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CNBC Exclusive: Federated CEO Outlines Strategy for Boosting Sales

It's converted more than 400 May Department Stores to the Macy's Brand since buying its former retail rival in 2005. Now Federated Department Stores is deciding what to do next. CNBC's Margaret Brennan sat down with Chief Executive Officer Terry Lundgren in an exclusive interview, his first since the company's integrated February sales numbers were announced.

"We just bit a big one!" Lundgren said of the May Department Stores acquisition. That may be an understatement. Lundgren led a merger that swallowed up iconic U.S. retailers such as Lord & Taylor, Hecht's, Filene's and Marshall Field's. So is Terry Lundgren done shopping?

"No comment," Lundgren laughed. While he says acquisitions still lie ahead, there's nothing on his shopping list right now. Lundgren's first priority is building Federated's sales. While February's numbers were disappointing, he's confident that sales are picking up. Wall Street focuses on growth, and the giant retailer plans to grow first and foremost from within the company, Lundgren said.

"I think Bloomingdale's can open new stores," he said. "I'm so excited about progress we made at Bloomingdales by opening three stores recently. We'll be opening two more this year, and more beyond that. With the Macy's brand expansion being recognized beyond America, there may be the potential for international expansion down the line."

The recently announced decision to change the company's moniker to Macy's from Federated fed speculation that the merchant may trim Bloomingdale's from the core Macy's business. Lundgren brushed that rumor aside.

Bloomies constitutes only 10% of the overall business, but Lundgren pointed out that the division is larger than competitor Saks and smaller than Nordstrom in terms of number of stores. Bloomingdales' smaller size is an advantage, Lundgren said, and he intends to leverage it in order to stay competitive with other up-market retailers. Lundgren hopes to achieve the same degree of agility within the core Macy's business so it can keep current with fashion and consumer trends.

Ask Lundgren about his $130 million bet on building Macy's direct-to-consumer online business, and he lights up.

"Macys.com is growing exponentially," he said. Since September, business at Macys.com has doubled, seeing especially strong growth in regions where the company's brick-and-mortar presence is new.

"St. Louis never had a Macy's," Lundgren said, "and all of a sudden that went through the roof. It's very exciting to us." The company is building a warehouse in Tennessee to accommodate the growth, and Lundgren says Federated may already be outgrowing that capacity. Online shoppers are key to driving in-store sales -- Lundgren estimates that consumers who shop in both channels are 30% more productive than those who use only one or the other.

Another strategy for bringing new shoppers through Macy's doors is expanding the number of exclusives and private-label brands the company sells. Currently, 20% of inventory at Macy's is from one of its private-label brands like I.N.C., a highly successful contemporary clothing line. Macy's plans to make its largest brand debut in the fall when it brings a Martha Stewart home goods line to 800 stores. Lundgren expects several hundred millions of dollars in sales from that line, and he's exploring further guest-designer exclusives.

With those investments ahead, is Lundgren concerned about a potential leveraged buyout of the company? Activist investor Carl Icahn made headlines about a potential buyout of Federated in September when he bought 7 million shares of the company.

"I'm reading about it as you are," Lundgren said. He pointed out that Federated's stock price is up 25% over the last fiscal year. Shareholders seem to be happy with that level of growth, Lundgren said, and he's not seeing much activity on the buyout front.

"As long as you have growth ahead of your company, it's good for your shareholders to keep it public," he said.

Converting the May Loyalists

Lundgren's still not satisfied with the newly combined company's topline sales growth. Former May customers have been sluggish about shopping in new Macy's stores, and Federated has hit resistance -- particularly in Chicago -- from loyal Marshall Field's customers. Still, Lundgren says he has no doubt that a unified national brand was the right decision.

Federated considered leaving a flagship Filene's in Boston and a Marshall Field's in Chicago, but Lundgren said that model would have been "doomed for failure." One reason: Marketing would have been limited. Regional stores would have missed out on national opportunities like online shopping and advertising assets such as the Macy's Thanksgiving Day Parade.

Lundgren's confident that the new Macy's can win over those customers from the formerly regional department store chains. In his words, "We're back."

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