By  on January 27, 2006

NEW YORK — Federated Department Stores sees a return to its all-time-high profits and better same-store sales — but that's about two years away.

The near term is challenging because of the complicated task of converting May stores into Macy's units after Federated's $17 billion acquisition, and the company on Thursday projected a first-quarter loss in 2006 of 5 cents to 15 cents a share, below Wall Street's estimate of a 70 cent profit. It expects to earn 45 cents to 55 cents in the second quarter and $3 to $3.25 in the second half.

Federated is forecasting sales for 2006 of $27.25 billion to $27.75 billion and earnings of $3.45 to $3.70. Earnings for the fourth quarter of 2005 and the year will be announced Feb. 21.

Company shares fell 3.45 percent, or $2.44, to close Thursday at $68.37 in New York Stock Exchange trading.

"The integration of Federated and May Co. is on track and we are optimistic about the success of Macy's and Bloomingdale's as national brands," Terry J. Lundgren, chairman, president and chief executive officer, said in a statement. "Forecasting for 2006 with precision is particularly challenging because of the number of variables related to the integration. While 2006 is a transition year, we expect significant improvement in 2007 and a return to our historical peak levels of profitability, adjusted for the impact of the sale of credit portfolios, by the 2008-2009 period."

Federated's chief financial officer, Karen Hoguet, during a conference call Thursday that provided Wall Street with a glimpse of the future, said: "We are aiming to accelerate comp-store sales growth to exceed 3 percent each year, and expect to return to peak EBITDA in the 2008-2009 time frame."

She forecast EBITDA of 14 to 15 percent in 2008-2009, around Federated's high of 14.7 percent and May's of 16.8 percent in 1999.

"One of the biggest opportunities is to accelerate sales performance in former May Co. stores," Hoguet said. "We are making significant changes to the assortments, and as quickly as practical. We are introducing Federated private brands throughout May stores."

She said two May private brands, John Ashford and Karen Scott, will be fed into Macy's. The sale of May's credit operation is expected late in the second quarter or in August, while the sale of the bridal group is to close late in the second quarter or in the third quarter. The sale of Lord & Taylor is unlikely before the end of 2006, and 68 May doors will close this year."We will better tailor the merchandise offerings to local markets and will not treat all the stores the same," Hoguet added. "May had been undershooting its customers. [Federated] will raise the average unit retail [price] in many categories." The plan also calls for more exclusives from branded suppliers.

The projected 2006 sales are for continuing operations, which means excluding the bridal group, Lord & Taylor and the May doors, all to be divested. Comp-store sales are projected at 2 to 3 percent for 2006 and 2007. The first quarter could be down 1.5 to 0.5 percent, but up 3 to 5 percent in the second quarter, and 2 to 4 percent in the fall. Clearance sales in the divested doors will hurt comps.

Gross margins are expected to be down versus last year, and mostly in the first quarter. Total integration and consolidation costs will be $650 million to $725 million this year.

Capital expenditures was put at $1.6 billion for 2006, higher than the combined rates of Federated and May due to expenditures on the dot-com businesses and store conversions.

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