NEW YORK — Lower inventories lifted Federated DepartmentStores Inc.’s second-quarter margins and profits, but pulled down sales — promotional and otherwise.

The margin uptick won in the offset battle, though, and pushed income ahead of expectations.

With special items, net profits in the second quarter shot up 156.4 percent to $282 million, or $1.39 a diluted share, from $110 million, or 55 cents, a year ago.Results include disposition of most of the Fingerhut catalog business in the most recent quarter as well as Sterns’ closure and conversion of acquired Liberty House locations in the year-ago period.

Excluding restructuring charges and discontinued operations, the parent of Macy’s and Bloomingdale’s logged profits of $133 million, or 66 cents a share, 4 cents higher than Wall Street expected and 34.3 percent over year-ago earnings of $99 million, or 50 cents.

Among the adjustments to the quarter was a $149 million aftertax gain from the disposition of Fingerhut.

Investors approved of the results and drove shares of the Cincinnati-based firm skyward $2.32, or 7.1 percent, to close Wednesday at $34.83 on the New York Stock Exchange. The Dow Jones Industrial Average managed a triple-digit gain, adding 260.92, or 3.1 percent, to close at 8,743.31 while the Standard & Poor’s Retail Index shot up 18.25, or 6.8 percent, to 285.23.

Sales for the 13 weeks ended Aug. 2 were essentially flat at $3.486 billion versus $3.488 billion a year ago.

The top-performing merchandise categories were furniture, jewelry and young men’s apparel. Northern California and Florida were the weakest geographic regions.

"Our second-quarter performance demonstrates, once again, the benefits of operating with lower inventories, especially in uncertain times," said Karen Hoguet, senior vice president and chief financial officer, on a conference call.

Like many of its department store peers, Federated’s been cutting back on stocks; comp inventories were down 9.7 for the quarter.

Federated has done better than expected with the disposition of Fingerhut. In addition to the $149 million gain, the firm sold about $1.2 billion of Fingerhut receivables during the quarter. Initially, the firm expected the disposition and monetization of Fingerhut's assets to generate approximately $1.1 billion to $1.3 billion of aftertax cash proceeds, net of one-time costs. What little the firm still holds of Fingerhut should be disposed of this fall.Federated bought the company for $1.7 billion in February 1999, but was never able to turn it into a revenue and profit generator. It recorded a $770 million aftertax loss on its disposal — lower than the $800 million to $950 million originally expected — during last year’s fourth quarter based on the assumption that the operation would be closed. Of this amount, $292 million was attributed to losses during the wind-down period.

Federated said at the time that amounts would be updated if a sale were to go through.

A.G. Edwards & Sons analyst Robert Buchanan, in research notes, said Federated’s management "has gotten religion on the inventory control front, what with total stocks having decreased more than total sales for two straight quarters now."

However, he added, "For 17 of the past 20 months, Federated has posted declining same-store sales — joining most every other department store operator in the land in terms of losing market share."

With less clearance merchandise on Federated’s sales floors, lower inventories depressed sales and helped gross margins. Without last year’s inventory valuation adjustments related to Sterns, gross margins rallied 220 basis points to 41.2 percent of sales during the quarter.

"Even though the lower inventories may have hurt sales somewhat, we are not unhappy with our stock levels," maintained Hoguet. "From this low base we have a greater ability to flow fresh merchandise and it is this to which the customers respond."

However, selling, general and administrative expenses increased 70 basis points as a percent of sales during the quarter.

"It’s amazing what they’ve been able to do on the gross margin side," said Salomon Smith Barney analyst Deborah Weinswig. As for the rising SG&A costs, she noted, "If you don’t have the sales it’s difficult to leverage" expenses.

One especially bright spot for Federated came in young men’s. "No other retailers are really seeing the strength in young men’s as they are," observed Weinswig, who added the firm’s done a "great job" with urban merchandise.

For the first half, profits after special items swelled 120.8 percent to $371 million, or $1.82 a diluted share, from $168 million, or 83 cents, a year ago.Sales waned 1.5 percent for the six months to $6.94 billion from $7.04 billion a year ago. Comps dipped 2.9 percent.

Bottom-line expectations went unchanged for the back half, with the firm projecting earnings per share of 35 to 45 cents in the third quarter and $2.05 to $2.20 in the fourth.

Same-store sales projections for the fall, however, were cut to a 1 to 3 percent increase, down from previous guidance of a 3 to 3.5 percent uptick.

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