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Macy's new 'Miracle on 34th Street'

By Bruce W. FraserSpecial to The Christian Science Monitor / November 29, 1983



New York

Back in the mid-1970s, before he became chairman of R. H. Macy & Co., Edward S. Finkelstein caught New York's fashion elite flat-footed when he performed what many still regard as the rescue mission of the decade.

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Formerly chairman of the company's California division, Mr. Finkelstein went to work on Macy's Herald Square store, a sleeping giant. Over the next few years , the new chairman of Macy's New York transformed the storied 34th Street store, the world's largest, from a dowdy drain on profits into an exemplar of the new visual merchandising boom - part store, part theater, part continuing-education center.

He did it defying such veterans as Marvin Traub, chairman of Bloomingdale's, and his Fifth Avenue counterpart, Joseph Brooks, of Lord & Taylor, on their own turf. More nettling, he did it starting with housewares, not fashion apparel.

Today, Macy's is taking the big plunge, opening at least 10 new stores through 1988; it opened the first two recently, in California and Florida, for a total of 94 branches in 13 states.

The going will be tough. The recession has caused all retailers, including Macy's, to wring efficiencies from operations. But still Rowland Hussey Macy would be amazed to see how far the fancy dry goods store he opened on Sixth Avenue in New York in 1858 has come.

For the fiscal year 1983, ended July 30, earnings rose 37.7 percent, to $186. 7 million, or $3.72 per share, from $135.6 million, or $2.74 per share, the year before. Sales rose 16.4 percent, to $3.47 billion, from $2.98 billion. For the first quarter of the current fiscal year, the retailer's profits rose 24.6 percent on a 16.8 percent gain in sales.

Meanwhile, its stock is now selling at more than 14 times earnings. The market price has soared to over $56, far above its high of $26 in fiscal 1981 (prices adjusted for a 2-for-1 stock split in early 1982 and a 3-for-2 split in 1983, both distributed April 1 in their respective years).

According to Morgan Stanley & Co., Macy's came out on top in an analysis of profit per square foot of 11 major retailers. Macy's had an operating profit per square foot in 1981 of $12.53 and pretax income of $10.54 per square foot.

Until now, Macy's has opened new stores where it has had a strong identity - northern California, New Jersey, and Georgia, increasing market share. Paine Webber Mitchell Hutchins Inc. estimates that since 1974 Macy's has generated more than half its sales in areas in which it is the market leader.

But Macy's is not moving into the new markets timidly.

In August, Macy's California division opened a 177,000-square-foot store in Fashion Fair, a shopping center in Fresno. Macy's New York division followed, opening a 270,000-square-foot store in northern Dade County, Fla., on Oct. 6. Houston stores planned for openings next fall will include a 210,000-square-foot unit in Deerbrook in northeast Houston and another of the same size in Willowbrook, in the northwest section.

''We're thinking ahead to the year 2000 and we have faith in the economy there,'' said Arthur Reiner, chairman of Macy's New York division.

Macy's net income and cash flow have increased dramatically over the last 10 years. Debt has increased slower than the company's equity base. Unlike other retailers, the store does not have to borrow to build. Its cash flow is sufficiently high to allow self-financing.

Still, first-year start-up costs are high and the price tag for long-distance merchandising, particularly in Texas and Florida, where Macy's has no support base, will be steep.

In Florida, Macy's will be bumping against Allied Department Stores' Jordan Marsh and against Burdine's, part of Federated Department Stores - strong, well-run concerns. Foley's in Houston has traditionally been one of the most profitable divisions of Cincinnati-based Federated.

Industry observers praise Macy's for taking on its expansion program when the economic outlook is so uncertain. They believe it can take risks other retailers cannot - risks that may pay off five to 10 years from now.

''If you're right for the market and you do well,'' observes Bruce M. Missett , a retail analyst at Oppenheimer & Co., an investment banking house, ''then it's the fourth guy that always lagged the market that gets hurt.''

For Macy's and other department stores in 1983 and '84, there are several negative factors: increased competition from specialty stores; off-price retailers and discounters; similar merchandise elsewhere that prevents customer loyalty; lower markdowns; and excessive square footage, which puts pressure on profit margins.

But longer term, continued lower levels of inflation should reduce pressure on profit margins of retailers. Stores such as Macy's should benefit. Analysts predict that moderately improved sales and declining interest charges will probably result in earnings increases.