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May-day: Federated becomes the last Department Store standing


"[This Space intentionally, respectfully, left blank]"


The center of the department store universe is now, unquestionably, Cincinnati Ohio.

Not to diss the birthplace of Charlie Hustle and WKRP's famed "Turkey Drop" and "Dancing Chickens" promotions but there was a time, not very long ago, that Cincinnati would have seemed a strange hub for department stores. The hubris of thinking that residents of Ohio could possibly keep apace of the fashion trends would have come under attack with today's news. The thought would have been that Marshall Field's or the old Saks (SKS... now based in Alabama) would be able to use their more urban(e) base of operations to capture the fashion-first lead in department stores.

But retail ages in dog years (7 retail years for every one on the calendar). In that sense the days of NYC as the center of fashion in terms of what you actually see in stores is long, long gone. A relic from days before before Saks got rolled into Proffitt's... before Macy*s went Chapter 11 and was swallowed... even before Fields got absorbed into Dayton Hudson (now Target (TGT)). Those were heady days before web shopping and endless specialty chains reduced department stores to lurching dinosaurs with few justifications for ongoing existence, let alone a trend-setting dictum.

Those days are gone. Today the department stores seem suited to Cincinnati the way the Big Two automakers fit in Detroit. The question isn't so much one of a competitive vacuum being created by the merger (nor, despite the mumblings, an anti-trust issue) but rather one of why, exactly, anyone anywhere would pay $11B for a department store chain ($17B, counting debt).

Who wins and who loses? Let's run through the players for the knee-jerk reactions:

* Federated (FD): Well... they've got their long-sought national footprint and vendor power (to the extent such a thing matters in the world of Wal-Mart (WMT)). Now what? Remember that May (MAY) is still in the process of digesting the 30-odd stores they picked up from Target in the Marshall Fields deal last fall. Federated, having more than doubled their top-line and taken on $6-Billion in debt is stuffed to the gills with redundant stores and personnel.

Though not levered to the extent that led to the bankruptcies of the 90's, the idea of taking on this much debt for the rights to a no-growth, low margin group of stores puts a monster amount of "show-me" pressure on CEO Terry Lundgren and his crew. Sure, the debt is cheap and the efficiencies of going national are real but the longer-term trends for department stores are harrowing and there is little evidence to suggest that Federated has found "the answer" to that problem just yet.

With this deal having been part of the rumor-mill for months, the Street has had plenty of time to digest the idea and seems generally accepting. For whatever my opinion may be worth, I think there's more risk in this thing than is reflected in the conventional wisdom (as I read it so far). Federated has run out of chains to roll-up and, as of this morning, are reliant on improving operations fast to protect the stock... I wouldn't stick around to see if they can do it, had I a position in the name.


* Nordstrom (JWN): The stock isn't cheap, by industry standards (19x EPS, 1x sales) but Nordies has been quietly improving their operations even while the industry tanks. Much of that improvement has been created by the fumblings of the groups who have been part of the merger madness in retail. For my money, Nordstrom is one of the clear winners in this deal... they'd be the big winner if not for:

* Target (TGT): At an AG Edwards meeting last week Target mentioned limiting their stock buyback in the interest of keeping cash available for real estate opportunities.

What does that mean for a chain with 1,000-odd free standing stores all over the country? It means an expansion of their multi-level Target stores, filling the spaces vacated by failed department stores. Target has 100 such stores already and is looking for more.

With an overlap in over 90 cities and 20 states created by the May / Federated merger, look for Target to be in the market for a few of the locations on deck for "rationalization". This sets up Target for a chance to get nice discounts on some of the department store sites they just sold to May at a premium, let alone other choice sites.

For a chain running into their own growth wall on their traditional locations, this is a possibility with much appeal.

Losers (Via the Mighty Herb!):

In the "Clear Losers" department we have Finlay (FNLY) jewelers. I shoulda woulda coulda sussed this one out in real time. Since I didn't, all due credit, and the link of explanation, goes to Herb and his source, Shawn "Bet-you-wish-you-woulda-gone-my-way" Kravitz.

Same-Store-Sales are on deck for Thursday.

Collins and I will be furiously plugging away at our ever-improving Retail-Details spread sheet.

Without offering advice, I can tell ya'll that I'm sticking with my stance of playing the names with low expectations, as opposed to the chains that have been "on-fire" of late. Give me Hot Topic (HOTT) over Abercrombie (ANF), but don't give me a ton of either.

I'm not loving them generally but, if where I feel I "must" play, that's the M.O.

Dream-Crushing Business travel

"Home by Friday". That was the dream. It was a modest dream. A dream fitting the end of the week in that it should have been easily achieved and launched a fine and full weekend.

Sadly, the uncontrollable hand of fate was having none of it. Not only did I not catch the Dream Fulfillment Express but, through the cruel genius of the site-lines at Kansas City International, I was actually able to watch the last non-stop back to the Bay Area pull out, sans-Macke, as I stood trying to hide my rich-stew of rage from the security person "wanding" me at that very moment.

The extra night spent singing "Cats in the Cradle" to myself at the MCI Marriott (MAR) (it was either that or fly back to SF via Atlanta... I will not go backwards by timezones as a function of "connections"... it's a personal rule) gave me plenty of time to find the lesson of my experience. Because I'm a sharing sharer who enjoys sharing, I pass the lesson along freely here:

Never... EVER... mock airport security. Not even gently. Not even in a Critter Caption.

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Position in HOTT

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