Profits off 48% at Federated

Don Hogsett, May 19, 2003

Hurt by weakening sales and the cost of shuttering some stores in the Atlanta area, first-quarter profits at Federated Department Stores were slashed almost in half, falling by 48.3 percent, to $46 million from $89 million last year.

Even so, the results were better than expected. Earnings per share of $0.24 easily bested even Federated's initial forecast of just $0.14 to $0.19.

Easing the pressure on profits, store closing and consolidated costs were lower than estimated, the company said. The company had originally forecast closing costs in the Atlanta area — where it operates duplicative stores under the Macy's and Rich's nameplates — would total $35 million in the opening quarter, but now said some costs will be pushed back until later in the year. And total closing costs will be scaled back by $10 million to $15 million, the retailer added.

Federated sales declined by 4.7 percent, to $3.3 billion from $3.5 billion last year. Same-store sales fell back by 5.0 percent.

"Our ability to produce planned earnings in a sales environment that continues to be weak is reflective of a number of factors, foremost among them being good inventory management and tight expense controls, for which Federated is well known."

Indeed, even including the $8 million in store closing costs, overall operating expenses were reduced by 1.0 percent, to $1.1 billion from $1.2 billion, generating a cash savings of $11 million. Pull the closing costs out of the equation, and expenses actually fell by 1.6 percent, or by $19 million.

But offsetting any savings, average gross margin slimmed down by 60 basis points, or six-tenths of a percentage point, to 39.2 percent from 39.8 percent. Caught between the falling sales and margin erosion, gross margin dollars fell by 6.3 percent, to $1.3 billion from $1.4 billion.

In a lift to the bottom line, the retailer pared back its inventory levels by 3.8 percent, to $3.5 billion from $3.6 billion last year.

Federated Department Stores Inc.

Qtr. 5/3 (x000) 2003 2002 % change
a-SG&A expenses, operating profits and net income during the quarter were reduced by $8 million in pre-tax store closing and consolidation costs principally related to the closing of duplicative stores in the Atlanta market, where the company operates stores under the Rich's and Macy's nameplates.
Sales $3,291,000 $3,453,000 -4.7
Oper. income (EBIT) 146,000a 221,000 -33.9
Net income 46,000a 89,000 -48.3
Per share (Diluted) 0.24 0.43 -44.2
Average gross margin 39.2% 39.8%
SG&A expenses 34.8% 33.4%

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