Federated feels impact of Fingerhut

Don Hogsett, March 4, 2002

Its profits withered away by the $770 million cost of unloading its Fingerhut business, Federated Department Stores recorded a fourth-quarter loss of $447 million, compared with a year-ago profit of $332 million.

Acting as a further drag, the retailer racked up a further $95 million in restructuring charges — $43 million tied to the shutdown of Stern's; $44 million for the reorganization of Macys.com, Bloomingdales.com and Bloomingdale's By Mail; and another $8 million to integrate Liberty House into Macy's West.

Even cutting through that thicket of one-time charges, and excluding all the one-time items, earnings per share dropped off by 27.9 percent, to $3.03 from $4.20 last year.

It was a tough time at the top line as well in a notably disappointing holiday season for department store retailers. Sales fell off by 8.4 percent, to $5.1 billion from $5.6 billion last year, a shortfall of almost half a billion dollars. The acid-test of same-store sales declined by 6.0 percent. Skewing the results somewhat, this year's Christmas quarter contained only 13 shopping weeks, compared with 14 last year. But even adjusting for last year's extra week, same-store sales were off by 3.9 percent.

Further weighing down the bottom line, average gross margin thinned by 110 basis points in the midst of another highly promotional holiday season, contracting to 39.4 percent from 40.5 percent a year ago. Pressured by falling sales and lower prices, gross margin dollars tumbled by 10.9 percent, to $2.0 billion from $2.3 billion last year.

Despite the lower sales volume, operating costs held steady at 25.7 percent of sales, aided by aggressive cost cutting. Measured in absolute dollars, costs were cut down by 8.1 percent, to $1.3 billion from $1.4 billion last year, a cash savings of $117.0 million.

Federated Department Stores Inc.

Qtr. 2/2/02 (x000) 2002 2001 % CHG
a-Fourth-quarter results include an $18 million charge for an inventory valuation adjustment; a $95 million charge for asset impairment and restructuring, compared with $80 million a year ago; a $13 million pre-tax profit from discontinued operations vs. a $68 million year-ago loss; and a $770 million loss on the disposal of discontinued operations.
b-12-month results include a $53 million charge for inventory valuation adjustments; a $162 million asset impairment and restructuring charge vs. $80 million in 2000; a $14 million pre-tax profit from discontinued operations, compared with a year-ago loss of $1.0 billion; a $770 million loss on the disposal of discontinued operations and a $10 million loss on the early retirement of debt.
Sales $5,132,000 $5,604,000 -8.4
Oper. income (EBIT) 700,000 831,000 -15.8
Net income (447,000)a 332,000a
Per share (diluted) (22.23) 1.65
Average gross margin 39.4% 40.5%
SG&A expenses 25.7% 25.7%
12 months
Sales 15,651,000 16,638,000 -5.9
Oper. income (EBIT) 1,319,000 1,771,000 -25.5
Net income (276,000)b (184,000)b
Per share (diluted) (1.38) (0.89)
Average gross margin 39.1% 40.2%
SG&A expenses 30.7% 29.5%

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