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Integration Slows Federated

Profits in the crucial Christmas quarter rose 4.9% at Federated Department Stores, to $733 million from $699 million last year, helped by a deep cut in interest expense that saved the retailer $78 million, deep cuts in operating costs, and $54 million in proceeds from a debt tender offer.

Acting as a drag and tugging at the bottom line was $167 million in costs tied to the integration of the May Department Stores acquired in August 2005, up from $106 million in integration costs in the same period last year.

The integration effect showed as sales at the department store titan fell by 4.3%, to $9.2 billion from $9.6 billion last year, hurt by the closing of about 80 duplicative stores from the May buyout. Still, the acid-test measure of same-store sales rose by 6.1%

Lending strength to the bottom line, Federated whittled down its operating costs by 10.6%, to $2.3 billion from $2.6 billion, yielding a cash savings of $275 million. Stockpiles were cut by 2.6%, but not enough to keep pace with the 4.3% drop in sales.

Federated Department Stores

Qtr. 2/3 (x000) 2006 2005 % change
a. Fourth quarter results include $167 million in May integration costs vs. $106 million last year; and a $27 million after-tax loss from discontinued operations vs. a prior-year profit of $21 million.
b. 12-month results include $450 million in May integration costs vs. $159 million; a $191 million gain on the sale of receivables vs. $480 million and an after-tax profit of $7 million from discontinued operations vs. $33 million.
Sales $9,159,000 9,571,000 -4.3
Oper. Income (EBIT) 1,427,000 1,300,000 9.8
Net income 733,000a 699,000a 4.9
Per share (diluted) 1.40 1.26 11.1
Average gross margin 40.8% 40.6%
SG&A expenses 25.2% 27.0%
12 months
Sales 26,970,000 22,390,000 20.5
Oper. Income (EBIT) 2,095,000 2,113,000 -8.5
Net income 995,000b 1,406,000b -29.2
Per share (diluted) 1.81 3.24 -44.1
Average gross margin 39.9% 40.6%
SG&A expenses 32.2% 31,2%

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