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Federated Takes 'Critical' Aim at Home

To boost its lagging home business and to better woo its customers, particularly the ones it adopted through its acquisition of May Co., Federated Department Stores will shift its advertising approach to include more public media and heavier promotions, starting late this month.

Karen Hoguet, evp and cfo, said during the 850-plus unit department store operator's first-quarter earnings call that while Federated is having success in building a larger proprietary credit database on converted May customers, "We need more time and information on their shopping habits to be more effective in our marketing to them." Hence the call for an emphasis on advertising in "public media rather than direct mail, and our promotions will need to create more urgency in order for these customers to react."

The new advertising will comprise public as opposed to private — or proprietary — card holder focused sales and more television ads "as we try to drive customers into the stores," Hoguet said.

This effort is "particularly critical" in aiding the company's home areas, "which tend to be driven most by promotional offerings," she continued. "Our hope is to improve our home business with promotions and public advertising…. We are hoping these changes will help accelerate the business starting in late May."

Traffic and sales were weak in the quarter in the Home stores, with furniture being one of the poorest performing categories.

The retailer reported diluted earnings per share of 8 cents, in contrast to a loss of 9 cents in the year-ago quarter. Earnings from continuing operations were 11 cents, shifting from a loss of 13 cents for the year-ago period.

Sales for the quarter were down slightly to $5.92 billion from $5.93 billion a year ago — below the company's guidance of a sales upswing to $6 billion to $6.1 billion. Federated first quarter comps edged up 0.6%.

Federated reported a 60-basis-point cut in SG&A expenses, and a complementary 110-basis-point hike in average gross margins.

"In spite of weak sales, we achieved strong gross margin results and reduction in expense as a percent to sales," said chairman, president and ceo Terry Lundgren, adding, "We are on track to deliver at least $450 million in annual expense savings as a result of the May Company acquisition."

Federated projects second-quarter comps will range from flat to up 2%.

Hoguet said that as Federated continues re-branding and integrating all of its acquired May stores into the Macy's regime, company research shows former May store shoppers "understand and, more importantly, like Macy's more and more. And our store associates at our converted doors are getting more comfortable with way we operate Macy's stores."

Looking ahead to the second half of the fiscal year, Hoguet said Federated expects to perform well "even if the economy ends up softer than what we originally expected" because of "so many good things happening in the fall — particularly the launch of the Martha Stewart line."

One analyst commented on what appears to be a growing push for private label products at Macy's and a demand from the retailer for higher margins.

Hoguet argued that vendors have to produce product that sells and has a good sell-through: "We're much more focused as we work with vendors on that issue, rather than on having huge increases on gross margin rates."

Federated Department Stores, Inc.

Qtr. 5/5 ($millions) 2007 2006 % change
(loss)
a. Results reflect the acquisition of the May Department Stores Co., and the subsequent sale of its Lord & Taylor division and the Bridal Group.
b. Reflects discontinued operations including the loss on the April 2007 disposal of After Hours Formalwear of $7 million on a pre-tax and after-tax basis; an interest expense of $125 million, compared to $138 million one year ago; and a tax expense of $31 million, compared to a tax benefit of $44 million one year ago.
c. First quarter 2007 May Co. integration costs and related inventory valuation adjustments per diluted share were $0.05, compared to $0.14 for the prior-year quarter.
Sales $5,921 $5,930
Oper. Income (EBIT) 208a 20a 940.0%
Net income 36b (52)b
Per share (diluted) 0.08c (0.09)c
Average gross margin 39.8% 38.7%
SG&A expenses 35.7% 36.3%


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