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Consolidation Fever: Which Store Logos Could Vanish Next?

With earnings reports trickling in this month, rumors of retail consolidation have resurfaced. The latest: a merger of Federated and May Co.

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In the U.S., no other major bankruptcies are seen this year after Kmart’s filing in 2002. There will be a lot of trimming, though, with all the major chains re-examining individual store performances, preparing to shut weak units and cut staff. Regional operators, such as Gottschalks, Bon Ton, Elder-Beerman and Boscov’s, are considered takeover targets or restructuring candidates.

Each year around this time, the rumor mill grinds it out. But this year, due to the spate of high-profile executive departures since January following the difficult Christmas season, and the sense of urgency purveying the industry, it’s reached a feverish pitch. Everyone is asking, "Who’s getting the next pink slip?" and, "Who’s next to merge?" The more troubled the company, the hotter the rumors.

As far as May and Federated merging, it could be some time off. "There have been conversations on and off," said one source. "There could be antitrust problems, and there are always problems with some egos, and deciding who ends up running the business."

Though Federated is outperforming May Co., May has more cash, and could be the acquirer. The company has been very open to purchases, having bought a string of bridal businesses in the last few years, including David’s Bridal. Forecasting May’s eighth quarter of year-over-year declines in a row, Shari Schwartzman Ebert, analyst at J.P. Morgan Securities, said in a research note that she is looking for the group to report a drop of 11.4 percent in fourth-quarter earnings to $1.20 a share. May is expected to report fourth-quarter earnings on Thursday.

Retailers do a lot of wheeling and dealing over individual units, so they’re always watching each other. Just last week, Federated said it is buying two stores in Hawaii from J.C. Penney, which will be remodeled and opened as Macy’s next fall. However, retailers are now more aware of the debt risks and difficulties of assimilating stores on a bigger scale, and banks are more cautious than they were in the high-flying Eighties and early Nineties.

Nevertheless, "retail consolidations have to continue. The only way to survive is to become bigger," said Gil Harrison, chairman of Financo Inc. "It’s becoming harder and harder to earn a buck because unit prices are down. Just to break even, you have to sell more units."
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