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Federated Reverses Loss, Posts $36M in Earnings

Amid sluggish sales and concerns about the economy, Federated Department Stores hit its earnings targets for the first quarter ended May 5 and sees improving trends in the second half.

Amid sluggish sales and concerns about the economy, Federated Department Stores hit its earnings targets for the first quarter ended May 5 and sees improving trends in the second half.

The $27 billion Federated, which will change its corporate name to Macy’s pending shareholder approval at Friday’s annual meeting in Cincinnati, plans to boost advertising to draw greater traffic to the new, but lagging, Macy’s stores that were converted from former May doors. Television ads and intensified promotion of home categories — currently Federated’s weakest business — are on the agenda.

Net income for the quarter came to $36 million, versus a loss of $52 million a year ago. Diluted earnings per share from continuing operations were 11 cents, versus a loss of 13 cents. Excluding May merger integration costs of $36 million, earnings per share were 16 cents and operating income was $244 million.

A year ago, the company posted EPS of 1 cent and $149 million in operating income, excluding $129 million in integration costs.

Sales totaled $5.92 billion, down 0.2 percent from $5.93 billion last year. Federated was hoping for $6 billion to $6.1 billion in sales. Same-store sales were up 0.6 percent.

The recurring gross margin rate for the first quarter of 2007 was 39.8 percent, compared with 38.8 percent in the year-ago quarter.

“Sales in the quarter were soft, particularly in April. For the quarter as a whole, we were pleased with sales in the legacy Macy’s and Bloomingdale’s stores,” Terry J. Lundgren, Federated’s chairman, president and chief executive officer, said in a statement. “However, sales in the new Macy’s locations were disappointing in the quarter. In spite of weak sales, we achieved strong gross margin results and reduction in expense as a percent to sales. We are on track to deliver at least $450 million in annual expense savings as a result of the May Company acquisition,” which took place two years ago and led to the conversion of 400 former May doors to Macy’s last September. There are now about 850 Macy’s stores.

“While April has given us some concern about the consumer and the economic environment, we remain optimistic that our trends will improve, particularly in the back half of the year as we reach the first anniversary of the Macy’s brand conversion,” Lundgren said.

This story first appeared in the May 17, 2007 issue of WWD.  Subscribe Today.

With that in mind, Federated reiterated its full-year 2007 earnings guidance of $2.45 to $2.60 per diluted share from continuing operations, excluding merger costs.

The second quarter may still be difficult. Federated lowered its sales forecast slightly to $6 billion to $6.1 billion, compared with previous guidance of $6.1 billion to $6.2 billion. On a same-store basis, the company expects second-quarter sales to be flat to up 2 percent, versus prior guidance of up 1.5 to 2.5 percent. EPS, excluding merger integration costs, are now expected to be in the range of 35 to 45 cents, compared with previous guidance of 40 to 45 cents.

Karen Hoguet, Federated’s executive vice president and chief financial officer, said during a conference call that last quarter Federated’s sales were best online, at Bloomingdale’s and at Macy’s legacy doors. She said business was stronger in February and March compared with April, which was weak in apparel at both May and Macy’s legacy doors. Specifically, dresses, juniors, handbags, shoes, young men’s, contemporary ready-to-wear in women’s and men’s, luggage and mattresses were the strongest categories; furniture, traditional and moderate sportswear and structured career looks fared poorly.

Bloomingdale’s, coming off openings in downtown San Francisco, South Coast Plaza in Costa Mesa, Calif., San Diego and Chestnut Hill, Mass., in the past nine months, appears poised for additional openings. “We feel very good about Bloomingdale’s expansion potential and those plans could develop over the next six to 12 months,” said Hoguet. Bloomingdale’s could enter Texas and Arizona, among other parts of the country where the 38-unit upscale chain does not operate. Bloomingdale’s has been increasing its designer offerings and upscale marketing, and two years ago discontinued coupons.

According to a wire report, Investor Carl Icahn recently sold off his stake in Federated. He previously held 6.8 million shares, or 1.3 percent of the company.