Federated profit down 57% in Q2

Don Hogsett, August 18, 2003

Up against a tough comparison with last year, second-quarter profits at Federated Department Stores fell by 57.4 percent to $120 million from $282 million last year.

But sharply skewing the numbers, last year's profit included a $149 million one-time gain from the sale of its catalog and Internet operations. Pull those proceeds out of the equation, and earnings from continuing operations declined by a more moderate 9.8 percent, to $120 million from $133 million.

Sales dipped by 1.5 percent, to $3.4 billion from $3.5 billion last year. Same-store sales slipped even further, declining by 3.1 percent.

However, earnings came in sharply ahead of expectations at 65 cents per share, topping the retailer's earlier forecast of a 50 to 55 cent per-share profit.

Weighing on the bottom line, in addition to the softer sales, were thinning margins and rising costs. Under modest markdown pressure, average gross margin narrowed by 20 basis points, or two-tenths of a percentage point, to 41.0 percent from 41.2 percent a year ago. Costs climbed higher by 70 basis points, or seven-tenths of a percentage points, to 33.3 percent of sales from 32.6 percent a year, driven higher by $10 million in costs tied to the Rich's-Macy's consolidation and other store closings.

Lending some support to the bottom line, the retailer pared its interest expense by 16.7 percent, to $65 million from $78 million last year, generating a savings of $13 million — an amount equal to roughly 11 percent of the second quarter's entire profit.

Federated Dept. Stores Inc.

Qtr. 8/3 (x000) 2003 2002 % chg
a- Second-quarter and six-month results include a $149 million gain on the disposal of a discontinued operation.
Sales $3,434,000 $3,486,000 -1.5
Oper. income (EBIT) 264,000 300,000 -12.0
Net income 120,000 282,000a -57.4
Per share (diluted) 0.65 1.40 -53.6
Average gross margin 41.0% 41.2%
SG&A expenses 33.3% 32.6%
Six months 2002 2001 % chg
Sales 6,725,000 6,939,000 -3.1
Oper. income (EBIT) 410,000 521,000 -21.3
Net income 166,000 371,000a -55.3
Per share (diluted) 0.89 1.84 -51.6
Average gross margin 40.1% 40.5%
SG&A expenses 34.0% 33.0%

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