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Sluggish Sales Aside, Federated Turns Profit

NEW YORK — Federated Department Stores Inc. may have a new captain in Terry Lundgren, but the problem of its shrinking top line remains the same.<br><br>Despite the absence of a revenue run-up, Federated was able to improve its earnings,...

NEW YORK — Federated Department Stores Inc. may have a new captain in Terry Lundgren, but the problem of its shrinking top line remains the same.

Despite the absence of a revenue run-up, Federated was able to improve its earnings, dramatically with special items and modestly without them, by way of expense controls. Savings in that area, though, are going to be harder to come by this year, the company said.

Net income for the quarter ended Feb. 1 rose to $341 million, or $1.78 cents a diluted share. This compared with year-ago losses of $447 million, or $2.23, a result that was depressed by losses from the disposal of the Fingerhut unit and restructuring charges.

Income from continuing operations climbed 10 percent to $341 million, comparable with $1.78 a diluted share, from $310 million, or $1.55, a year ago. Without asset impairment and restructuring charges as well as store closing and consolidation costs, Federated’s profits nudged up 1 cent a diluted share to $1.99 from $1.98 a year ago.

Adjusted profits came in ahead of Wall Street’s consensus estimate of $1.95 a share. Last month, Federated said its earnings per share would be at the low end of its projected range of $1.95 to $2.05. Investors drove shares of the firm up 72 cents, or 2.9 percent, to close Tuesday at $25.54 on the New York Stock Exchange. Helping the stock was news that, in coming months, Federated will examine the possibility of paying out a dividend to its shareholders.

Overall sales for the parent of Bloomingdale’s and Macy’s, among others, slid 2.2 percent to $5.02 billion from $5.13 billion a year ago. Comparable-store sales fell 3.9 percent.

Federated tried to gain some sales momentum through increased differentiation in its assortments relative to the competition. Accordingly, its private label penetration rose last year to 16.4 percent of its mix, versus 15.9 percent in 2001.

Chief financial officer Karen Hoguet, on a conference call, said both the quarter and year were defined by “disappointing sales with good results in all aspects of performance including cash flow generation, inventory management and expense control.”

Sales are expected to remain challenging in 2003, with comp projections for the year ranging from down 1.5 percent to on par with a year ago. Given the sales assumptions, gross margins in 2003 are slated to be roughly equal with last year’s, and will likely be down in the first half.

Expense control will become more difficult as well, as selling, general and administrative expenses, in dollars, are projected to increase 2 to 2.5 percent this year. Hoguet acknowledged this perhaps was not what Wall Street was expecting. “It is getting more difficult. We have considered some aggressive expense reduction ideas, but the sales risk could quickly eat up all of the benefit of the expense savings. This has prevented us from proceeding. We are still trying, though, to find additional ways to reduce expense and increase productivity, but at this point we are focusing first and foremost on accelerating comp-store sales.”

However, Federated upped its EPS estimation for the year to between $3.05 and $3.25, including store closing costs. This is 5 cents ahead of the $3 to $3.20 range the retailer forecast in January.

This year, Federated will increase its net square footage by 1.6 percent with 12 new stores. Approximately $100 million has been earmarked for the further rollout of the firm’s “reinvent” initiatives, as well as the testing of new concepts under the program. More than 40 stores last year took part in the program, which updates the firm’s stores. Hoguet said the firm’s 18 to 19 Atlanta stores would be “reinvented” this year and that Federated generally plans to roll out the changes by region.

In the stores taking part in the program, the best response from customers and store employees was to the updated fitting rooms and the “way-finding” signage, she said. Shopping carts in the stores have also been received favorably.

While the perennial rumors of a Federated-May Department Stores Co. merger have recently resurfaced and stalled, the cfo did note that one of Federated’s strengths is in acquisitions and, in theory, the firm could acquire another department store player.

“From a more practical point of view, I don’t see a lot of opportunities out there,” she said. “It’s really not a major part of our thinking right now.”

McDonald Investments analyst Jeffrey Stein noted, “This is first and foremost a top-line story. They’ve done about all they can to cut expenses. They’ve trimmed the fat. If they trim any more they’re cutting into muscle. They need to drive the top line to drive the earnings.”

For the 12 months, reported net income ascended to $818 million, or $4.12 a diluted share, from a loss of $276 million, or $1.38, during the previous year. EPS from continuing operations and before extraordinary items rose to $3.41 for the year from $3.11 in 2001. Sales slid 1.4 percent to $15.44 billion from $15.65 billion in 2001. Comps were off 3 percent.