Federated doubles profits

Don Hogsett, Staff Staff, May 17, 2004

Selling more of its products at full price as the economy continues to improve, and building sales and margins while cutting costs, Federated Department Stores Inc. more than doubled first-quarter profits, pushing earnings up 108.7 percent, to $96 million from $46 million a year ago.

Sales at the parent of Bloomingdale's and Macy's improved 6.9 percent, to $3.5 billion from $3.3 billion last year. Getting the year off to a strong start, same-store sales also increased 6.9 percent.

As a result of fewer promotions, and driving hard bargains with suppliers, average gross margin increased 90 basis points, or nine-tenths of a percentage point, to 40.1 percent from 39.2 percent a year ago. In another big assist to the bottom line, costs were cut 90 basis points, or nine-tenths of a percentage point, to 34 percent of sales from 34.8 percent a year ago. Costs would have been even lower, and margins somewhat higher, but for $19 million in store closing costs, and another $7 million pegged to the Macy's Home Store centralization project.

Federated said it expects about $40 million more in costs this year from the Home Store project, plus another $30 million in markdowns on discontinued home merchandise.

In a further prop to earnings, interest expense was pared 14.3 percent, to $60 million from $70 million last year, generating a cash savings of $10 million.

While costs from the project will put a cap on profits this year, Terry Lundgren, CEO, commented, "We are very excited about the long-term advantages inherent in our strategy of consolidating home store operations for all of our Macy's-brand department stores. We are confident that the real benefits of this move will begin to be seen in improved sales and gross margin, and reduced expenses in our home-related businesses in fiscal 2005 and beyond."

Federated Department Stores Inc.

Qtr. 5/1 (x000) 2004 2003 % chg
Sales $3,517,000 $3,291,000 6.9
Oper. income (EBIT) 216,000 146,000 47.9
Net income 96,000 46,000 108.7
Per share (diluted) 0.52 0.24 116.7
Average gross margin 40.1% 39.2%
SG&A expenses 34.0% 34.8%

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