Analysts Not Sold on Retail Mergers

The biggest department store companies, among retailing’s worst performers in the last year, might be hoping to consolidate their way out of trouble.

But analysts and others say a flurry of deals is unlikely. And, they add, merging alone is not the answer to more successfully competing with discount chains such as Wal-Mart Stores Inc., Kohl’s Corp. and Target Corp.

The latest merger speculation was sparked Monday by reported talks between the nation’s two largest department store companies, Federated Department Stores Inc., parent of Bloomingdales and Macy’s, and May Department Store Co., owner of Robinson’s May.

That report in the Wall Street Journal fueled speculation about other acquisitions among department stores, which have suffered from declining mall traffic and eroding sales after Sept. 11.

But, experts say, any meaningful deal between Federated and May is unlikely.

“Can’t happen,� said Bob Buchanan, a department stores analyst with A.G. Edwards. “I doubt that we will see May and Federated merge in my lifetime, chiefly because the two companies don’t like each other, and I know enough senior executives at both companies to say that.�

Investors showed no significant reaction to the news Monday. Federated shares gained 23 cents to $43.70 and May shares lost 16 cents to $36.48, both on the New York Stock Exchange.

Other combinations, focusing on the few regional chains not swallowed up in the ilast round of consolidations in the 1980s and 1990s, don’t make sense in the short term, Buchanan and others said.

Possible targets include Dillard’s Inc., a 340-store Arkansas-based chain with stores throughout the South and Midwest. It has suffered declining sales and earnings, particularly after its $3.1-billion purchase of Mercantile Stores, despite moves to lure more moderate customers.

Dillard’s, however, is family controlled and operated. And thus far, it is more interested in being the acquirer than the acquired. Dillard’s stock fell 32 cents to $22.48 Monday on the Big Board.

Fresno, Calif.-based Gottschalks Inc. is another oft-cited possible acquisition. It has 86 smaller-city department stores in California, Alaska, Idaho, Nevada, Oregon, Utah and Washington, and in 2000 added the Seattle-based Lamonts chain of 34 stores. Gottschalks’ earnings not including tax and charges fell 88% last year despite an 8.5% sales gain.

However, investors drove Gottschalks stock up 62 cents, or 21%, to $3.60 on the New York Stock Exchange in volume that was far higher than normal for the issue.

Still another rumored target is the department store divisions of Target Corp., which includes Mervyn’s and Marshall Fields. Also on the list is Saks Inc., which owns the Parisian, Younkers, Carson Pirie Scott and Proffitt’s stores. It previously has talked of separating its luxury Saks Fifth Avenue from the more moderate stores group.

“Consolidation is inevitable in the longer term, but the holdouts have held out for various reasons,� said Gilbert W. Harrison, chairman of Financo Inc., an investment bank that focuses on the merchandising sector. “The problem is not how do the department stores become larger and consolidate, but rather how do they reinvent themselves to get the consumer to shop there?�

The companies declined to comment.

Still, some analysts said the rumors have a ring of truth.

“I think we’re likely to see any number of combinations proposed and some actually occur, because it has to happen,� said Todd Slater of Lazard Freres in New York.

If the department store sector shrinks, the effect on California could be dramatic, creating a glut of retail real estate and hitting an important local sector, apparel manufacturing.

“There will be consolidation, there has to be,� Buchanan said. “But it’s probably a ways down the road....My bet is that you will not see major consolidation activity over the next year in the department store world.�