Terry Lundgren

Federated Department Stores' bottom line in the first quarter of its "transition year" was weighed down by costs from merging with May Co.

NEW YORK — Federated Department Stores Inc.’s bottom line for the first quarter of its “transition year” was heavily weighed down by the costs of merging with May Department Stores.

The retailer on Wednesday posted a $52 million first-quarter loss, but managed to beat its own guidance and said its integration of The May Department Stores Co. remains “solidly on track” as sales soared.

Meanwhile, the books are out for both Lord & Taylor and the Bridal Group businesses. Federated is said to be seeking $1.2 billion for Lord & Taylor. Financial and industry sources said Federated wants between $800 million and $1 billion for the Bridal Group, which includes David’s Bridal.

For the three months ended April 29, the loss was $52 million, or 19 cents a diluted share, versus $123 million in net income, or 71 cents, in the same year-ago quarter. The results included May Co.’s contribution, which Federated acquired on Aug. 30, 2005. Because the company plans to divest its Lord & Taylor and Bridal Group divisions, those results were treated as discontinued operations. The loss from continuing operations was $74 million, or 27 cents a share. Excluding May Co. merger integration costs and related inventory valuation adjustments, first-quarter diluted earnings per share from continuing operations was 2 cents. That exceeded Federated’s prior guidance for a loss of 5 cents to 15 cents a diluted share excluding merger costs.

Sales rose 62.9 percent to $5.9 billion from $3.6 billion.

Karen M. Hoguet, executive vice president and chief financial officer, said during a conference call to Wall Street analysts that same-store sales for the Federated doors were “flat with last year and better than our expected minus 1.5 percent to minus 0.5 percent.”

Terry Lundgren, chairman, president and chief executive officer, said in a statement, “Considering this was the initial quarter of physically bringing together the Federated and May Co. organizations, we were very pleased with first-quarter results that were ahead of our expectations. Performance was driven by stronger-than-expected same-store sales at Macy’s and Bloomingdale’s stores, as well as expense levels that were below plan. Our first quarter indicates that the integration of Federated and May Co. continues solidly on track.”

This story first appeared in the May 11, 2006 issue of WWD. Subscribe Today.

Stacy Turnof, analyst at Merrill Lynch, in a research note, wrote, “We believe that the 2 cents number [from continuing operations excluding merger costs] — 12 cents above the midpoint of the company’s guidance of a loss of 5 cents to 15 cents — is healthy. We believe that the weakness in the stock creates a particularly attractive buying opportunity. Federated remains one of the our favorite ‘buy’ rated stocks.”

Shares of Federated closed Wednesday down 1.2 percent at $77.98 in trading on the New York Stock Exchange.

Lundgren emphasized that 2006 is a transitional year for Federated, with each individual quarter having its own set of challenges and opportunities. He said the company is working through merchandise conversions in the second and early third quarter so that a “fresh new Macy’s assortment is in place in all stores when more than 400 former May Co. locations convert to the Macy’s nameplate in September.”

Hoguet said the strongest sales in the quarter by region was at Macy’s Florida, while the two divisions that were entirely May Co. doors, Macy’s North and Macy’s Midwest, had the weaker performances in the quarter. As for the Macy’s and Bloomingdale’s nameplates, the cfo said the categories that showed strength were dresses, juniors, young men’s, cosmetics and fragrances, as well as men’s. The home businesses remained weak, but some soft home goods such as housewares and textiles showed some improvement.

“Average unit retail was up 6 percent in the Federated doors and we have seen improved sell-throughs at regular price,” she told analysts.

As for the businesses being divested, Hoguet said, “We have had lots of interest expressed in both, and we still expect to complete the bridal transaction in the second or third quarter and Lord & Taylor by yearend.”

She said the company also converted the credit systems for 40 percent of May’s credit portfolio, which will allow Federated to sell the converted portfolio to Citigroup earlier than expected, possibly in the next month or so, subject to regulatory approval. The sale of the remainder of the credit card receivables is scheduled for July or August, after the balance of the credit portfolio is converted. The retailer recently sold the credit card receivables owned by General Electric Capital Corp. to Citigroup on May 1 for $112 million on an aftertax basis.

The company said proceeds from the sale of its divisions will be used to pay down short-term borrowings in connection with the May acquisition. Federated also expects to begin repurchasing shares in the second or third quarters of 2006.

The retailer said sales and earnings guidance for 2006 remain unchanged. Excluding certain items such as one-time merger integration and inventory valuations costs, earnings per diluted share is expected to be between 45 cents and 55 cents in the second quarter, $3 to $3.25 in the third and fourth quarters, and at $3.50 to $3.75 for the year.