FEDERATED BEATS WALL ST. ESTIMATES
Byline: Thomas J. Ryan
NEW YORK — Despite undertaking massive acquisitions and consolidations, Federated Department Stores Inc. reported fourth-quarter earnings sharply ahead of Wall Street estimates.
Including the impact of the acquisition of Broadway Stores Inc. in July, but excluding business integration costs stemming from the R.H. Macy acquisition in December 1994, net income was $295 million, or $1.46 a share, in the quarter.
That easily topped Wall Street’s mean estimate of $1.38 a share, pushing Federated’s stock on Tuesday up 3/4 on the New York Stock Exchange to 33 7/8, a 52-week high.
“Perhaps our most significant accomplishment of the past year,” stated Allen Questrom, chairman and chief executive officer, “was in demonstrating our ability to run our businesses successfully, while at the same time integrating Macy’s into Federated and acquiring Broadway. On that basis, 1995 wasn’t just a good year — it was exceptional.”
Analysts said the strong performance was helped by tight cost controls driven by an ability to streamline expenses and a 2.2 percent sales gain, which, though soft, still was better than many of its department store competitors could muster.
Business integration charges totaling $82.5 million in the quarter and $293.9 million in the year retarded earnings in both periods. For the full year, Federated’s net income after charges was only $74.6 million, or 0.5 percent of sales.
The company expects $300 million in costs in the current year, principally related to the Broadway acquisition. Federated also noted that from July 29 to Oct. 28, Broadway had losses of $65 million that were not tax deductible.
In the quarter, net income was $244.9 million, or $1.21 a share, against $107.3 million, or 71 cents, a year earlier. Federated said year-ago results were “not meaningful” because of the Macy and Broadway acquisitions.
Sales jumped 67.7 percent to $5.3 billion from $3.1 billion, reflecting the acquisitions.
Gross margins slipped to 37.3 percent from 37.5 percent, but Federated was able to slash selling, general and administrative expenses to 25.4 percent of sales from 27.4 percent.
Business integration and consolidation expenses rose to $82.5 million, or 1.5 percent of sales, versus $58.9 million, or 1.9 percent, a year ago. Interest expense grew 75 percent to $129.97 million from $73.2 million.
Federated highlighted the fact that it was able to increase net and operating income, excluding costs stemming from the integration of R.H. Macy and acquisition of Broadway, as well as other divisional consolidations.
Looking ahead, Questrom said he anticipates a continued “highly competitive retail environment” in 1996, but he believes the company is “positioned appropriately to compete effectively in the year ahead.”
He said Federated will concentrate on increasing same-store sales and improving efficiencies.
“We also will be tightly focused throughout the coming year on generating improved results from the former Broadway locations in California and the West that are being converted to Macy’s and Bloomingdale’s, and we believe we will be helped in that process by an improving California economy,” Questrom said.
“It was a good quarter,” said Jeffrey Edelman, an analyst at C.J. Lawrence, noting that Federated’s strong cost discipline enabled it to expand operating margins by 150 basis points.
In the year, net income was $74.6 million, or 39 cents a share, against $187.6 million, or $1.41, in fiscal 1994. The latest year included consolidation costs of $293.9 million, or 1.9 percent of sales, versus $85.9 million, or 1 percent. The latest year also includes $25.6 million as a one-time start-up charge for Federated Department Stores Foundation.
Net income in 1995, excluding costs related to Broadway, was $268.7 million, or $1.40 a share. Excluding all charges, earnings reached $332.8 million, or $1.82 a share, in the latest year.
“It represents another year of accomplishment,” said David Poneman, at Sanford Bernstein. He noted that the $1.82 a share generated before charges was well ahead of the $1.52 Federated told analysts it was aiming to reach at the time of the R.H. Macy acquisition.
Poneman said 1995’s improvement was impressive considering that the company was absorbing both Macy’s and Broadway, as well as consolidating its Lazarus, Rich’s, and Goldsmith’s divisions. He was optimistic about Federated’s chances in 1996.
“The numbers may be constrained some by the cost of Broadway, but I expect the company to do well and probably achieve or exceed expectations,” said Poneman.
Gross margins, he said, got a boost from better-than-expected margins on liquidation sales at Broadway. He said Federated expects the phase-in of Macy’s merchandise in the old Broadway stores to be 80 to 90 percent complete by July.
Edelman said absorbing all the integration charges at once will help the company’s results later on, and he looks for Federated to earn $1.95 for 1996.
He expects Macy’s to make a bigger contribution to the bottom line in 1996. Analysts believe Federated will earn between $1.90 and $1.95 in 1996.
Federated also broke out full-year sales results for each division for 1995.
Macy’s East saw the biggest growth, with sales jumping 34.5 percent to $4.6 billion against $3.4 billion. Its store count grew to 89 from 64, reflecting the conversions of Abraham & Straus and Jordan Marsh.
Sales at Macy’s West’s climbed 7.1 percent to $2.5 billion from $2.3 billion. The division added two stores and now has 59.
Stern’s had good growth, with sales advancing 19.4 percent to $845 million from $707.4 million. Stern’s added five stores to close with 27 in operation.
Bloomingdale’s sales gained 10.1 percent to $1.4 billion from $1.3 billion. It added one store to close with 17.
Bon Marche’s sales nudged up 2.7 percent to $896.9 million from $873 million as it added one store to close at 41. Burdines’ sales advanced 5.9 percent to $1.33 billion from $1.26 billion, and its store count increased by one to 47.
The Rich’s/Lazarus/Goldsmith’s division achieved sales of $2.15 billion, slightly ahead of $2.13 billion the year before, with its store count declining to 75 from 76.
The company’s 57 Broadway stores contributed $1.05 billion, representing sales since July 29, the date of the acquisition. Overall, its department store count rose to 412 from 355.
Sales at Macy’s Specialty, which consists of Aeropostale and Charter Club, rose 26.9 percent to $162.9 million from $128.4 million. Macy’s Specialty increased its count to 153 from 122.
Volume at Bloomingdale’s mail order subsidiary increased 8.3 percent to $114 million from $105.3 million.
Macy’s Close-Out, which the company discontinued last year, had sales of $66.1 million, down from $83.1 million.