Fate of Robinsons-May offices uncertain in merger.

As Federated Department Stores hashes out its May Department Stores Co. acquisition, the future face of at least four greater San Fernando Valley shopping centers hangs in the balance along with the fate of the Robinsons-May regional headquarters in North Hollywood.

Although Federated's plans to digest its newest acquisition are still in the making, the company has made it clear that May stores will take on the Macy's brand, leaving about 90 malls nationwide with duplications, including a number of the Valley's shopping centers.

Glendale Galleria currently houses a Robinsons-May and a Macy's store, as does Northridge Fashion Center, both General Growth Properties malls.

The Simi Valley Town Center, which is currently under construction and slated to open in October, is to be anchored by a Macy's and a Robinsons-May store.

Westfield's Shoppingtown Topanga, currently undergoing a major renovation, houses a Robinsons-May and the company's neighboring property, Promenade, includes two Macy's stores.

And Macerich Co.'s The Oaks mall in Thousand Oaks, has two Robinsons-May units and two Macy's units.

"We believe that the merger presents opportunities and also risks for mall REITs," wrote James W. Sullivan in a research report for Prudential Equity Group LLC. "The opportunities involve reclaiming underperforming stores (in productive assets).... The risks involve the closure of underperforming stores (in weak assets) that could result in residual tenant vacancy as the asset goes into decline."

Federated had yet to work through most of the details of the acquisition when it announced its $17 billion purchase late last month, but the company did say it expected store closures and layoffs as a result.

The May corporate headquarters will be consolidated into Federated and obvious redundancies in support functions would be eliminated, resulting in layoffs.

"While it is too early to be specific, we are obviously looking at store overlap for potential dispositions, and we would expect there to be some disposition," said Karen Hoguet, Federated CFO in a conference call.

Regional headquarters

Also in question is the Robinsons-May regional headquarters, located on a 26-acre parcel in North Hollywood. The office, which employs an estimated 1,700 workers, oversees some 56 Robinsons-May and Meier & Frank locations in California, Nevada, Arizona, Utah, Oregon and Washington.

Robinsons-May officials there did not respond to a request for comment.

Mall operators were generally optimistic that the acquisition would not affect their store lineups.

Brian Gabler, assistant city manager for Simi Valley, said he expected Robinsons-May and Macy's to anchor Simi Valley Town Center as planned.

"Contractually, they are obligated to open and operate their stores," Gabler said. "The possibility exists that they could split the stores, have men's in one and women's in the other. There are a lot of different scenarios that could take place."

Northridge Fashion Center officials agreed.

"In a lot of cases Macy's operates two stores in one location," said Rick Forster, senior general manager at the mall. "(Closures) may happen in some locations, but I don't think it will happen here. In this case, we think we have a pretty strong Robinsons-May store."

But because of the uncertainty surrounding the acquisition, Macerich officials have postponed their timetable to present plans for a renovation of The Oaks mall, which includes remaking one of its Robinsons-May stores and expanding the other unit.

"You're going to have one department store company owning 600,000 square feet of space in four locations, so why would you tear one (building) down and expand one (building) not knowing what effect the merger will have?" said Randy Brant, senior vice president at Macerich.

The merger of Federated with May, which will put a total of 950 department store units under one ownership, is certainly not the first of department store consolidations, the reason for the current duplication at malls.

But historically, the overall result has been a reduction of business opportunities, for shopping centers and for vendors.

"What we've experienced anytime two companies merge, the combined business tends to drop," said John Paul Beltran, CEO at Calabasas-based John Paul Richard, a ladies apparel maker that sells both to Federated and May. "I think Federated will probably sell some stores off to other companies, and those are stores that will probably no longer do the same kind of business. Those stores they sell off are businesses that you never really recover."

Decline in share

That's been especially true in the department store sector, which has been steadily losing market share to specialty and discount retailers and has become exceedingly cost conscious as a result.

In 2003, department stores accounted for 3 percent of total non-auto retail sales, down from 5 percent a decade earlier, according to Retail Forward Inc., a management consulting and market research firm. Yet the sector has managed to remain profitable, in large part because of cost cutting efforts.

"Although the pace of mergers and acquisitions has slowed in recent years since most smaller chains have already been gobbled up, a number of department stores have been actively right-sizing their store base by closing duplicative nameplates within existing markets or shedding underperforming stores ..., "the company wrote in an industry report.

Perhaps ironically, that could open new opportunities for shopping centers that have devoted some of their best real estate to department store operators even as their customer base has fallen.

"Most every woman in America bought lingerie in a department store and now there's Victoria's Secret," Brant noted. "Most people bought electronics in department stores and now it's Circuit City and other electronics retailers. Things are changing."