NEW YORK — Federated Department Stores Inc.’s second-quarter profits fell by more than half and sales retreated as well, but the firm’s ability to beat consensus estimates and recent guidance marked it as a star in the beleaguered department store sector.

For the three months ended Aug. 2, the Cincinnati-based operator of Bloomingdale’s and Macy’s, among other nameplates, said net income dropped 57.4 percent to $120 million, or 64 cents a diluted share. That compares with last year’s earnings from continuing operations of $282 million, or $1.39. This year’s earnings included costs of $10 million, or 3 cents, for store consolidation and closings. Excluding income from its 2002 sale of Fingerhut assets, last year’s EPS was 66 cents.

Analysts, however, applauded the performance, as it beat their expectations by 2 cents and surpassed Federated’s own revised guidance of 60 to 63 cents. Previous to its most recent revision, Federated had forecast EPS as low as 50 to 55 cents.

“Federated remains our favorite value stock,” wrote Goldman Sachs analyst George Strachan. “We continue to believe that Federated stock, which is selling at a 15 to 16 percent discount to May based on our fiscal 2004 estimates, remains an attractive investment within the secularly challenged department store industry. We believe that Federated is well positioned to take advantage of the improved cyclical spending environment that we anticipate in the second half of 2003.”

Linda Kristiansen of UBS Investment Research also believes Federated enjoys advantages over its competition, including an “exceptionally lean inventory position and tight expense control [that] suggests it has the most leverage among the major department stores.

“Federated’s assortment is more skewed to better-priced brands than moderate and to a greater extent than May Co.,” she said. “Therefore, we believe Federated is also ideally positioned to benefit from improving trends in career apparel.”

Federated shares moved down 37 cents, or 0.9 percent, to land at $42.24 in New York Stock Exchange trading Wednesday.

Federated credited the better-than-expected earnings to sales that came in above plan, dipping just 1.5 percent to $3.43 billion from $3.49 billion a year ago. Comparable-store sales declined 1.2 percent during the quarter.“Sales were a bit better than we expected, especially after the weak first quarter,” said chief financial officer Karen Hoguet on a call with analysts. “As a result of the better sales and strong gross margin and expenses results, our bottom line was considerably stronger than expected.”

Gross margin retracted 20 basis points to 41 percent of sales, but that was also better than anticipated, said Hoguet, as Federated experienced fewer markdowns and less shrinkage.

“By family of business, we were most pleased by the performance of career apparel, both women’s and men’s, big-ticket home and cosmetics,” said Hoguet. “We were most disappointed in our sales of housewares and kids’.”

Overall, for the first six months of the fiscal year, Federated reported net income decreased 55.3 percent to $166 million, or 88 cents a diluted share. By comparison, last year the company recorded earnings of $371 million, or $1.82. Excluding discontinued operations, last year’s EPS was $1.09.

Sales for the half declined 3.1 percent to $6.73 billion from $6.94 billion a year ago. Comps also dropped 3.1 percent. Third- and fourth-quarter comps are forecast at a 1 percent decrease to a 1 percent increase.

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