Federated Pushes Profits Sky High

Don Hogsett, November 14, 2005

Boosted entirely by the sale of accounts receivable, which more than offset costs tied to the buyout of May Department Stores, third quarter profits at Federated Department Stores Inc. rose more than five-fold, by 489.2 percent, to $436 million from $74 million.

Propping up the bottom line, Federated brought in $480 million from the earlier sale of accounts receivables, and in another big lift to profits recorded a gain of about $10 million stemming from Visa/Mastercard antitrust litigation.

The big one-time gains offset costs stemming from the Aug. 30 May Department Stores acquisition, including $63 million in May integration costs, and a big jump in interest expense tied to acquisition financing. Interest costs rose $90 million, or 136.6 percent, to $145 million from $55 million during the same period a year ago.

Adding two months of May sales to its own, Federated reported a sales gain of 64.1 percent, to $5.8 billion from $3.5 billion during the same period a year ago. But hampered by the faltering May operation, same-store sales inched up just 0.6 percent. Through the first nine months of the year, mostly as a stand-alone basis without May, Federated same-store sales climbed 1.4 percent.

Average gross margin expanded during the third quarter, but not enough to offset an even greater increase in costs. Margins improved 60 basis points, or six-tenths of a percentage point, to 40.4 percent from 39.8 percent. But costs rose even faster, by 70 basis points, or seven-tenths of a percentage point, to 35.5 percent of sales from 34.8 percent a year ago.

Acting as a big drag, merchandise stockpiles swelled sharply in the aftermath of the May buyout, climbing 82 percent, compared with the 64 percent increase in sales. Inventories rose to $7.8 billion from $4.3 billion last year.

Looking ahead, Federated said its guidance for the all-important Christmas quarter is unchanged, with a forecasted same-store sales gain of 1 to 2 percent. The company said it expects per-share earnings of $2 to $2.20 per share from continuing operations, excluding the Bridal Group, which has been put up for sale. Per-share profits would be even higher, $2.35 to $2.45 per share, but will be clipped, the retailer said, by another $100 to $150 million in pre-tax costs tied to the integration of May stores.

Federated Department Stores Inc.

Qtr. 10/29 (x000) 2005 2004 % change
a. Results in both the third quarter and nine months include $63 million in costs tied to the integration of May Department Stores, offset by $480 million in proceeds from the sale of accounts receivable and $3 million in after-tax income from discontinued operations.
Sales $5,875,000 $3,525,000 64.1
Oper. income (EBIT) 284,000 175,000 62.3
Net income 436,000a 74,000a 489.2
Per share (diluted) 1.79 0.42 326.2
Average gross margin 40.4% 39.8%
SG&A expenses 35.5% 34.8%
Nine months 2005 2004 % change
Sales 13,049,000 10,656,000 22.5
Oper. income (EBIT) 827,000 637,000 159.4
Net income 707,000 249,000 183.9
Per share (diluted) 3.58 1.38 159.4
Average gross margin 40.6% 40.4%
SG&A expenses 34.3% 34.4%

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