December 12 2007: 8:26 AM EST
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Macy's makeover

CEO Terry Lundgren talks to Fortune about the department store giant's troubled buyout of May, speculation of widespread store closings and plans to bolster sales.

By Suzanne Kapner, writer

Macy's needs a strong holiday season after same-store sales have disappointed.

(Fortune) -- It was considered a retailing masterstroke - the $11 billion acquisition of the May Department Store Company by Federated Department Stores to form what is now known as Macy's. The 2005 merger created the first national department store chain and gave Macy's unprecedented clout with suppliers. Macy's Chief Executive Terry Lundgren, considered the merger's architect, was initially lauded as a visionary. Then the trouble started.

Shoppers groused about a decision to replace former May stores, names such as Filene's, Foley's and Marshall Field's, which were beloved in their communities, with the largely unknown Macy's brand. A reduction in the level of promotions - those 20 percent off coupons that have become a fixture in department store retailing - further angered deal-hungry customers. Sales stagnated and Macy's (Charts, Fortune 500) stock took a hit. Shares are down 15 percent since the takeover closed.

Macy's has since made some adjustments to its strategy in the hopes of winning back shoppers that fled to rivals such as J.C. Penney (Charts, Fortune 500) and Kohl's (Charts, Fortune 500). Lundgren talked to Fortune about the acquisition, the mistakes and the future for Macy's, including the all-important holiday shopping season.

Fortune: What is the biggest lesson you learned from the acquisition of the May Company?

Lundgren: We thought by reducing the number of coupons we'd be giving our customers more everyday value. What we learned is that many customers had become accustomed to shopping with coupons. In retrospect, I would have phased out the coupons more gradually, rather than try to change customers' buying habits overnight.

Q: Following the merger, you closed dozens of overlapping stores. Now some analysts are talking about the possibility for further store closures. Can you comment?

A: We always go through the normal process of pruning our real estate portfolio, but there are no plans for a wide-scale closure of stores.

Q: What's your view of this holiday shopping season? Does it seem more promotional than past years?

A: Every holiday season is highly promotional. I don't think this year is any worse than prior years.

Q: What do you consider your greatest accomplishment of the past year?

A: Our home business, which had been a weak spot, has turned around. We didn't have enough differentiated product. The product we were selling you could get at a lot of stores. But with the addition of Martha Stewart and some other lines, business has picked up. That's especially true in terms of big-ticket items. I've got furniture and mattress suppliers telling me that our business is outperforming the industry.

Q: What has been your biggest disappointment?

A: Our same-store sales have not been strong and that has been very disappointing. Our complete focus is on getting our sales to move in the right direction. Despite the economy, consumers will still spend. The goal is to get them to spend more with us versus our competitors. What we are trying to do is win market share.

Q: How do you do that?

A: By making Macy's known as the place to go for brands.

Q: You recently signed a deal to be the exclusive retailer of Tommy Hilfiger merchandise. Are you looking for more deals like that and would you be interested in buying a brand outright?

A: I would be interested in buying a brand, but it can't be just a name. It needs to have good management and design talent and also have the potential to expand into other categories. As for more exclusives, if I can find more ideas like Martha Stewart and Tommy Hilfiger, I'd sign them in a minute. To top of page

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