NEW YORK — Finlay Enterprises narrowed its second-quarter loss as it benefited from operational discipline and an increase in department store sales, but the company said it will lose a substantial amount of business from planned consolidations at Federated Department Stores and closings at May Department Stores Co.

On Tuesday, Finlay issued a statement that said, because of the consolidation of the Burdines-Macy’s stores in February, Federated will not renew Finlay’s lease with the Burdines department store division, which runs through Jan. 31. Finlay operates in all 46 Burdines units and posted sales in the last fiscal year of about $50 million in those stores.

The impact of the nonrenewal on Finlay’s fiscal 2003 earnings is expected to be about $1.5 million, or 10 cents a share, because of fixed asset disposal and severance, Finlay said. About $1 million of these costs would be noncash, although the Burdines estimates exclude any potential charge for impairment of goodwill resulting from the closings. The potential impact on next year’s earnings because of the lost sales is estimated to be between 30 and 35 cents a share.

As reported, Federated has decided to add the Macy’s name to all of its regional department stores — including Burdines — creating a $13 billion, 420-unit Macy’s chain. Macy’s operates its own jewelry departments, with its own set of buyers.

Meanwhile, as a result of May Co.’s plan to close 32 Lord & Taylor stores and two Famous-Barr units in which Finlay operates jewelry departments, Finlay will be faced with an additional charge of $1.5 million, or 10 cents a share, related to asset disposal and severance. While May has not announced a specific timetable for these store closures, Finlay expects to record the charge in the second half of the year. Finlay recorded sales of $17 million in 2002 from these stores which, as May stated, produce volumes below average L&T levels. Accordingly, Finlay’s departments in the units are less profitable than those in other L&T stores.

Factoring in the Lord & Taylor closings as well as the potential impact of the Burdines leases not being renewed, the company now expects full-year earnings of $2.20 to $2.30 a share, excluding any potential charge for impairment of goodwill.Finlay now operates about 1,000 locations in department stores around the country.

Finlay said its losses narrowed to $562,000, or 6 cents a diluted share, for the second quarter ended Aug. 2, compared with a loss of $744,000, or 8 cents a share, in the year-ago quarter. Total sales for the quarter rose 3 percent to $192.8 million from $187.1 million a year ago and comp-store sales rose 2.6 percent.

The performance surpassed estimates made by Finlay at the end of the first quarter, when it predicted a second-quarter loss of between 12 and 17 cents a share, based on flat comps.

For the first half, Finlay’s losses narrowed to $2 million, or 22 cents a diluted share, compared with a loss in the year-ago period of $18 million, or $1.88, including a charge associated with the cumulative effect of an accounting change. Before the charge, the loss was $800,000, or 8 cents. Sales for the six months increased 1.2 percent to $379 million from $374.5 million and increased 1 percent on a comp basis.

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