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Federated-May Fit Grows, But Shows Scant Profit

Still picking up the tab for last year's buyout of rival May Department Stores Co., Federated Department Stores Inc. recorded a small third-quarter loss of $3 million, compared with a year ago-profit of $424 million when the chain banked $480 million on the sale of its credit-card business.

Peering through the thicket of one-time charges and gains that obscures the bottom line, Federated reported a 3.3% increase in operating profits, to $279 million from $270 million during the same period a year ago.

Federated sales rose by 6.0% during the quarter, to $5.9 billion from $5.6 billion a year ago, overall results capped by the shutdown or sale or some former May doors.

The acid-test gauge of same-store sales rose a strong 5.9%, sharply higher than an earlier forecast of a 3% to 5% gain in comps.

Federated ceo Terry Lundgren said earnings came in "at the high end of our expectations. On a year-to-date basis, we're ahead of our guidance. We continue to view 2006 as a transition year that has included a tremendous amount of change for our organization, notably a transition of more than 400 stores to the Macy's nameplate."

Nicked by a $28 million one-time inventory adjustment charge tied to the May acquisition, average gross margin dipped by 60 basis points, or six-tenths of a percentage point, to 39.8% from 40.4% a year ago. Excluding the one-time charge, average gross margin on a recurring basis came in at 40.3%, virtually flat with last year's 40.4%.

When measured as a percentage of sales, operating costs were up only slightly, by 10 basis points, or one-tenth of a percentage point, to 35.6% from 35.5%.

After paying down some of its take-over debt with the proceeds from the sale of the credit-card portfolio, interest expense was pared by 28.3%, to $104 million from $145 million a year ago, generating a cash savings of $41 million.

Federated saved even more by keeping a tight rein on stockpiles, which declined by 5.1%, to $7.0 billion from $7.4 billion during the same period last year, generating a cash savings of $375 million.

Federated Department Stores

Qtr. 10/28 (x000) 2006 2005 % change
(loss)
a. Third quarter results include a $28 million inventory valuation charge stemming from the May Department Stores acquisition; $117 million in May integration costs, compared with $63 million during the same period a year ago; $20 million in after-tax income from continuing operations, compared with $424 million the prior year; and a $23 million after-tax loss from discontinued operations, compared with a year-before profit of $12 million. Results in the 2005 third quarter included a $480 million gain on the sale of accounts receivable.
b.Nine-month results include a $168 million inventory valuation charge; May integration costs of $283 million, compared with $63 million last year; a gain of $191 million on the sale of accounts receivable, compared with $480 million last year; $228 million in after-tax income from continuing operations, compared with $695 million last year; and $34 million in after-tax income from discontinued operations, compared with $12 million a year ago.
Sales $5,886,000 $5,555,000 6.0
Oper. income (EBIT) 251,000 270,000 -7.0
Net income (3,000)a 436,000a
Per share(diluted) (0.01) 0.90
Average gross margin 39.8% 40.4%
SG&A expenses 35.6% 35.5%
Nine months
Sales 17,811,000 12,819,000 38.9
Oper. income (EBIT) 668,000 813,000 -17.8
Net income 262,000b 707,000b -62.9
Per share (diluted) 0.47 1.79 -73.7
Average gross margin 39.5% 40.6%
SG&A expenses 35.8% 34.3%


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