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PLAYERS WEIGH MAY’S NEXT STEP AFTER FIELD’S BUY

June 9, 2004, was certainly a “Field Day” for May Department Stores Co. — pun intended. That’s the day the normally staid retailer announced it would pay an eye-opening $3.24 billion to Target Corp. for the 62-store Marshall Field’s chain. The purchase effectively bumps the mid-level May chain upscale and also took Field’s away from competing bidder Federated Department Stores.

The move by May, which suffered substantial sales and earnings declines in 2003, surprised many analysts, who had laid odds that Federated would walk away with the prize — and for a much smaller sum — following Target’s proclamation in March that it was up for bid.

May, which operates Famous-Barr, Filene’s, Kaufmann’s and Lord & Taylor, also got nine Minneapolis-area Mervyn’s stores in the deal, along with three distribution centers and some $600 million in receivables. This was the company’s biggest expansion since 1986, when it bought Associated Dry Goods Corp., and makes May a force in three markets where it had been soft: Chicago, Detroit and Minneapolis.

The announcement raised questions about what May would do with some newly redundant real estate, including four Minneapolis-area mall sites — Brookdale Shopping Center, Burnsville Center, Maplewood Mall and Rosedale Center — that have both a Mervyn’s and a Marshall Field’s in them.

May has kept mum about its plans for those overlaps. But Craig Estrem, COO at the Minneapolis office of retail real estate specialty firm Madison Marquette, says the company could opt to install some Marshall Field’s Men’s & Home stores, a home decor and men’s fashion concept. (One such unit already operates in the area, at Ridgedale Center mall.) May could even sell a few of the freestanding Mervyn’s stores to J.C. Penney, which is busily rolling out a nonmall concept (see story), or to another retailer, Estrem says. “Whatever it does, the sentiment is that they were worth more as a real estate play than as a business,” he said.

All nine of the acquired Mervyn’s stores will be closed.

Estrem and others say the Marshall Field’s buy was also designed to keep Nordstrom and other Marshall Field’s competitors out of the market. “It was smart of May Co. to protect the Marshall Field market share,” said Estrem. Ken Perkins, a retail analyst at New York City-based Thomson First Call, said the move “puts May in a market where it didn’t have a presence … and they can parlay that into a more competitive position.”

The other six overlapping-store markets, which all contain both a Lord & Taylor and a Marshall Field’s, are the Chicago area’s Northbrook Court, Oakbrook Center and Old Orchard Mall, and the Detroit-area Fairlane Town Center (Dearborn), Twelve Oaks Mall (Novi) and Lakeside Mall (Sterling Heights). Analysts believe that May will continue to operate these dual stores simultaneously.

At a June 10 conference call, May CEO Eugene Kahn said the Field’s acquisition makes the company “more of a full-line company” and called Marshall Field’s a “learning laboratory” for future upscale offerings; May will make nothing but “evolutionary” changes to the brand, he said, adding that Marshall Field’s Chicago flagship on State Street is the type of world-class shopping venue that only May’s competitors could boast of previously.

Additionally, vendors that have confined their new lines to such higher-end department stores as Bloomingdale’s, Neiman Marcus and Nordstrom will now supply them to May through Marshall Field’s — and potentially to some of its other concepts, says retail consultant Margaret A. Gilliam, president of New York City-based Gilliam & Co.

Analyst Walter F. Loeb, president of Loeb Associates, said that May “wanted to be in a leadership position and did not want to fall further behind Federated in size and growth dynamics.” Loeb speculates that one possible factor in Target’s decision to sell to May could have been May’s propensity to retain brand names, as opposed to Federated’s practice of incorporating stores under its Macy’s and Bloomingdale’s name, as it did with Lazarus and Burdines.

Although the $3 billion-plus price seemed high, “May saw a once-in-a-lifetime opportunity to get these [Midwest] markets and outline synergies that over the long run would pay off,” said Philip Zahn, a fixed-income analyst at Fitch Ratings.

Rumblings abound that Federated may now pursue Little Rock, Ark.-based Dillard’s, though the three sons of founder William Dillard control two-thirds of the board through voting shares, which could trump a bid. Gilliam doesn’t fall in with that thinking, however. “Just because Federated didn’t get Marshall Field’s, it doesn’t mean they still have to buy something,” she said.

Spokeswoman Carol Sanger said Federated “is constantly looking for acquisition opportunities that make sense to us, but we will not overpay. We’ll wind up walking away from more deals than those we pursue.” May did not respond to interview requests.

— SM