Lundgren Takes Helm As Federated Returns To Black in 4th Qtr.

NEW YORK — A merchant is in charge again at Federated Department Stores Inc., and he’s returning to some fundamentals to focus on top-line growth.

The $15.4 billion retailer Tuesday named Terry Lundgren as its new chief executive, effective today, and announced a new corporate structure, consisting of five vice chairmen, reporting to Lundgren. While unorthodox to have so many executives with the title of vice chairman, in practice, it’s a classic corporate structure that enables the ceo to focus on strategy, investors, and managing his managers, leaving them to the nitty-gritty.

Speaking in a manner befitting a merchant, Lundgren told WWD, "The best strategy for Federated is to improve comp-store sales. That’s where our focus will be, particularly in 2003."

His appointment as ceo confirmed a WWD page-one report on Monday.

Lundgren, who also holds the title of president, succeeds James M. Zimmerman, who will continue as chairman for about a year before he retires at 60. While Zimmerman is an operations and financial executive, Lundgren rose through Federated’s stores and merchandising organizations in the Eighties and Nineties, and has been spearheading Federated’s private label buildup and "store of the future" program. Unlike Zimmerman, who has been based at Federated’s headquarters in Cincinnati, Lundgren will remain at Federated’s offices inside Macy’s Herald Square, in the heart of the garment district.

For Federated and most retailers, the priorities have been cost control, price cutting, couponing, consolidating with other retailers, and appeasing Wall Street. Somehow buying and selling of merchandise became a lost art in the Nineties, and some even think department stores are a lost cause. Not Lundgren, of course. "We’ve been successful at delivering earnings in spite of challenging sales results, but for us, the mission is to grow comp-store sales," he stressed.

Lundgren said 2003 will be "the year to lay the groundwork for delivering an improved shopping experience and product mix," so Federated can prosper at the cash register when there’s an improvement in consumer confidence, which has been plummeting, along with Federated’s sales. To fight the down trend, Lundgren said Federated, among other strategies, will roll out its "store of the future" format to entire metro markets starting with Atlanta. Heretofore, stores have been retrofitted on an individual location basis. He also spoke of deepening private label assortments and exclusives, currently representing 16 percent of total volume, but potentially 20 percent or a few points higher, and continuing to upscale Bloomingdale’s.

Asked how successful the "store of the future" program has been, Lundgren suggested it was a work in progress. "We are not done. We are going to keep on this subject and keep listening to our customers," he said.

The first retrofitted store, a Lazarus in Easton, Ohio near Columbus, "clearly outperformed the large majority of Federated stores," Lundgren said. "Customer feedback has been very favorable. We are strong believers in the program. We rolled out 44 units in the fourth quarter and we’re ready to keep going. I am looking at markets and am going to make sure the next step involves very specific markets, like Rich’s and Macy’s in Atlanta," two nameplates currently being merged.

By covering an entire market, he noted, it becomes economically feasible to advertise "store of the future" features. They have 12 new technologies, shops and amenities, such as fitting room complexes with a lobby, a seating area for significant others, CNN monitors and computer terminal jacks to get online. Stores are also equipped with price lookup, so customers and sales associates can scan a bar code and get the latest price on items; larger signs that are reminiscent of discounters, and new shop concepts. Children’s shoes have returned to the Federated stores, and juniors shops are enlivened with video games, snacks, a photo booth, and a cyber cafe. With these strategies, Federated is seeking to attract younger customers, where department stores have lost major market share.

Lundgren said that, beyond Atlanta, Federated has not committed the program to any other metro area yet. Also, Bloomingdale’s is not part of the program. "We want Bloomingdale’s to have a totally different experience. The mission for Bloomingdale’s is to be a step up beyond the Macy’s focus and core target audience. Bloomingdale’s is continuing to trade up its business, to be more aspirational and creative, and recently, Bloomingdale’s has opened some exciting stores," Lundgren added, citing the Bloomingdale’s Home unit in downtown Chicago. It’s housed in the restored and landmarked Medina Temple.

With Macy’s, too, "There is an opportunity to trade up a bit. But we want to make sure we offer great value for our customers while not chasing much more moderate customers," such as those served by Kohl’s or Wal-Mart. "We’re going after the fashion-oriented consumer, interested in unique, quality product at good value."

Lundgren’s appointment got a general thumbs-up from Wall Street Tuesday, even though it had been foreseen for some time. "There’s every reason to believe that they will maintain or extend their leadership on the merchandising side," said McDonald Investments analyst Jeffrey Stein. "A merchandising culture is fairly deeply ingrained in this company, so I think that would make this a seamless transition."

A.G. Edwards & Sons analyst Robert Buchanan said, "The change will be good for the company. It’s very important that Federated and May Co. break out of the conventional bind that has held them back over the years. Beyond any change on the organization chart, the chief challenge that Terry faces is to reinvigorate the company with new and novel thinking."

Reporting to Lundgren under the new corporate structure will be five vice chairmen, including four newly named ones. They are: Susan Kronick, formerly group president for regional department stores, who now has all the divisions — Macy’s East, Macy’s West, Bloomingdale’s, and regionals Burdines, The Bon Marche and Rich’s/Lazarus/Goldsmith’s — reporting to her; Tom Cole, chairman of Federated logistics and operations, which includes store design and construction; the Federated Systems Group and the financial, administrative and credit services divisions; Janet Grove, chairman of the Federated Merchandising Group, and Thomas G. Cody, formerly executive vice president/legal and human resources, who now also has internal audit, external affairs and philanthropic activities.

Also, Ronald W. Tysoe continues to serve as a Federated vice chairman, responsible for finance and real estate. Zimmerman, in addition to chairing the board, will work with Lundgren on corporate strategic initiatives. But with Zimmerman no longer involved in the day-to-day operations, the atmosphere will certainly change at Federated, considering he has been considered among the toughest and demanding retail operators in the business.

"With the five vice chairmen, Terry has an ace team to support him so he can move into the more strategic role," observed Hal Reiter, ceo of Herbert Mines Associates executive search. "If you are trying to create a full-entity ceo, with most organizations they don’t run operations. They have a discreet group of operators running business units. This allows Terry to work with the investors, Wall Street, acquisitions, financings, new formats or ventures. A ceo should not be rolling up his sleeves. Federated has created a classic organization with a classic pyramid structure."