By and  on February 27, 2002

NEW YORK -- Happy to bid adieu to 2001, Federated Department Stores Inc. posted steep fourth-quarter losses, although slightly lower than expected, and outlined steps to improve its customers' shopping experience in the future.

The Cincinnati-based department store giant, which saw last year's sales dip below $16 billion, also boosted its expectations for 2002. Wall Street returned the favor by trading its shares up $2.64, or 6.8 percent, to close at $41.66 on the New York Stock Exchange Tuesday.

Net losses for the quarter ended Feb. 2 totaled $447 million, or $2.23 a diluted share, compared with year-ago profits of $332 million, or $1.65.

Results were dragged down by a $770 million aftertax loss on disposal of the Fingerhut unit, $292 million of which are attributable to estimated operating losses during the wind-down period. While Federated, as reported, has signed a letter of intent to sell Fingerhut to Business Development Group Acquisitions Inc., it is recording the loss based on the assumption that the catalog operator will be closed instead. Estimates would be updated if the sale goes through. The $770 million figure is below the $800 million to $950 million previously forecast.

The quarter also carried with it a truckload of other restructuring charges related to the closure of Stern's, integration of Liberty House and the reorganization of the firm's direct business, aggregating to $95 million in pretax items. The prior year's quarter included $80 million in pretax charges.

Income from continuing operations before charges retreated 22.5 percent to $310 million, or $1.90 a diluted share, compared with $400 million, or $2.23, during the year-ago period, which included an extra week. By this measure, earnings per share beat Wall Street estimates of $1.86 a share by 4 cents.

Overall sales for the quarter descended 8.4 percent to $5.13 billion from $5.6 billion a year ago. Same-store sales at department stores were down 6 percent.

In a statement, chairman and chief executive James Zimmerman, cited cash flow -- which was up to more than $775 million for the year compared with $600 million last year -- as a point of strength. "By this standard, 2001 was a good year for Federated," he noted. "This is strategically important in maintaining maximum financial flexibility."Federated asserted it has enough cash to acquire rival chains, and Karen Hoguet, senior vice president and chief financial officer, on a conference call said, "The ability to add department stores to our operations is a good thing." However, Hoguet declined to comment on the speculation that drove up Dillard's price late last week, and there were no other references to it on the call.

While Hoguet said Federated was "ready to leave 2001 behind," she added the company still has work to do going forward. "We are not just assuming that last year was a bad economy. While that obviously impacted our numbers, we are not sitting still. We will be taking steps to strengthen our department stores.

"What we're trying to do is basically simplify the shopping experience," said Hoguet. This includes reducing clutter and inventories, which will also narrow assortments and reduce the choices the customer faces. Inventories at the end of the quarter were down 7 percent compared with a year ago.

Federated's private brand penetration in 2001 grew to 16 percent, a 1 percent uptick, and has gotten off to a strong start in 2002, she said.

Christine Kilton-Augustine, an equity analyst with ABN AMRO, upgraded Federated to "buy" from "add." She noted the firm "has the most potential among the traditional department store group for margin expansion, given the strength of its private brand programs, which we see expanding to 20 percent."

The most challenging item on the firm's plate this year, according to Hoguet, is the simplification of its pricing. Not only can Federated's pricing confuse customers, she said, it can insufficiently communicate the firm's value propositions.

Kilton-Augustine observed, "They offer good value. The fine line they have to walk is: How do you communicate that to the customer.

"More than anything, it has to do with your signage, how you advertise your promotions and, related but also separate, how your store actually appears," she noted.

The question Federated must answer, she pointed out, is, "Do people associate department stores with value only when there's a sale?"

Federated has been successful in attracting younger customers, though, with its comparable-store sales in juniors up 3 percent in the last year, compared with a total company decline of 5.3 percent. Young men's sales have also been "very strong" across the board.For the year, inclusive of charges, losses widened to $276 million, or $1.38 a diluted share, against the previous year's $184 million, or 89 cent, deficit. Operating income declined 34.7 percent to $1.1 billion from $1.69 billion. Sales were off 5.9 percent to $15.65 billion from $16.64 billion last year.

The parent of Bloomingdale's and Macy's was confident enough about 2002 to boost its profit estimates by a nickel to a range of $3.30 to $3.55 a share for continuing operations, assuming a 1 to 1.5 percent comp increase.

In a separate development Tuesday, another Minnesota state court lawsuit was filed, this time by the Alaska Ironworkers Pension Trust, to force Federated to find a buyer for its Fingerhut subsidiary instead of proceeding with a liquidation of the unit.

The lawsuit is similar to the one filed earlier this month by Nick Wesenberg, a Fingerhut employee and Federated shareholder, also in Hennepin County in Minneapolis. The Alaska Ironworkers lawsuit also named as defendants Zimmerman and Terry Lundgren, Federated president and chief operating officer, as well as other officers. The pension trust said it holds thousands of shares of Federated.

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