Federated Department Stores Inc.

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Federated Department Stores Inc.

7 West 7th Street
Cincinnati, Ohio 45202
U.S.A.
(513) 579-7000
Fax: (513) 579-7185

Public Company
Incorporated: 1929
Employees: 56,421
Sales: $7.08 billion
Stock Exchanges: New York
SICs: 5311 Department Stores

Federated Department Stores, Inc. is one of America’s largest operators of premier retail chains, with over 220 department stores in 26 states. Retail divisions in the group include: Abraham & Straus/Jordan Marsh, Bloomingdale’s, The Bon Marche, Burdines, Lazarus, Rich’s/Goldsmith’s, and Stern’s. The current combination of stores was formed in the late 1980s, when Federated Department Stores, Inc. and Allied Stores Corporation were acquired and merged by the Campeau Corporation. The heavily leveraged merger caused the new group to file for Chapter 11 bankruptcy in 1990. The reorganized Federated Department Stores, Inc. emerged from bankruptcy in February 1992.

Federated Department Stores, Inc. was organized in Columbus, Ohio, in 1929 as a holding company for founding members F&R Lazarus & Company, its subsidiary Shillito’s, and Abraham & Straus department stores. The Federated group was formed and led by Fred Lazarus, Jr., whose namesake company was the dominant retail store in Columbus. F&R Lazarus was created by Fred’s grandfather, Simon. The elder Lazarus, a Jewish refugee of religious persecution in Germany, founded the men’s clothing store in 1851. Shillito’s, a Cincinnati-based store acquired by F&R Lazarus in 1928, was founded in 1830. While Shillito’s was the oldest store west of the Allegheny Mountains, it ranked only fourth among Cincinnati stores by the time it was purchased by Lazarus. Within a year under the management of the Lazarus family, Shillito’s sales grew by over 50 percent, and within a decade, the store had regained the top spot in its urban market. The other founding member of Federated, Abraham & Straus (A&S), was founded in 1865 in Brooklyn, New York. It would grow to become the group’s sales and profits leader by the mid-twentieth century.

Bloomingdale’s joined the Federated group in 1930, a year after Federated was organized. This revered name in retail had been founded in 1872 by Lyman and Joseph Bloomingdale on New York’s east side. Although the brothers had chosen an area of the city that was underdeveloped at the time, Bloomingdale’s reputation for carrying unique merchandise brought more and more patrons to the store. The department store carried European imports as early as 1886 and quickly became a leader in home furnishings.

During the 1930s, Fred Lazarus, Jr. earned a reputation for innovation that made his family “the first name in retail,” according to a 1961 Forbes article. In the late 1920s, “Mr. Fred” instituted an administrative division of labor that placed department managers in charge of buying and selling all of the merchandise in their particular department. This brought a spirit of entrepreneurship to the individual departments in each store. In 1934, Lazarus revolutionized retail clothing sales when he adopted a French merchandising technique in which apparel was arranged according to size, rather than by color, price, or brand. The system became an industry standard. In 1939, Mr. Fred was a key figure in convincing President Roosevelt to move the Thanksgiving holiday to the fourth Thursday of November. The calendar change extended the Christmas shopping season, giving retailers more time to sell at their busiest time of year.

Federated stores helped their customers during the Great Depression by extending credit and establishing a reputation for community involvement in times of crisis. The Federated organization helped support its divisions throughout the Great Depression by sharing their risks and benefits. The loosely-defined coalition worked so well that, by the end of World War II, the holding company was making more money than it could profitably reinvest in existing stores.

With the threat of fierce competition from suburban shopping centers, Federated reached a turning point at which it had to decide whether to break up or form a central organization geared towards expansion. Chairperson Fred Lazarus, Jr., whose chain had contributed substantially to the success of Federated, pushed for a stronger organization, which he achieved in June 1945. Federated’s main office was moved to Cincinnati, and the central management team worked to capture a leading role in the retail revolution of the postwar era. Although the holding company’s leadership took a more aggressive role in corporate administration after 1945, divisional autonomy remained a hallmark of the Federated organization for decades.

Federated “boomed” along with the postwar population of the 1950s through expansion and acquisition. In 1956, Burdines, of Miami, became a division of Federated through an exchange of common stock. Rikes’ and Goldsmith’s, the largest department stores in Dayton, Ohio, and Memphis, Tennessee, respectively, were purchased in 1959. Over the course of the decade, sales at Federated’s 50 main stores and 32 branches increased over 100 percent, and the group became the United States’ largest, most profitable department store company. Its members included the most prestigious department store chains in almost any given metropolitan area: Foley’s of Houston, Sanger’s in Dallas, and Filene’s of Boston. The haute couture reputation of Federated’s stores carried a high price, which translated into the high profit margins that accounted for much of the corporation’s success.

Growth continued in the 1960s: by mid-decade, Federated’s annual sales topped the $1 billion mark. Sales increased 250 percent from 1960 to 1970, reaching $2 billion by 1970. Ralph Lazarus succeeded his father, Fred Lazarus, Jr., as chair and chief executive officer of Federated in 1967. He had worked his way up through the corporate ranks, from salesperson to general merchandise manager, vice-president for publicity, executive vice-president, and finally president by 1957. In 1965, Federated purchased Bullock’s and I. Magnin, two upscale department stores based in California. The Federal Trade Commission forced a consent decree on Federated as a result of the purchases, so that the company was prohibited from acquiring any more department stores until 1970.

Since the company’s expansion by acquisition was limited, Ralph Lazarus led Federated into the supermarket industry in 1968 with the purchase of Ralph’s Industries, a West Coast supermarket chain that served upper-income markets. The chain had 65 stores that contributed ten percent of Federated’s total sales by the end of the decade. Federated also got into mass merchandising during the 1960s, with the creation of Gold Circle discount stores in 1968. The small Gold Circle chain totaled five stores in Columbus and Dayton at the end of the decade.

However, Federated’s success was not uninterrupted. In 1971, the group sold its Fedway chain to a competitor, Dillard Department Stores, for $6 million in cash. Fedway had been created in 1951 to take advantage of southward population shifts. Its stores represented a new direction for Federated, a move into the small, but burgeoning markets of the “sunbelt”: Texas, Arizona, and California. Fedway peaked in the mid-1960s with 11 stores and over $30 million in annual sales. After that point, the chain was overcome by larger, more experienced retailers like Sears & Roebuck, Montgomery Ward, and J.C. Penney. By the time it was liquidated, Fedway’s sales volume had dwindled to $13 million, and the chain had shrunk to six stores.

The Federated chain grew dramatically in the 1970s. Net income increased from $91.1 million in 1970 to $277.7 million in 1979, and sales nearly tripled during that time to $6.3 billion. The growth was stimulated by a $2.2 billion acquisition spree that almost doubled the group’s number of stores to over 350 units. This growth was doubly astonishing in light of punishing recessions that cycled throughout the 1970s. Part of Federated’s enduring success stemmed from the fact that most of its upper-class clientele was not as badly affected by economic downturns as working class shoppers.

The group made a pivotal acquisition in 1976 when the purchase of Rich’s Inc. gave it a foothold in southeastern retail. The $157 million stock trade gave Federated a 109-year-old, Atlanta-based institution with 11 department stores, three Rich’s II boutiques, and 11 Richway discount stores in Atlanta, Birmingham, Alabama, and Charlotte, North Carolina. The Rich’s chain gained the financial backing of America’s largest department store chain, with resources that promised to expand the division throughout the south.

Federated also expanded its established chains more aggressively. In 1976, Bloomingdale’s opened its first full-line store outside the New York market, in a suburb of Washington, D.C. Bullock’s, I. Magnin, Burdine’s, and other divisions were also planning regional and cross-country branches far from their traditional metropolitan markets. For example, Bullock’s, based in Los Angeles, moved into Arizona in 1977.1. Magnin planned to add five new stores and go national between 1976 and 1980. Filene’s, a Boston store, moved into New Hampshire, and Cincinnati-based Shillito’s had three stores in Kentucky by 1977. New stores were built 20 percent smaller than usual to squeeze more profits from less space. Federated’s tradition of divisional autonomy gave way to more centralized supervision.

But Federated’s growth was countered by troubled divisions throughout the 1970s. In the early years of the decade, Federated’s biggest unit and dollar producer, the original Abraham & Straus store in Brooklyn, pulled the entire A&S division down. Some of the division’s problems were out of its control, like a demographic shift that eroded its traditionally affluent customer base. As middle-class Brooklynites escaped to the suburbs, they were replaced by an impoverished population with little interest in A&S’s pricey merchandise. Many of the new residents were also drawn to a large regional mall just miles away. Furthermore, the chain’s management had neglected its 100-year-old, 1.5 million square foot Brooklyn store. By 1973, both sales and profits at A&S had leveled off, and two years later, A&S’s pretax profits slid a disturbing 45 percent. The chain launched a comprehensive remodeling in an attempt to recapture its middle-income shoppers.

Ralph’s, the 98-unit Los Angeles-based supermarket chain, faltered throughout most of the decade as well, as management made a lukewarm commitment to that competitive industry. Although Ralph’s was recognized as one of the country’s most productive, enterprising food stores, it fell victim to costly price wars in California in 1976 and 1977. The grocery chain eventually withdrew to its home region, closing 18 stores after failing in northern California.

Federated’s long-running attempts to diversify into mass merchandising, which began in the 1960s, reaped uninspiring results in the 1970s. Gold Circle, which was projected to grow into a 200-unit upscale discounter, had only 42 units by 1981. It had run into trouble after it expanded into California with seven stores in 1976 and 1977. Prior to the expansion, the chain had been limited to Cleveland, Columbus, Cincinnati, and Rochester, New York. High startup costs and no profits in the western units disappointed Federated officials, who had underestimated the competition that came from K Mart and Target. By the end of the decade, Gold Circle was slated to retreat from the California market entirely.

Two industry trends also threatened Federated’s dominant position in retail. Specialty stores started to broaden their appeal, attracting increasingly more upscale shoppers. At the same time, Sears, J.C. Penney, and other mass merchandisers were enhancing their stores to attract more affluent shoppers. Federated felt the squeeze between these two forces: the company’s 1979 profits stagnated at $179.9 million, even though sales had increased ten percent to $5.4 billion.

When Howard Goldfeder was elevated from president to CEO, succeeding Ralph Lazarus in 1981, he set demanding return-on-investment quotas as a prerequisite to further expansion. Furthermore, he instituted seven new strategies to induce Federated to retake its position as a retail innovator. These included: enlarging market share through more aggressive promotions and deeper inventories; renovating key units in major markets; expanding department stores into the high-growth sunbelt; cultivating new divisions; ensuring lower management turnover; repositioning and expanding Ralph’s supermarkets; and disposing of or merging less profitable units.

Nevertheless, some industry analysts criticized Federated, and especially Goldfeder, for attempting to dominate too many segments of the retail industry. While rivals Dayton-Hudson and R. H. Macy’s sharpened their focus on either mass merchandising or upscale retail, Federated spread its investments and profit margins among a wide range of concepts. As the decade wore on, Federated’s return-on-equity stagnated, and its stock price dwindled. By the late 1980s, the company was ripe for a hostile takeover; it wasn’t strong enough to command a high stock price, yet it was not weak enough to be beyond help.

In 1988, Federated was acquired by Campeau Corporation. Subsequently, Federated’s Bullock’s and I. Magnin divisions were sold to competitor R. H. Macy Corp., and the Foley’s and Filene’s divisions were sold to other retailers. Furthermore, the headquarters of Allied Stores Corporation was moved from New York to Cincinnati to be consolidated with Federated. Allied had been founded in 1935 to succeed Hahn Department Stores, Inc., a holding company that managed Boston’s Jordan Marsh stores, among others. Allied had been instrumental in the establishment of the United States’ first regional shopping center in 1950, and had acquired the Stern Brothers and Block’s department stores over the course of its history.

Campeau Corporation’s Robert Campeau had acquired Allied for $3.6 billion in a 1986 hostile, debt-financed takeover. Then he borrowed $6.5 billion—97 percent of the purchase price—to buy Federated in 1988. Campeau had scheduled his 1989 debt payments according to profit projections of $740 million. However, Federated only made $372 million that year, and Campeau’s creditors clamored for the $627 million that was due them. On January 15, Federated and Allied filed the second largest nonbank bankruptcy on record and the largest, most complex restructuring in the retail trade.

During the course of the two-year reorganization, Federated and Allied merged and cut all ties with Campeau Corporation. More than 40 stores were liquidated. Federated traded $8.2 billion in debt for $850 million in cash, plus $2.8 billion in new debt and 92 million shares of new stock valued at $2.3 billion. Over $2 billion of the debt was forgiven, but the new Federated was still stuck with $3.5 billion debt on its balance sheet. The new entity boasted 220 department stores in 26 states and annual sales of about $7 billion. A new CEO, Allen Questrom, led the reorganization. He had been instrumental in the turnaround of Federated’s troubled Rich’s division in the 1980s and was hailed as one of the top leaders in retailing of the 1990s.

Together with Federated president James A. Zimmerman, Questrom instituted cost-cutting measures that benefited Federated and its customers in the first months after the reorganization. SABRE, a data processing system, and FACS, the credit services operation, helped centralize sales, credit, and inventory tracking while promoting economies of scale. The merger of the background operations of Abraham & Straus and Jordan Marsh saved Federated $25 million per year without disrupting either chain’s image. Part of the savings realized by these measures was passed on to the choosier shopper of the 1990s. Some industry observers cited Questrom’s commitment to GMROI (gross margin return on investment), a new, but reliable performance measurement for department stores, as another reason for high confidence in the new Federated.

Within months of its rise from bankruptcy, Federated made one of Wall Street’s largest initial public offerings of 1992. The group had planned to offer 40 million shares and use the proceeds to pre-pay a chunk of its long-term debt, but was pleasantly surprised when applications for 50 million shares poured in, thus enabling the company to generate more than $500 million. In 1992, Federated prepaid almost $ 1 billion of its debt. During the first six months of 1993, the company was able to retire $355 million of its most expensive bonded debt. The interest savings permitted Federated to increase its 1993-96 budget for store renovations and openings by $461 million to $1.2 billion.

In January 1994 Federated was attempting to purchase R. H. Macy & Company, which had been in bankruptcy, by acquiring a large portion of Macy’s debt. The merger would require bankruptcy court approval, however.