must have declined by even more than 7.7%.

Given the media blitz that cities like Houston, St. Louis, Washington, Los Angeles, San Diego, Minneapolis, Detroit, and other "convert" cities have been exposed to over the last couple of months, it's remarkable to think that Macy's sales at its recent converts may have nevertheless taken more than a 7.7% nosedive. If true, it doesn't bode well for Federated's grand Macy-fication project.

But I suspect that the losses are not uniform across the country. I live in Southern California, and I liked the old Robinsons-May stores here just fine. They were, however, mid-tier stores that don't really stir the same kind of loyalty that Marshall Field's continues to stir. I'd be surprised if sales are down here. I'm originally from Washington, D.C., where Hecht's was once considered the third best department store in town. I'd be surprised if many Washingtonians are boycotting Macy's, even if they are sad about the loss of Hecht's. 

Marshall Field's is differentWeb sites have popped up in its defense.  Petitions have drawn 60,000 names.  A song has been written in its honor.  Hundreds of people showed up to protest the conversion. 

Marshall Field's stores made up about 20% of the newly converted Macy's stores. If these stores averaged more than a 7.7% decrease in sales, Marshall Field's may well have suffered catastrophic declines in sales (perhaps even along the lines of 36%) and those declines are being averaged in with more modest declines (or even increases)in other recently converted stores. The rumors are consistent with the evidence (although they are by no means proven). 

What seems likely is that things are not looking good, since if Federated had something positive to say, it almost certainly would have said it. I hope that we'll be getting full disclousure from Federated soon. 

Or maybe we'll just be told that we should reserve judgment again ....

Addendum:  Even the 7.7% same store increase from October '05 to October '06 at the "legacy" Macy's and Bloomingdale's isn't great news.  Nordstrom (10.7%), Saks (9.2%) and J.C. Penney's (8.1%)all did better.  These gains may (or may not) be a result of shoppers who declined to patronize the newly converted Macy's stores and hence migrated to other stores.

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Gail Heriot
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Comments

We weren't thrilled here in Columbus when they took down the Lazarus sign and replaced it with Macy's. I know nothing about how it is doing since the conversion--the one closest to me had been stumbling for some time before the conversion.

Posted by: Norma | Nov 5, 2006 2:50:54 PM