NEW YORK — An era ends Wednesday when May Department Stores Co. stages its last annual meeting here, marking the demise of a giant retailer and familiar nameplates, job cuts and relief for shareholders who get cash and stock in the acquiring Federated Department Stores.
The irrevocable nature of the meeting, where shareholders are expected to approve the merger, underscores retailing’s simple rule: survival of the fittest. Retail experts say May represented an obsolete business model, a failure of leadership and a stagnant stock.
And at least one former May senior executive, Ken Kolker, said the company’s acquisition by Federated might have been avoided if executives had heeded danger signals years ago.
The months ahead will bring a series of painful downsizings, as May gets absorbed by Federated. After the deal is closed — expected this fall — May’s St. Louis headquarters and the regional offices will be dismantled, and nameplates such as Filene’s and Marshall Field’s will eventually be replaced by Federated’s Macy’s and Bloomingdale’s brands. Federated is expected to start interviewing May executives this fall and retain some. Federated has said layoffs won’t begin until March.
Still, Federated is paying $17.75 in cash and 0.3115 of a Federated share, for each May share. Federated shares are trading at around $75, bringing the current value of the offering to around $41 a share. May is trading at just over $41 a share and has risen about $6 since the deal was announced last March.
Federated is paying $17 billion, including $6 billion in debt, for May, and has already announced it would sell May’s and its own credit card portfolios to Citigroup for $4.5 billion to help pay for the May acquisition.
“There are a lot of happy shareholders, and if you are a big holder, you’re probably overjoyed,” Kolker said in an interview. “But thousands of people will be losing their jobs. They are the victims. It didn’t have to be that way.”
With the takeover, May’s culture is now an anomaly, added Elaine Hughes, of the executive search firm E.A. Hughes & Co.
“May is probably the last of the big department stores to follow a tradition where American corporations took the role of the parent,” she said. “They protected you, insured your pension and benefits and long-term job security. Employees had a sense of entitlement. With the breakup of the telephone conglomerates, the demise of steel companies, and with May getting bought by Federated, it’s more than apparent that model has disappeared.
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“Anyone pursuing a career in retailing should realize that your greatest security is in your own talent skills — not the environment that houses them,” Hughes added.
“This merger is good for the department store and shopping center industries,” said one chief executive officer of a real estate company. “Federated becomes a much stronger company, in every way — its footprint, economies of scale and ultimately the balance sheet.” With the deal, Federated doubles its store count and volume to about 1,000 department stores and $30 billion in annual sales, though approximately 150 stores could be sold off to satisfy government regulatory concerns.
“A stronger Federated in turn makes the mall business stronger,” the real estate ceo said. “And it’s absolutely good for shareholders. When the merger was announced I bought stock. But the May board completely blew it. They should have dealt with Gene [Kahn, former chairman and ceo of May] a long time ago. They painted themselves in a corner and allowed themselves to be vulnerable to a takeover. Shareholders were suffering; they are doing fine now, but think about what the stock could have done,” had the board been more decisive, he said.
“Not to take anything away from Federated, which has long had a wonderful franchise and brilliant leadership, but it’s true. May could have bought Federated at one time,” said Isaac Lagnado, president of the Tactical.org consulting firm.
“The reality is that May Co. was renown to have consistent profits and predictable gross margins, great systems and good regional franchises. It had the capital-raising power to be the acquirer, until the last six years.”
Lagnado added that the deal represents an enormous undertaking for Federated, involving figuring out what to do with properties that must be shed, and how to integrate and absorb the best staff from May. “It’s a big deal, but worth it.”
There are other lessons to be learned from the May experience.
“The big story here is that David Farrell departs and the company goes downhill,” said Emanuel Weintraub, president and ceo of Emanuel Weintraub Associates management consultants. Farrell became chairman and ceo in 1979, and through dictatorial control that lasted almost two decades, he built May into one of the most powerful and profitable retailers in America. He was succeeded in May 1998 by Gene Kahn, who was forced out in January 2005 after some five years of declining profits and market share. May’s performance, on the other hand, was exemplary under Farrell, who had a strong track record except when it came to succession planning, retail experts said.
“Without good leadership nothing else counts,” Weintraub said. “You dissipate capital and you diminish assets. I think they will be studying this case at the Harvard School of Business. This will be a classic.”
Kolker could be a guest lecturer. For several seasons, Kolker, as a senior adviser to May, advised management and the board about May’s misguided path and two years ago sent a letter to board members, blaming management for the company’s “precipitous free-fall,” which made it vulnerable to takeover. He cited “egregious slowness and indecision” in adjusting inventory levels to the realities of sales trends, excessive pressure on vendors for allowances and markdown money, a failure to counter Kohl’s and a flawed private label strategy that neglected May’s core customer and was too young in approach.
In addition, external forces beyond May’s control, such as the rise of Wal-Mart and Target and the growth of specialty chains, also chipped away at May’s market share. May was trapped in the middle market, as primarily a moderate to better department store business, whereas consumers were gravitating more toward discounters and upscale chains.
“I want you to know that May is in deep trouble, in every which way, but the situation is not hopeless,” Kolker wrote in the letter.
The board’s reaction? “I never received a single call, note or reference from any of these people,” Kolker recalled, except for a request from John Dunham, then a director and now May chairman, ceo and president, who, Kolker said, asked him to pack up and leave May’s office at 1120 Sixth Avenue.
May officials declined to address Kolker’s assertions. The company said in a statement: “The document is a private letter from one person to the board, and we have no comment on it.” Kahn could not be reached for comment.
Before his decade serving as senior adviser, Kolker was ceo of May Merchandising and May Department Stores International, the central buying and private label arms of May. Kolker, 81, started his career at Abraham & Straus. He is a graduate of the Harvard Business School and the Wharton School of the University of Pennsylvania.
“David Farrell and Ken were the driving merchant force in our glory days,” said an insider familiar with Kolker’s experience with the May board.
“I was there to help May succeed,” Kolker said. “The only thing that got to me was to see May not succeed. Why will these people be on the street? That’s what gets to me.”
Through his correspondence to May, Kolker notified Kahn and other executives of the problems he saw suffocating the company. The selling floors had become “ossified” by subpar performing vendors, and advertising should be redirected, he wrote. May’s formula for profitability became one of offsetting reduced turnover and slimmer margins with expense management and a “soaring increase in vendor allowances.”
He documented specific items that should be exploited, in one case pointing to a men’s piqué knit polo, priced at $12.99, that one season produced a transaction increase of 105 percent and a 45 percent boost in dollar sales, despite a decline in the average selling price. More sales promotion dollars needed to be deployed to such products offering compelling values, Kolker urged.
He also recommended brands May should sell, including New Balance at one time, and suggested others get pared back, like Levi Strauss.
Kolker said he won’t take a stand at the annual meeting, and will be there primarily to say hello “to some of the old boys.”
“I have no ax to grind anymore,” Kolker said. “I made my point.”