By  on October 7, 2005

NEW YORK — Federated Department Stores issued new guidance Thursday for the third and fourth quarters, telling Wall Street analysts the company anticipates operating income will hold up despite reduced same-store sales because of its acquisition of May Department Stores and planned credit operation sell-offs.

There were "no surprises" about May during the acquisition process, and Federated still expects to achieve $175 million of cost savings from combining operations in 2006 and $450 million in 2007, Karen M. Hoguet, Federated's executive vice president and chief financial officer, said during a conference call.

"There are lots of moving pieces, but we continue to be very excited about the new Federated and especially the opportunities for a national Macy's," Hoguet said.

"The key messages to take away are that the old Federated divisions are on track to deliver expected operating income this fall, even with slighter lower sales," she said.

Federated's $17 billion acquisition of May was completed in August. Conversion of most May locations to the Macy's nameplate is expected in fall 2006, though 76 individual stores and the David's Bridal specialty will be sold and a decision on the Lord & Taylor division will be announced by Jan. 31. About five to 10 May units could be converted to Federated's Bloomingdale's division. Stores identified for divestiture account for about $2.1 billion in sales, meaning the combined Federated-May business will have some $27 billion in sales.

Hoguet said during the call that there is going to be a 12- to 18-month transition period that will produce significant improvements in divisional performances.

Last February, before its announcements that it would acquire May and sell both the Federated and May credit businesses to Citigroup, Federated projected comp-store sales — sales in stores open at least a year — to increase 3 percent this fall, and earnings per share of $3.20 to $3.30 in the fall.

Based on August and September results and a forecast of a 1 to 2 percent increase for October comp sales, "we now expect third-quarter comp-store sales [for Federated alone] to be up 1 to 1.5 percent, and 1 to 2 percent for the fourth quarter," Hoguet said.She said the best guidance of EPS from continuing operations, including a $380 million aftertax gain on the sale of Federated receivables and $150 million to $250 million in pretax, onetime costs, is $1.50 to $1.65 a share in the third quarter, and $2 to $2.20 in the fourth quarter. The continuing operations include Federated and May, but not David's Bridal.

Excluding the gain and onetime costs, the estimate on EPS on continuing operations on a diluted basis would be 20 cents to 25 cents in the third quarter, and $2.35 to $2.45 for the fourth quarter. Last year, the company reported 42 cents for the third quarter and $2.55 for the fourth quarter.

Hoguet said the company still expects the Federated portion of the credit transaction with Citigroup to close by the end of October, and bring in about $2.7 billion, after taxes, in cash, after eliminating $1.2 billion in receivables debt. "This is higher than previously expected due to higher receivables and additional cash accumulated to retire aftertax debt. The $2.7 billion will be used to repay acquisition-related debt."

May sales, excluding May's bridal group, are projected at $2.1 billion to $2.2 billion in September and October, and $4.6 billion to $4.7 billion in the fourth quarter, representing a sales decline of 4 to 6 percent in both the September and October period and the fourth quarter. "On a comp-store basis, we are expecting declines of roughly 5 to 7 percent," which is lower than the minus-4 percent for the August year-to-date period.

Operating income before the purchase accounting adjustments and onetime items for May is assumed to be $70 million to $85 million for September-October and $575 million to $600 million for the fourth quarter, compared with $146 million in September-October 2004, and $646 million in the fourth quarter of 2004, excluding the bridal group.

"As we have stated, we do not expect to make any operating changes to May divisions this fall, but we do recognize that, with the Sept. 20 announcement of division realignment, there could be some additional disruption to the business in the May doors," Hoguet said. However, she added that May management has been given incentives "to stay focused on delivering the fall results, but as you might imagine, this is a difficult time period to be operating, particularly in the four divisions that will go away."Regarding onetime costs stemming from the acquisition, Federated is estimating $50 million to $100 million in the third quarter and $100 million to $150 million in the fourth quarter, and a total of $1 billion for the 2005-2007 period. The costs are primarily related to expenses for retaining management, asset write-downs associated with Federated store divestments and costs of transitioning the organization.

The prognosis gave a lift to Federated stock, which closed at $65 Thursday on the New York Stock Exchange trading, rising 2.19 percent or $1.39.

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