Byline: Sidney Rutberg

NEW YORK — While Federated Department Stores managed to improve margins and beat Wall Street projections in the third quarter, margins collapsed at Dillard Department Stores producing what one analyst called a “disastrous quarter.”
Before charges for integrating Broadway Stores, Federated reported earnings of $68.7 million, or 33 cents a share. Wall Street was looking for 32 cents before the special item. After a $44.3 million pre-tax integration charge, Federated’s net income was $41.8 million, or 20 cents.
In the year-ago quarter, Federated had a loss of $22.6 million before integration charges. After the charge, principally for integrating Macy’s into Federated and other consolidations, the net loss was $46.4 million.
Sales for the quarter were off 3.7 percent to $3.61 billion from $3.75 billion, but same-store sales were ahead 2.5 percent.
Allen Questrom, Federated’s chief executive officer, said in a statement that the company was “on track for a good year.” He also noted that while the decision to reduce promotions dampened comparable-store sales, “the result has been strengthened margins.”
For the holiday season, Questrom said he expects comp-store sales to continue to grow at about the same pace seen this year.
However, Federated should get a lift this Christmas from the debut of Bloomingdale’s in California. The chain opened units in Palo Alto and Century City last week and will cut the ribbon Saturday on units in Sherman Oaks and Newport Beach.
“Bloomingdale’s in California will do quite well,” said Kimberly K. Wallin, analyst at Furman Selz. She added that overall, Federated looks good going forward.
The picture at Dillard’s is not as pretty. Although third-quarter sales rose 6 percent and same-store sales were ahead 1 percent, profits plunged 38 percent to $31.6 million, or 28 cents, from $51 million, or 45 cents. Analysts were projecting 50 cents for the latest quarter.
Gross margin dropped to 34.8 percent of sales from 36.9 percent in the year ago period.
Dillard’s stock fell 3 3/8 to 29, while Federated slipped 1 1/8 to 34 5/8 on the New York Stock Exchange Wednesday.
Michael B. Exstein, analyst at PaineWebber, said the quarter for Dillard was “disastrous.” He said that Dillard’s “policy of not promoting appears to have crystallized into greater and deeper markdowns.” He added, “Gross margins were down 2.1 basis points.”
Analysts have also contended that it’s time for Dillard’s to make some serious expansion maneuvers. Over the last few years, Dillard’s has sat on the sidelines as Federated and other competitors grew through acquisitions. However, Dillard is making some incremental moves, entering California in fall 1997 with a 200,000-square-foot unit in the Weberstown Mall in Stockton, and negotiating for a site in the Coddingtown Mall in Santa Rosa, which could open in spring 1998.
The $6 billion, Little Rock, Ark.-based chain reportedly is pursuing other California locations, primarily in the northern part of the state.
It also reportedly has eyed the Leggetts unit of the Belk retail empire in the South and has begun slowly entering the Denver and Atlanta markets. The chain operates 253 traditional department stores, mainly in the South and Midwest, but has stores as far west as Arizona and Nevada. It expects to enter Wyoming and Idaho next year.
The more aggressive Federated, even with swallowing Broadway Stores and Macy’s over the last three years, appears to be managing its mushrooming business well. Last quarter, as Exstein said, Federated “had good margins and expense control.” He said, “Federated has worked out a reasonable balance of costs and margins as opposed to pressing for more sales.”
In the quarter, gross margin improved to 39.3 percent of sales from 37.9 percent, while selling, general and administrative expenses dropped to 32.9 percent from 34 percent. Operating income before interest and taxes rose 60.7 percent to $187.3 million, or 5.2 percent of sales, from $105 million, or 2.8 percent of sales.
Wallin said she was satisfied with Federated’s profit improvement considering that sales were sluggish in August and September. “Not many of Federated’s competitors were able to do it.”
She expects Federated to earn $2.10 a share for the year before the special item compared with $1.82 in 1995.
For the nine months to Nov. 2, Federated sales were up 4.2 percent to $10.194 billion from $9.784 billion. Operating profits soared 170 percent to $318.3 million from $117.6 million. However, after integration charges, interest and tax credits, there was a loss of $23.3 million in the latest period against a year-ago loss of $170.3 million.
At Little Rock, Ark.-based Dillard’s, profits for the nine months to Nov. 2 slipped 7.6 percent to $127.5 million, or $1.12, from $138 million, or $1.22. Sales were up 7 percent to $4.290 billion from $3.997 billion.
Meanwhile, Fresno, Cal.-based Gottschalks Inc., reported sharply reduced losses for the third quarter and nine months ended Nov. 2. In the quarter, the loss was pared to $1.5 million from $3.2 million a year earlier. Sales were up 11.1 percent to $95.7 million from $86.1 million. Gross margin inched up to 32.1 percent of sales from 31.9 percent and SG&A expenses eased to 32.9 percent from 34.9 percent.
For the nine months, Gottschalks lost $3.6 million against $8.3 million. Sales were up 8.2 percent to $276.9 million from $255.9 million.
Steve Furst, president and chief operating officer of Gottschalks, said the strategy of improving margins and tight expense control has “significantly improved our bottom line,” adding that he is optimistic about the holiday season.
Gottschalks operates 35 department stores and 25 specialty apparel stores. Federated, based in Cincinnati and New York, operates more than 400 department stores and 150 specialty stores.