Federated beats Street as profits dip

Don Hogsett, Michele SanFilippo, November 17, 2003

Nicked by $29 million in store closing and integration costs, second-quarter profits at Federated Department Stores Inc. slipped by 36.8 percent, to $67 million form $106 million last year, but still managed to beat Wall Street expectations and the retailer's own previous guidance.

Coming in at 36 cents per fully diluted share, earnings easily exceeded Federated's earlier guidance of a 25 to 30-cent per-share profit, and a revised forecast of a profit of 30-33 per share.

Sales at the department store retailer held steady during the period, edging up by 0.2 percent, to $3.5 billion. Same-store sales inched up by 0.3 percent.

Taking a bite out of the bottom line during the period was $29 million in costs tied to the previously announced Rich's-Macy's integration in Atlanta; the integration of Burdine's and Macy's in Florida; and the scheduled closing of the Lazarus-Macy's store in Columbus, OH.

Terry J. Lundgren, president and ceo, said the better than expected earnings were driven by an improving sales trend, tight inventory controls and strong gross margins.

In a big cash savings, Federated reduced its merchandise stockpiles by 5.0 percent, to $4.4 billion from $4.6 billion last year.

Average gross margin improved by 70 basis points, or seven-tenths of a percentage point, to 40.0 percent from 39.3 percent, helping to offset higher costs. Operating costs increased by 110 basis points, or 1.1 percentage points, to 35.0 percent of sales from 33.9 percent the preceding year.

Looking ahead to the all-important Christmas quarter, Federated reaffirmed its fourth-quarter earnings forecast of $2.15 to $2.20 a share, and said it anticipates same-store sales will range between a one percent drop to a one percent gain.

Federated Dept. Stores Inc.

Qtr. 11/1 (x000) 2003 2002 % chg
a-Earnings in the year-ago quarter included $31 million from the sale of discontinued operations; and earnings in the year-before nine-month period included $180 million from the sale of discontinued operations.
Sales $3,486,000 $3,479,000 0.2
Oper. income (EBIT) 173,000 188,000 -8.0
Net income 67,000 106,000a -36.8
Per share (diluted) 0.36 0.54 -33.3
Average gross margin 40.0% 39.3%
SG&A expenses 35.0% 33.9%
Nine months 2003 2002 % chg
Sales 10,211,000 10,418,000 -2.0
Oper. income (EBIT) 583,000 709,000 -17.8
Net income 233,000 477,000a -51.2
Per share (diluted) 1.25 2.37 -47.3
Average gross margin 40.1% 40.1%
SG&A expenses 34.4% 33.3%

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