Starry Holiday Key to Macy's Turnaround

Posted November 8, 2007
Updated November 11, 2007

— Macy's Inc. is turning to star power this holiday season to fight disappointing sales and resistance to its takeover of local department stores.

Macy's launched star-packed ads featuring celebrities such as Donald Trump and R&B singer Usher, made changes in merchandise including exclusive alliances with well-known designer brands and returned to more promotions at some locations.

The changes are meant to drive traffic and win over shoppers in some markets where the Macy's name replaced local favorites it absorbed as part of its acquisition of the May Department Stores Co. in 2005.

"They've started in the right direction," Wendy Liebmann, president of WSL Strategic Retail, said. "Now they have to deliver on the new message and the quality of their merchandise."

Macy's says its exclusive home furnishings collection by domestic entrepreneur Martha Stewart that debuted in September is off to a good start.

"There will be more Martha Stewart product in the stores for the holiday, and we're optimistic about it," Macy's spokesman Jim Sluzewski said.

Macy's recently announced deal to be the exclusive department store retailer for the Tommy Hilfiger U.S.A brand of men's and women's sportswear in the United States won't begin until fall 2008, but the designer appears in current TV ads.

"The plan is to draw more customers with exclusive alliances and then sell them their private labels as well," said Patricia Edwards, managing director and a retail analyst with Wentworth, Hauser and Violich.

Analysts say that while impending holiday sales aren't a make-or-break situation, they need to show progress. That may be a tall order in view of a slumping housing market and consumer worries over jobs and tight credit. The National Retail Federation is predicting the slowest growth rate for holiday sales in five years.

Speculation about Macy's as a takeover target began in June and has resurfaced a few times, with analysts not ruling it out.

"If Christmas is very disappointing and the stock price goes down, then they may become more vulnerable to takeover efforts," Michael C. Appel, managing director of Quest Turnaround Advisors LLC., said.

The Cincinnati-based retailer attributed a 77 percent drop in its second-quarter earnings to continuing costs from the $11 billion acquisition of the May Co. in 2005 and lower sales. Macy's said Thursday that same-store sales were down 1.5 percent in October - worse than the 0.6 estimate from analysts.

The retailer is slated to report third-quarter earnings Wednesday. Analysts surveyed by Thomson Financial are looking for earnings of 8 cents per share, after a loss due to the costs of the May acquisition on the same quarter of last year.

Former May customers haven't responded as well as hoped to the September 2006 re-branding. A year after Marshall Field's and other May stores officially converted to the Macy's nameplate, dozens of protesters gathered outside the Chicago store carrying "Macy's Go Home" signs and urging a shopper boycott.

Marshall Field's fan Jim McKay, who has led protests, said many shoppers have been dissatisfied.

"The quality of merchandise is less quality but they're still charging the same prices," McKay said. "They feel like there's less service, and less enthusiasm among the staff."

But one shopper is warming up to Macy's.

"I think initially, Macy's had a problem with some of the quality of the clothes," Rich Lauwers, from the Chicago suburb of Evanston, said. "But they have really stepped up, so I'm coming back."

Lord & Taylor, a division Macy's sold last year for $1.08 billion to NRDC Equity Partners, said it picked up market share in some cities in the fall of 2006 when Macy's transformed the former May stores. Lord & Taylor sales in Boston were up 30 percent, and sales in Washington, D.C., were up 24 percent last fall, Lord & Taylor President and CEO Jane Elfers said.

Macy's CEO Terry Lundgren has acknowledged that the rate of some changes should have been slower.

"I think we threw a lot of change on the May company stores very quickly," Lundgren, also president and chairman, said.

Macy's has returned to providing more coupons at some former May locations, consistent with last Christmas' levels, and is fine-tuning merchandise assortments.

Macy's holiday performance will be watched closely this season, even if holiday sales are down throughout the industry, said Dan Hess, chief executive of Merchant Forecast, a New York City-based research firm.

"If everyone else is doing poorly, they need to do less poorly," he said.

Macy's competition is broad-based, from discount chains like Target Corp. to moderate-priced retailers like J.C. Penney Co. and luxury retailers like Nordstrom Inc., depending on merchandise categories.

Competitors also are increasingly turning to private-label brands and exclusive designer lines. Kohl's Corp. has introduced a successful exclusive line of apparel and home furnishings from designer Vera Wang. Penney's will offer an exclusive clothing and home-accessories line from Polo Ralph Lauren Corp.

Macy's also is counting on holiday versions of the ads that debuted this fall to lure customers. Celebrities including singer Jessica Simpson and music producer and rapper Sean "Diddy" Combs add their star power and brands, often poking fun at their public images.

"I love the new ads, and I can tell you that everyone who is doing well is focusing on brand, brand image and branded products," Edwards, the retail analyst, said. "Previously, Macy's ads were about price. Now they are appealing to people who want Martha Stewart cookware or Usher fragrance."

Macy's first national advertising campaign in September 2006 didn't draw rave reviews.

"It was all about geography, showing Macy's was everywhere," Liebmann said. "It didn't answer why shoppers should walk in the door. This one does."

Retail analysts think Macy's will have at least another year to show whether management's strategies are working but note that this is the second holiday season under the national brand.

"Certainly Wall Street, not to mention shoppers, are looking for something special out of Macy's this season," Liebmann said.


AP business writer Ashley Heher in Chicago contributed to this report.


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