CINCINNATI — Powered by cost savings, Federated Department Stores Inc. reported earnings before special items jumped 48.5 percent in the first quarter, easily topping Wall Street estimates.
In the quarter ended April 30, earnings rose to $32.2 million, or 25 cents a share, up from comparable earnings of $21.7 million, or 17 cents, a year earlier. After a non-recurring charge of $3.5 million to retire debt, Federated’s year-ago net came to $18.2 million, or 14 cents a share.
Earnings per share were sharply above Wall Street’s average estimate of 19 cents.
Some analysts said Federated’s strong showing could benefit its pursuit of R.H. Macy & Co.
“The better they do, the easier it will be for them to keep a higher valuation on the merger,” said Laurence C. Leeds Jr., managing director at Buckingham Research.
On Monday, Federated upped its offer for the bankrupt Macy’s by submitting a $3.8 billion revised organization proposal to mediator, Cyrus R. Vance.
Under the revised plan, Federated valued its stock between $21 and $26 a share. On Wednesday, Federated’s stock closed at 22, up 1/2 on the New York Stock Exchange. Peter Schaeffer, an analyst at Dillon Read & Co., said Federated’s stronger earnings might provide a boost to Federated’s stock price, thereby aiding its merger bid with Macy’s. He explained that not only will it help the retailer provide less dilution for shareholders, but demonstrates Federated’s ability to run Macy’s.
“We think the company is doing extraordinarily well. With the reduction in operating expenses, they are able to constantly reduce gross margins to give back value to customers,” Leeds added.
Operating income increased 24.7 percent to $103.4 million, or 6.2 percent of sales, from $82.9 million, or 5.2 percent.
Sales rose 4 percent to $1.65 billion from $1.59 billion while same-store sales gained 2.1 percent.
“We had a very strong earnings performance in the first quarter, despite sales that increased only modestly over the prior year,” said Allen Questrom, chairman and chief executive officer.
The bottom line improvement primarily stemmed from a reduction in selling, general and administrative expenses to 32.8 percent as percent of sales from 34.9 percent a year ago.
Questrom said lower expense ratio resulted from a continued focus on controlling variable expenses through centralization of operations and with the aid of investments in technology.
Federated’s bottom line was also fattened by increased revenues from credit operations, resulting from higher accounts receivable balances this year.
Analysts said Federated has been working harder to build its credit card operations over the last 12 months and has been extending more credit to customers.
Wall Street was surprised at the amount of cost savings the company was able to achieve.
“With sales and margin under pressure, they knew they had to be very tight on expenses and they made a corporate-wide effort to do that,” said David A. Poneman, a retail analyst at Sanford & Bernstein. He said poor weather at the start of the quarter hampered the clearance of winter merchandise. Federated operates 220 stores under the names Abraham & Straus, Bloomingdale’s, The Bon Marche, Burdines, Goldsmith’s, Jordan Marsh, Lazarus, Rich’s and Stern’s.