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Federated profits jump 35 percent

With stronger margins, lower costs and improved inventory controls offsetting sluggish holiday sales, fourth-quarter profits at Federated Department Stores Inc. raced ahead by 34.9 percent, to $460 million from $341 million last year.

Sales in the Christmas quarter were relatively flat, edging up just 0.7 percent, to $5.1 billion from $5 billion last year. Same-store sales rose 1.4 percent.

Providing a big lift to the bottom line, average gross margin expanded in a less promotional holiday season, improving by 110 basis points, or 1.1 percentage points, to 41 percent from 39.9 percent.

In another lift to profits, operating costs were reduced by 130 basis points, or 1.3 percentage points, to 26 percent of sales from 27.3 percent last year. Measured in absolute dollars, costs were cut by 4 percent, to $1.3 billion from $1.4 billion, yielding a cash savings of $55 million.

Perhaps the biggest boost to profits came from tight inventory controls, with stockpiles reduced by 4.3 percent, to $3.2 billion from $3.4 billion, saving the company $144 million.

For all of last year, Federated earnings tumbled by 15.3 percent, to $693 million from $818 million. Sales declined by 1.1 percent, to $15.3 billion from $15.4 billion, with same-store sales dipping by 0.9 percent. During the year, Federated generated $1.59 billion in cash flow from continuing operations, an increase of more than $400 million.

In more good news, Terry Lundgren, Federated chairman, CEO and president, said the new fiscal year is off to a strong start, with February sales "trending well ahead of expectations, attributable in part to favorable weather and the possibility that some anticipated March sales migrated into February."

Given the strong start, Federated said it's raising its February same-store sales forecast to an increase of 7 to 8 percent, compared with a prior forecast for a 2 to 3 percent gain.

Federated Department Stores Inc.

Qtr. 1/31/04 (x000) 2003 2002 % chg
a-2002 net income included a one-time gain of $180 million stemming from the sale of discontinued operations. Excluding the one-time item, income form continuing operations rose 8.6 percent, to $693 million from $638 million.
Sales $5,053,000 $5,017,000 0.7
Oper. income (EBIT) 758,000 634,000 19.6
Net income 460,000 341,000 34.9
Per share (diluted) 2.50 1.78 40.0
Average gross margin 41.0% 39.9%
SG&A expenses 26.0% 27.3%
12 months 2003 2002 % chg
Sales 15,264,000 15,435,000 -1.1
Oper. income (EBIT) 1,341,000 1,343,000 -0.1
Net income 693,000 818,000a -15.3
Per share (diluted) 3.71 4.12 -10.0
Average gross margin 40.4% 40.0%
SG&A expenses 31.6% 31.3%

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