Federated Rides Strong Quarter

Don Hogsett, May 16, 2005

Cincinnati — Helped by modestly stronger sales, wider margins and lower costs — and importantly putting behind it a handful of costs tied to store closings and the Macy's home store centralization that depressed the bottom line a year ago — Federated Department Stores Inc. boosted first quarter profits 26.8 percent, to $123 million from $97 million last year.

The number Wall Street watches, earnings per share, came in at 71 cents, up 34 percent from 53 cents a year ago, beating the retailer's original forecast of a 45 to 50 cent profit, and even its upwardly revised target of a 65 to 70 cent per-share profit.

But skewing the year-over-year comparison somewhat, last year's earnings were reduced by 6 cents per share to cover store closing costs and the Macy's home store consolidation. Excluding those one-time costs, earnings per share rose at a more moderate, but still strong, pace of 20.3 percent.

But it wasn't enough for hungry analysts and investors, who pushed the company's stock down by almost 2 percent in mid-day trading on Wednesday, May 10, when the news was put out. After the company, in a conference call, cautioned investors that an exceptionally strong first quarter would be tough to duplicate later in the year, the retailer's stock, after initially rising higher, slipped 1.7 percent, or $1.10 per share, to $62.80 from $63.90 the day before.

Helping to drive the bottom line improvement, Federated boosted sales in the opening quarter 2.5 percent, to $3.6 billion from $3.5 billion last year, on a smaller base following earlier store closings. Same-store sales did even better, climbing modestly by 2.6 percent.

Providing another lift to the bottom line, average gross margin improved by 20 basis points, or two-tenths of a percentage point, to 40.3 percent from 40.1 percent a year ago. Gross margin dollars rose 2.8 percent, to $1.5 billion from $1.4 billion during the same quarter a year ago.

Lending further supports, operating costs, when measured as a percentage of higher sales, declined by 60 basis points, or six-tenths of a percentage point, to 33.3 percent from 33.9 percent the preceding year.

Looking ahead, Federated said it expects second quarter profits to come in at 80 to 85 cents a share.

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