NEW YORK — Federated Department Stores reported higher third-quarter earnings, despite the challenges of integrating May Department Stores, the impact of hurricanes and small same-store sales gains.
Strong inventory disciplines and a surprise performance from May operations boosted results.
Federated reported net income from continuing operations of $436 million, or $1.78 per diluted share, compared with $74 million, or 42 cents, in the same 13-week period last year, exceeding guidance.
St. Louis-based May was acquired last August for about $17 billion. It is in the early stages of being integrated into Federated, which is based here and in Cincinnati. Federated plans to sell 82 department stores and May’s credit operation and bridal group to reduce debt and overlap in malls, and to satisfy government antitrust concerns. Most of the sell-offs are expected by the middle of 2006, and Federated anticipates they will generate more cash than it needs to eliminate debt incurred to fund the merger.
Included in the earnings per share figure are a one-time pretax gain of $480 million ($384 million after tax, or $1.58 per diluted share) on the sale of receivables to Citigroup, and pretax integration costs of $63 million ($39 million after tax, or 16 cents per diluted share) related to the May merger.
Excluding the items, earnings per share came to 36 cents, compared with guidance of 20 to 25 cents, partly because of a gain of $10 million, or 3 cents per diluted share, related to Federated’s portion of a Visa/MasterCard antitrust litigation settlement.
Total Federated-May sales in the quarter were $5.79 billion, an increase of 64 percent from $3.53 billion last year, but same-store sales rose just 0.6 percent. Seven department stores were opened and one was closed in the quarter.
Operating income totaled $701 million, or 12.1 percent of sales for the quarter, compared with $175 million, or 5 percent of sales, in the year-ago period. Operating income includes a pretax gain of $480 million on the sale of receivables to Citigroup and integration costs of $63 million in the third quarter this year. In the same period last year, Federated’s operating income included $36 million in store closing, centralization and consolidation costs.
“We were pleased with our performance relative to our guidance,” Karen M. Hoguet, Federated’s executive vice president and chief financial officer, said during a conference call. “We were disappointed that sales were not stronger, but given the sales trend, we were pleased with our overall performance.” She cited “better than expected operating results, particularly in the May division” and Federated’s “discipline and ability to react” in the face of major distractions.
“The key take-away is that Federated is on track and achieved slightly better than expected profit on lower sales.” She figured comp-store sales would have been 1 to 2 percent ahead if the hurricanes hadn’t struck.
Handbags, fragrance, shoes, dresses and juniors were the strongest categories. The weakest was the home store, where Federated has been struggling for several seasons. Cold-weather businesses were also weak because of warm weather, but picked up as temperatures dropped, Hoguet said. May divisions had stronger than expected October sales. They were slightly above $2.2 billion and were driven by incremental markdowns needed to reduce inventories. The October trend is continuing this month, she added.
At Federated, sales in the quarter were strongest at Bloomingdale’s, and Florida stores, including Macy’s and Bloomingdale’s, before Hurricane Wilma. Federated’s central division is the weakest.
For the fourth quarter, Federated’s guidance remains unchanged. Excluding integration-related pretax costs of $100 million to $150 million, the company expects fourth-quarter earnings from operations of $2.35 to $2.45 per share.
Same-store sales are seen increasing 1 to 2 percent, with fragrances and handbags trending favorably and traditionally strong Christmas performers. However, Hoguet said the company is expecting lots of markdowns at May to get inventories in shape to start fiscal 2006. May could be minus 5 to 7 percent in the fourth quarter.
Three Macy’s stores in south Florida and two in New Orleans, accounting for $59 million in sales during the fourth quarter of 2004, will stay closed this year because of damage from Hurricanes Katrina and Wilma.
Federated had 2004 sales of $15.6 billion. Federated, combined with May, but after the store disposals, is seen generating about $28 billion in annual volume with about 950 stores.
Capital expenditures for the year, including May, are estimated at $900 million, well below the original budget. Some spending was delayed as decisions were made on which stores to shed. Next year, spending on stores will rise to $1.6 billion, but decline to around $1.2 billion for 2007 and potentially lower in subsequent years.
“The first half of the year will be particularly challenging as the realigned divisions take over,” Hoguet said. “We will be converting systems and positioning May doors for a September rebranding to Macy’s, which will include the capital spending and also assortment and promotional changes.”
Asked by an analyst if the integration work affects the business, Hoguet replied, “We do not believe that is a factor at all.”
Reshaping May stores with Federated’s private brands and branded assortment will be most evident in the third quarter next year, though starting in February, consumers will be able to cross-shop from a credit perspective.
Federated last summer hired Kurt Salmon Associates to help determine how to re-assort May stores by examining demographics and pyschographics at May locations. Federated continues to work on which brands to liquidate from May doors, either immediately or over time, and which brands could be introduced to Federated doors.
Hoguet said May management is running the May business through the fourth quarter, though Federated is “very strong” about making sure inventories are in the right place at the end of January.