Macy’s Nimble Steps to Keep Wolf From Door : Retailing: While other department stores have sought Chapter 11 protection, Chairman Edward S. Finkelstein apparently has maneuvered his firm out of immediate danger.


Twenty years ago, in the days when Ed Finkelstein zipped around San Francisco in a Jaguar with a MACYS 1 license plate, he was developing a reputation as one of the nation’s top merchants.

Under Finkelstein’s direction, Macy’s California jazzed up its merchandise and its image and eventually emerged as the Bay Area’s leading department store chain. Later, he was promoted back to New York, where he engineered a stunning turnaround at R. H. Macy & Co.'s once-drab flagship store on 34th Street.

Now Finkelstein, Macy’s chairman and chief executive since 1980, is trying to perform another miracle on 34th Street by rescuing the whole company. He largely has himself to blame for its current bind. Macy’s is loaded with debt from a Finkelstein-led buyout that took the company private in 1986 and from the acquisition of the Bullock’s and I. Magnin chains in 1988.

Even so, Edward S. Finkelstein, at age 66, has managed to remain one of retailing’s most admired--and intimidating--executives. And by drawing heavily on his reputation and the force of his mercurial personality, Finkelstein and other Macy’s executives so far have held together what amounts to a delicate coalition of the company’s key suppliers, lenders and investors.


As a result, while other debt-heavy retailers such as Los Angeles’ Carter Hawley Hale Stores have fallen into bankruptcy, Macy’s is fighting cleverly to stay afloat amid the hard times.

Many analysts say that a major setback or a recession that lasts into 1992 still could sink Macy’s, one of the nation’s biggest department store organizations. In coming years, the company will need to raise more capital. But since last fall, Macy’s has carried out a series of effective crisis-management maneuvers that appear to have taken it out of immediate danger.

“Anything could happen at any time, but step by step, brick by brick, he (Finkelstein) is building strength back into Macy’s,” said Bud Konheim, president of Nicole Miller Ltd., a Macy’s supplier that makes dresses and ties.

That doesn’t make Finkelstein--who declined to be interviewed for this article--the best-loved person in retailing. Detractors acknowledge that he is gifted when it comes to anticipating consumer tastes and extremely loyal to his cadre of longtime aides, but they also describe him as overbearing, thin-skinned and hot-headed.


“You’re pretty much on Ed’s team or not on Ed’s team,” said a former Finkelstein associate.

Finkelstein, who joined Macy’s in 1948 straight from Harvard Business School, has clashed with newspaper reporters and Wall Street analysts critical of the company. Apparel industry sources say Finkelstein cut off a major supplier to Macy’s stores, Bernard Chaus Inc., in 1987 after getting into a personal dispute with the chairman of the women’s clothing firm. Chaus could not be reached for comment.

Two years ago, Finkelstein startled his industry by abruptly quitting as chairman of its leading trade group, then known as the National Retail Merchants Assn. His resignation came a day before he was to be master of ceremonies at the association’s annual awards luncheon, forcing the group to scramble for a replacement.

The Macy’s chief executive also has drawn barbs for putting his sons Daniel and Mitchell, both in their 30s, into high-ranking jobs at the company. Daniel is chairman of the 25-store Macy’s California division, and Mitchell heads the company’s buying office in Hong Kong. Years ago, Ed Finkelstein is said by a former associate to have griped about an earlier Macy’s chairman, Jack Straus, who put one of his own sons in charge of the company’s overseas buying.

Probably the sharpest criticism of Finkelstein, though, has stemmed from his decision to lead an investment group including 348 Macy’s executives in the company’s $3.7-billion leveraged buyout. He described it as a move designed, among other things, to hold onto key managers and to give them a powerful financial incentive to focus on the company’s long-term health.

But the buyout also was widely regarded as an effort by Finkelstein and his backers to make a fortune in a few years’ time. They bought the company’s stock when it was depressed, and then apparently hoped to sell the shares back to the public at a profit once Wall Street became bullish on the company’s prospects again.

A former Macy’s executive who asked not to be identified said Finkelstein, who invested $4.4 million of his own money, told him that he expected to make 30 times that much in the deal.

“What Finkelstein was trying to do was to become a billionaire when the company goes public again. Instead, all he’ll be is a multimillionaire,” said a half-kidding Robert Kahn, a retailing consultant in Lafayette, Calif., who believes that Macy’s will recover.


Finkelstein’s misjudgment in the buyout, Kahn said, didn’t stem from lack of merchandising skill. Rather, he said, “it was greed.”

What Finkelstein failed to anticipate was the downturn in retailing that began in the late 1980s. Not only did Macy’s sales slow, but the company was forced into a disastrous price-cutting war with competitors that were desperately trying to bring in business.

Finkelstein’s foray into the takeover game also backfired. He was outbid by Campeau Corp. for all of Federated Department Stores, but arranged to buy Federated’s Bullock’s and I. Magnin divisions to expand Macy’s presence outside of its base in the Northeast.

Trouble is, that saddled Macy’s with another $1 billion in debt and, in I. Magnin, gave the company a faltering chain that it apparently has been unable to turn around.

By last year, Macy’s situation looked bleak. Its losses more than tripled to $215.3 million on sales of $7.3 billion in its fiscal year that ended in July, and analysts speculated last fall that a bad Christmas season would put the company in bankruptcy.

Making matters worse for Macy’s was a bad case of the jitters among apparel firms and other retail suppliers and lenders. After Campeau’s department store empire sought bankruptcy court protection in January, 1990, these suppliers and lenders were sweating over who would be next to go broke owing them money.

In May, many grew fearful that Macy’s was a likely candidate and the flow of merchandise to the company--the lifeblood of any retailer--was threatened. Macy’s won back suppliers and lenders--and avoided disaster--by quickly assuring them that it would do a better job of keeping them updated on the company’s finances.

That marked the first of several deft crisis-management maneuvers by Macy’s over the past year.


On one front, Macy’s over the last half-year raised $177 million in equity in a private offering to new and existing shareholders. The money was used to reduce debt by buying back junk bonds and, perhaps more importantly, to signal to suppliers and financiers that the company is determined to avoid bankruptcy.

What better way to demonstrate Macy’s commitment than to have its biggest investors--a powerhouse group including General Electric Capital Corp., Mutual Series Fund, Loews Corp. and real estate developer Taubman Co.--sink more money into the firm?

The $177 million raised by Macy’s also included $25 million from Hong Kong entertainment mogul Sir Run Run Shaw, who last week agreed to invest another $25 million. An additional $19 million of the total came from shopping center developers who apparently were persuaded that it was in their interest to help one of their big tenants.

Meanwhile, Finkelstein countered the speculation that a bad Christmas would break the company by repeatedly giving assurances that it would cut costs, mainly by holding down inventories. To emphasize the point, Finkelstein published a full-page letter in the trade newspaper Women’s Wear Daily lambasting “outrageous statements by so-called experts” and declaring, “You deserve to know these FACTS!”

As it turned out, Macy’s sales fell 9.4% during the three-month period ended Feb. 2, but due to inventory controls, its net loss before a one-time accounting adjustment narrowed to $7.3 million from $39 million a year earlier.

Taking into account that one-time accounting adjustment--an $85.3-million gain from buying back junk bonds--Macy’s actually showed earnings of $78 million for the quarter, its first quarterly profit in two years.

Macy’s also worked hard at cultivating suppliers, credit agencies and lenders--which are known in the retailing business as factors. While a retailer such as Carter Hawley, the owner of Broadway-Southern California department stores, paid bills slowly for months before being pushed into bankruptcy, Macy’s has made it a point to be on time.

When it comes to relations with suppliers, Macy’s and Carter Hawley have been “in two different leagues,” said Richard Hastings, an analyst with Solo Credit Service in New York.

Last month, Macy’s threw a special cocktail party for credit analysts and apparel industry lenders; some of the guests said they never were invited to such an event before.

Macy’s also started holding meetings to update suppliers on the company’s plans and bolstered confidence in its financial management by hiring a respected Wall Street investment banker, Diane Baker, as its chief financial officer.

Actually, the process of tightening financial controls began in late 1988, when Myron E. Ullman III was named executive vice president. Analysts say he has emerged as the de facto No. 2 executive at Macy’s, with a powerful mandate to curb costs and discipline what was an entrepreneurial outfit.

All told, Macy’s efforts have restored a measure of faith in the company. “They’re doing all the things they’ve said they would do,” said Richard Posner, executive vice president of Credit Exchange Inc., which provides credit information to the apparel industry.

Many of the same suppliers and factors that pulled the plug on Carter Hawley and Campeau’s department stores before they went into bankruptcy have continued to extend credit to Macy’s--albeit sometimes with tight limits.

The factors now “have nothing but good to say about a guy (Finkelstein) they were writing off last May and June,” said Konheim of Nicole Miller.

Still, Macy’s faces a difficult road. Even if most suppliers continue to ship to it, it’s still more difficult for the company to get fresh merchandise than it was in better times.

Apparel makers will ship Macy’s “only as much as they feel they can lose,” said Alan Millstein, publisher of the newsletter Fashion Network Report.

Millstein added that Macy’s prominent board--who include Loews Corp. Chairman Laurence A. Tisch, investors Michael F. Price and former Secretary of State Henry A. Kissinger--so far “have circled the wagons.” But, he said, at some point they could lose patience with Finkelstein and Macy’s performance and force a change.

Finkelstein “is a real survival artist,” said Millstein. “But unless the economy turns around in New York, he’s going to be in real trouble.”

Moreover, Macy’s operating results remain weak and the company still is expected to lose money this year. Its operating cash flow--a key measure of performance for a debt-burdened company--is expected to be $700 million to $720 million this year, off only slightly from last year but down more than 20% from two years ago.

Unless it is able to buy back its zero coupon bonds, Macy’s could face hefty interest charges starting in November, 1993, when those securities start paying cash interest. Macy’s bonds have climbed lately on the company’s improved prospects, but that has made it more expensive for the company to retire its debt.

GE Capital’s agreement to buy Macy’s credit card operation--a deal to cut the retailer’s $5 billion in debt by $1.4 billion and to bring in $100 million in fresh cash--has been delayed since January and now is scheduled to close next month.APRIL If it falls apart, it could put Macy’s into a new bind. The proceeds are earmarked toward paying off some of the $175-million due Macy’s banks in December.

Competitors, meanwhile, continue to pressure Macy’s. Nordstrom, the successful Seattle-based department store chain, last year entered the New York area, Macy’s home turf, and is a strong rival in San Francisco.

Toys R Us recently opened a store across the street from Macy’s 34th Street location in Manhattan, apparently damaging what had been its lucrative toy business. At the same time, Macy’s expense cuts, by reducing the amount of merchandise available and perhaps undermining service, could weaken its franchise in the long run.

In fact, the entire department store industry is declining as discounters and specialty stores such as the Limited and Gap siphon off sales. But Macy’s suburban mall specialty chains--Aeropostale, Charter Club and Fantasies by Morgan Taylor--apparently have had mixed results.

All the same, Macy’s these days is talking about getting aggressive again. It is dramatically stepping up its television advertising with a new $150-million campaign. In the New York area, it will start sponsoring New York Mets baseball telecasts this season.

Why would a retailer focusing so much of its attention on women’s fashions get involved with baseball? In the fashion industry, there is speculation that it’s part of an image-building program among potential investors intended to help Macy’s go public again.

In any case, the mood among Wall Street analysts and fashion suppliers, whose outlooks tend to swing swiftly, is more upbeat than it has been for some time.

“People are willing to bet that (Macy’s) will pull this off,” said Pam Stubing, an analyst with Moody’s Investors Service.

R.H. MACY & CO. AT A GLANCENew York-based R. H. Macy & Co. is the nation’s third-largest department store company, with 76,000 employees. The company is privately held, but it discloses its finances because it has publicly traded junk bonds. In its fiscal year ended July, 1990, Macy’s posted a loss of $215.3 million on sales of $7.3 billion.

* Department store divisions: New York-based Macy’s Northeast is the biggest division. The others are Atlanta-based Macy’s South/Bullock’s and two San Francisco-based units, Macy’s California and I. Magnin. Overall, these divisions have 147 stores.

* Specialty stores: Aeropostale, Charter Club and Fantasies by Morgan Taylor, all primarily located in suburban shopping malls. Overall, these chains have 105 stores, but their revenues are only about 1% of Macy’s business.

* Outside board members: The 15-member board includes a number of prominent figures, including former Secretary of State Henry A. Kissinger and Laurence A. Tisch, chairman of Loews Corp. and president of CBS Inc. Others are Michael F. Price, chairman of Mutual Series Fund, and A. Alfred Taubman, chairman of Taubman Co., a real estate development firm.

* Top executives: Edward S. Finkelstein, chairman and chief executive officer; Mark S. Handler, president and chief operating officer; Myron E. Ullman III, executive vice president. All also are members of Macy’s board.

RECENT MACY’S DEVELOPMENTS* Over the past half-year, Macy’s has raised $177 million in equity from investors, enabling it to buy back and retire high-interest junk bonds. Another $25-million investment has been promised by Hong Kong investor Sir Run Run Shaw.

* On Feb. 25, Macy’s reported a narrowed operating loss for its second quarter, which covers the crucial holiday shopping season. Its net loss before an extraordinary item was $7.3 million, versus a loss of $39 million a year earlier. Taking into account a one-time gain related to buying back junk bonds, Macy’s actually turned its first quarterly profit in two years, with net earnings of $78 million.

* On March 25, Macy’s bankers--led by Manufacturers Hanover Corp. and Bankers Trust--relaxed the terms of their loan agreement with the retailer, giving it more flexibility in raising cash. The banks also approved Macy’s plans to sell its credit card operation to General Electric Capital Corp.

What’s Ahead

* Macy’s says it will close the sale of its credit card operation to General Electric Capital Corp. in April, eliminating $1.4 billion of the $5.1 billion in debt on its balance sheet and bringing in about $100 million in fresh cash.

* After two weak Christmas shopping seasons in a row, Macy’s needs to show improvement in the 1991 holiday season, analysts say. In coming years, it also will need to raise more capital, apparently by selling stores or other assets, mortgaging real estate or selling stock to public or private investors.