Federated Remains Strong

Cincinnati — Even though its new May Department Stores business isn't performing as well as expected — and is forecast to come up short through the all-important Christmas season — Federated Department Stores said its core business is still on track and reassured analysts and investors that operating profits are still on target, even on a lower level of sales.

And following a 12- to 18-month transition period, Federated said it expects “a significant improvement in May's performance.” And going forward, said Karen Hogue, Federated executive vice president and chief financial officer, in a conference call with analysts, “We are still highly confident that the combined company will be able to generate higher comps than the separate companies did before, but probably not until 2007.”

Focusing on the newly acquired May division, Hogue, conceded May “did perform worse up until the time we bought them than we had anticipated. So we're starting at a lower base. But the good news is we see so much opportunity that we're not really concerned.”

Specifically, said Hogue, May operating profits before one-time items, and excluding the bridal business which is now on the block, is “assumed to be $75 to $85 million for September and October,” roughly half the $146 million reported last year. And operating profits for the crucial Christmas quarter are forecast at $575 to $600 million, down from $646 million last year.

And same-store sales at May, said Hogue, are expected to slide as well, falling 4 to 6 percent through the holiday period. “Our assumptions for sales in the May divisions — excluding bridal — is roughly $2.1 billion to $2.2 billion in September and October, and $4.6 to $4.7 billion in the fourth quarter.”

In the core Federated business, including Macy's and Bloomingdale's, same-store sales are expected to come in somewhat beneath their original target, said Hogue. Third quarter same-store sales are forecast to rise 1 to 1.5 percent, missing an original target of 3 percent. Christmas quarter comps are now forecast to rise 1 to 2 percent.

But even given the weakness at May, and a lower forecast for the core Federated business, “We are assuming operating income at the low end of what was implied in February.”

Hogue cautioned analysts and investors not to expect much in the way of improvement at May until the second half of next year. “There's going to be very little we can do to impact the business in the spring. We're hoping that by the second quarter, maybe. But I think realistically it's fall '06 before we can have an impact.”

Hogue said Federated has encouraged May management “to stay focused on the fall results, but as you might imagine this is a difficult time period to be operating, particularly in the four divisions that will go away.”

She cautioned analysts and investors the May buyout will result in about $1 billion in one-time costs, with “a big chunk left in the next 12 months. A piece will be markdowns related to inventories we're not going forward with, especially private label. The rest is severance.”

Hogue said Federated has yet to complete a plan for the spring season. “We're still working on that. We don't know yet how much markdown we're going to need to take.”

Hogue urged analysts and investors to focus on the long term. “We recognize that you do want to use our short-term financial performance as an indicator as to how successful the combined company will be. But you also need to recognize, please, that until the names are changed next fall and the new division organizations have a chance to implement the change, it will be difficult to really make that judgment. That does not mean that we are not focused on short-term performance — because we are. We are working very hard to plan for the transition and our future, while at the same time executing our fall 2005 strategy.”

Home & Textiles Today Staff | News & Commentary

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