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NEW YORK — Federated Department Stores Inc. was on a roll in the first quarter, boosted by strength in its private label business and performance in key categories such as sportswear, handbags and cosmetics.

The retailer on Wednesday reported a 26.8 percent jump in first-quarter income, and a 34 percent gain in diluted earnings per share, beating Wall Street’s expectations by 3 cents.

Federated, which anticipates closing on its $11 billion acquisition of May Department Stores Co. in the third quarter, said net income for the three months ended April 30 rose to $123 million, or 71 cents a diluted share, from $97 million, or 53 cents, in the same quarter a year ago. Earnings per share exceeded both the retailer’s initial forecast of 45 cents to 50 cents, as well as its revised guidance of 65 cents to 70 cents a diluted share. Wall Street’s consensus expectation was 68 cents.

“We obviously were very pleased with the quarter’s results and our above-expectations sales performance, especially since these comparisons are against a strong first quarter last year,” Terry Lundgren, chairman, president and chief executive officer, said in a statement.

Sales rose 2.5 percent to $3.61 billion from $3.52 billion. Same-store sales gained 2.6 percent after a comp-store sales gain of 6.9 percent in the first quarter last year. Sales were strong in jewelry, handbags, cosmetics, men’s and women’s sportswear and the juniors’ categories. In addition, the firm said it posted “very strong” sales of its private brand merchandise in the period.

Federated, the parent of Macy’s and Bloomingdale’s, projected earnings per share of 80 cents to 85 cents for the second quarter ending July 30, but declined to provide an update on second-half earnings forecasts until determining the future of its credit card business and the exact timing of the May acquisition. A decision on the sale of the credit card business is expected during the second quarter.

“We went into the quarter concerned about the very strong 2004 performance that we were up against,” Karen Hoguet, Federated’s chief financial officer, told Wall Street analysts during a conference call. “Many, if not all of you, expressed the same concern. However, we were able to exceed our sales expectations by a nice margin, and we were able to really leverage the above-plan sales, dropping most of it to the bottom line.”

This story first appeared in the May 12, 2005 issue of WWD.  Subscribe Today.

Lundgren said in the statement that results show that focusing on sales is the right approach for Federated. The retailer has pinpointed four priorities — differentiated assortments, simplified pricing, an improved shopping experience and more effective marketing — to make Federated stores attractive places to shop.

Robert Drbul, a Lehman Brothers analyst, wrote in a research note that because of the strong first-quarter and “our belief that Federated continues to manage its business impressively,” Lehman is raising fiscal year 2005 earnings per share estimate to $4.86 from $4.85 and maintaining the fiscal year 2006 forecast of $5.20.

As for the May deal, Drbul wrote that Federated could take several different actions to unlock shareholder value: sell its credit business for an estimated $3 billion; sell May’s credit business for about $2 billion, and sell the David’s Bridal business for an estimated $1.5 billion, which would leave the company “essentially debt free.”

May on Tuesday said first-quarter earnings fell 46 percent to $41 million, or 13 cents diluted share, from $76 million, or 24 cents, in the comparable period a year ago.

“We are more enthusiastic than ever before about the tremendous potential inherent in combining these two retail businesses, and eagerly await regulatory approvals so we may broadly communicate with May Co. employees to share the details of our exciting vision for the combined company,” Lundgren said in the statement.

Federated said when it reported fourth-quarter and fiscal-2004 results on Feb. 22 that it expected earnings per share of $3.20 to $3.30 for the second half, with comps to climb by 3 percent. Federated announced its planned acquisition of May on Feb. 28.

Operating income was $252 million, or 7 percent of sales, versus $217 million, or 6.2 percent, a year ago. Interest expense in the quarter was $54 million, $6 million below last year, and slightly better than expected because of the retailer’s strong cash position, Hoguet said. She added that cash flow before financing — cash provided by operations less cash used by investing activities — was an outflow of $5 million in the quarter versus an outflow of $37 million last year.