NEW YORK — Fall is looking fabulous.

Federated Department Stores posted a 3.3 percent sales gain for the second quarter and said it was optimistic about fall fashions. The retailer’s outlook backs up recent observations from analysts who say the back-to-school season is shaping up to be one of the best ever.

Still, Wall Street was fixated on the negative, punishing Federated’s stock after the retailer delivered weaker-than-expected quarterly profits. Shares of Federated fell 3.3 percent, or $1.52, to close at $44.50 in trading on the New York Stock Exchange.

“We’re feeling good about the fall fashions,” said Karen Hoguet, chief financial officer, during a conference call to analysts. The cfo was referring to consumer acceptance of the early fall color palettes in lavender, berry and green.

Hoguet said the firm is expecting the consumer to “continue to perform well at retail. But there’s obviously a lot going on in the world. But we are comfortable and you layer on the good fashion that we see coming, [it] makes us feel pretty good about the fall season.”

Terry Lundgren, chairman, president and chief executive officer, said in a statement that the company was pleased with its strong start for the year and expects that strength to continue into the fall season.

At least one analyst thought Wall Street’s reaction to Federated’s results was “knee-jerky.”

“Federated is a well-run company,” observed Christine Augustine, equity analyst at Bear Stearns. “I think that what we’re seeing is the fruits of many years of strategic planning to reposition itself from a pricing standpoint. It is very frustrating to have the stock react this way for what was a very good quality quarter. While sales in June were slightly down, Federated saw a bounce back in July. I think that the company is expecting flat sales in August because of a late Labor day, but [otherwise] the underlying trend is quite good.”

The retailer said income for the three months ended July 31 dropped 35 percent to $78 million, or 43 cents a diluted share, from $120 million, or 64 cents, in the same year-ago quarter. Wall Street’s consensus estimate was 46 cents. The quarter included a one-time charge of $59 million, or 20 cents a diluted share, in connection with Federated’s repurchase of $273 million of its long-term debt. Excluding the one-time cost, diluted earnings per share would have been 63 cents, or 1 cent above the retailer’s prior guidance of between 57 cents to 62 cents for the quarter.

This story first appeared in the August 12, 2004 issue of WWD.  Subscribe Today.

Sales for the quarter rose 3.3 percent to $3.51 billion from $3.43 billion. Same-store sales were also up by 3.3 percent for the period. Private label performance, particularly INC, was strong across the store in the quarter. Sales were strongest at Burdines Macy’s, Macy’s West and Bloomingdale’s. By category, sales were strongest in women’s and men’s sportswear, handbags, jewelry, cosmetics and men’s tailored apparel. Young men’s and swimwear were among the weakest categories.

During the conference call, Hoguet fielded questions raised by analysts over rising pension costs, which contributed to a higher expense ratio for the quarter. Federated’s pension costs were $40 million more than a year ago, which Hoguet attributed to the “last couple of years of lack of returns in the market.”

Hoguet, in response to how Federated views its credit card business in light of Dillard’s announced sale of its portfolio, said Federated’s credit card portfolio remains an “important strategic business for Federated. As you know, the proprietary portfolio is shared between the old Federated and the Macy’s side, which is owned by GE.”

Hoguet also disclosed that Federated will have the ability to end the GE agreement in April 2006. “So that may lead us to look at other options,” the cfo said.

Robert Buchanan of A.G. Edwards, wrote in his note, “We like the job being done these days by Federated ceo Terry Lundgren.”

He explained that under Lundgren, Federated’s turnover has improved nine of the past 11 quarters, with gross margins expanding in eight of those 11 quarters. In addition, Federated has taken “market share from chief rival May [Department Stores]. Federated’s comps have bested those of May [for] nine quarters in a row.”

Despite accolades for Lundgren, enthusiasm for Federated’s stock is tempered by the prospect of 5 percent growth in the second-half’s EPS, Buchanan wrote.

Bear Stearns’ Augustine isn’t as concerned. “During certain time frames, you flex up to drive sales,” she said. “It evens out in the end, but there can be variation from quarter to quarter. If sales slow, then the expense ratio is going to be a potential problem. So far inventory levels are very clean and when you think about comps, Federated has been getting very high-quality comps through full-price selling.”

Federated is projecting an increase in same-store sales of 1.5 percent to 3 percent for the second half of the year, with a full-year comps increase of 3 to 4 percent. The retailer also guided EPS for the third quarter in the 35- to 40-cent range and fourth quarter EPS of between $2.45 to $2.55. The full-year earnings estimate of $3.70 to $3.80 is 10 cents higher than the earlier guidance of between $3.60 to $3.70 a share.

For the six months, income was up 5.4 percent to $175 million, or 96 cents a diluted share, from $166 million, or 88 cents, a year ago. Sales rose 5.1 percent to $7.07 billion from $6.73 billion.

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