FEDERATED FALLS 25.9%, FINGERHUT UNIT BLAMED AS STORES HANG TOUGH
Byline: David Moin / Jennifer Weitzman
NEW YORK — Hampered by $167 million in charges mostly related to the troubled Fingerhut division and closing Stern’s, Federated Department Stores reported a 25.9 percent decline in fourth-quarter net income despite an increase in its department stores’ operating income.
While disclosing the disappointing outcome, Federated officials stressed that its department stores performed well in the slowing economy. That provoked a positive reaction from Wall Street, which boosted the stock to a new high for the 52-week period. Shares closed up $1.66, or 3.63 percent to $47.37 on the New York Stock Exchange.
In addition, Federated gave a glimpse of the future, announcing a high-level management reorganization and succession strategy, spotlighting Susan Kronick. Currently, chairman and chief executive of Burdines — which just happened to be Federated’s top performing chain last year — Kronick will become group president on April 1, supervising Burdines, as well as two other regional operations, The Bon and Rich’s/Lazarus/Goldsmith’s. Federated’s national chains, Bloomingdale’s and Macy’s, continue to operate without a group president.
Also, James Zimmerman, Federated’s chairman and ceo, in an interview with WWD, projected continued strong cash flow and earnings per share growth, amid the 2 percent comp-store growth seen for 2001.
He said 2000 was “a complicated year to describe” particularly since 1999 marked “Federated’s best year ever — when everything went well.”
In 2000, Federated’s department stores, which represent over 90 percent of Federated’s $18.4 billion total business, did well in a difficult environment, he said. “We achieved our profit expectations in department stores and outperformed the competition. It was a fight. While the economy at the end was difficult, we’re pleased with department store performance.
“The consumer direct part of the business is where the disappointment came,” fueled by the Fingerhut credit problem, surfacing around the middle of the year. “That was a big detractor of profits.” Zimmerman said. Federated has been shrinking the Fingerhut business, stabilizing it and reviewing alternatives about its future, including possibly selling all or parts of it. In a conference call with analysts, Karen Hoguet, Federated’s chief financial officer, said that for the quarter, delinquencies at Fingerhut declined to 21.5 percent from 24 percent in July.
Zimmerman also said Bloomingdale’s By Mail struggled but ended the year strong, while macys.com and bloomingdale’s.com are “growing rapidly.” He projected Federated’s dot-com volume at $200 to $250 million in 2001, compared to $156 million in 2000 and $60 million in 1999. “The business will probably triple in sales over the next three years,” he said.
The Internet business still loses money, but lost a little less than expected and should break even by 2003, according to Zimmerman. “We’re committed to that plan,” he said, adding that Federated is “pleased with that part of its consumer direct business and very pleased with Internet bridal business.”
“The best news in the whole P&L is that Federated actually did exceed its original operating and free cash flow objectives. On balance, it was a disappointing year, but with lots to be proud of.”
That disappointment continued in February, though Federated planned a low rate of sales growth for the month, based on where promotional events fell on the calendar. Also, a winter storm “snowed out The Bon for three days,” Zimmerman noted.
Looking ahead, Zimmerman said, “The second half will be a little easier than the first. We’re looking for 2 percent comps for the year,” and 13 to 15 percent earnings per share growth over the next several years powered by strong cash flow.
That 2 percent comp target represents a downward forecast from the 3 percent projection Federated started issuing around mid-2000. In 1999, Federated posted a 4.5 comp gain; in 2000, 2 percent. “In some future years, we can return to 3” percent growth, Zimmerman projected.
In the last quarter, ready-to-wear outperformed the home business. Nevertheless, Federated going forward will be expanding its freestanding furniture store concept “a little more aggressively,” at a pace of two to four furniture openings annually over the next several years. Federated operates about two dozen furniture stores currently.
“Home is a great strength for Federated,” Zimmerman said. “The apparel business was very good in the fall. It was the best overall category fueled in large part by our private brands.” Yet, there’s less competition in home than in apparel, Zimmerman observed.
Zimmerman also said the conversion of Stern’s into primarily Macy’s gives Macy’s the opportunity to experiment with new formats, and different sized stores that could be merchandised and priced differently from traditional Macy’s stores. Last fall, Macy’s opened a scaled-down store selling just fashion and accessories in West Palm Beach, Fla. “Realistically, it will take another year to build factual evidence, but the anecdotal evidence is positive that 100,000 and 80,000-square-foot formats can work for us.”
Federated, which has a reputation for dramatic takeovers, hasn’t changed its position on acquisitions, and will continue to “aggressively” go after stores up for sale, according to Zimmerman. Among the properties on the market are Montgomery Ward sites. “We’re interested, but not in a large number of them,” Zimmerman said. “Generally, they are not great locations for our strategies.”
In the management reorganization, Kronick, who is 49 and has been chairman and ceo of Burdines since June 1997, continues to report to Terry Lundgren, Federated’s president and chief merchandising officer. The three regional department stores she will supervise combined operate 171 stores in 15 states in the Pacific Northwest, Florida, the Southeast and Midwest and had sales exceeding $4.6 billion last year.
Aside from overseeing those divisions, Federated said Kronick will be included in corporate-level policy meetings concerning all Federated units, further grooming her for a possible broader role.
Asked what’s behind Kronick’s promotion, Zimmerman explained, “We made that move for a combination of reasons — to help us execute the business, help us strategize the business and it’s a development opportunity for Sue.”
He also praised her performance at Burdines and said the chain was Federated’s most profitable division last year. She has broad experience at Federated. Prior to Burdines, Kronick ran Rich’s as ceo, and served as senior executive vice president of stores for Bloomingdale’s. Kronick has spent her entire career with Federated where she began in 1973 as an executive trainee at Bloomingdale’s.
May Co. also operates with group presidents that supervise a number of divisions, though Zimmerman noted it’s not the first time Federated has utilized the position. In the Eighties, Howard Goldfeder served as a Federated group president and went on to become chairman and ceo.
A likely succession scenario at Federated would be Lundgren rising to ceo and Kronick becoming president, in the event that the 56-year-old Zimmerman decides to retire. But in the meantime, Kronick will support the management of the regional chains, where several high-level executive changes, were announced in tandem with Kronick’s promotion. Timothy Adams, 47, president of The Bon Marche in Seattle since March 1998, will become chairman and ceo of the 53-unit, $1.4 billion Burdines, succeeding Kronick.
Peter Sachse, 42, vice chairman-director of stores for Macy’s East since February 1999, will take over as president of the 42-unit, $1 billion The Bon Marche, succeeding Adams. Ronald Klein, 51, chairman of the soon-to-be-closed Stern’s division, will return to the 90-unit, $4.7 billion Macy’s East as executive vice chairman, a new title at the company’s largest department store division, responsible for store operations. Klein was vice chairman and director of stores at Macy’s East prior to moving to Stern’s in January 1999. As reported, in May, Macy’s East will take over 17 Stern’s, while Bloomingdale’s will take over two.
All changes are effective April 1.
James N. Andress continues as president of Stern’s, playing a key role in the Stern’s conversions and is expected to be named to another position.
“We’re very proud of the way Federated does develop a new generation of executives,” Zimmerman said. Asked if Federated is considering additional consolidations after Stern’s, Zimmerman replied, “We have no plans in that regard.”
The Cincinnati-based company said its profits for the three months ended Feb. 3 dropped to $332 million, or $1.65 a diluted share, compared to earnings of $448 million, or $2.04. Excluding the one-time charges, Federated’s earnings were $2.15. Analysts expected the company to earn $2.10, according to First Call.
Sales improved 2.4 percent to $6.1 billion from $6 billion. Department store sales grew 6.6 percent to $5.5 billion while comparable-store sales moved ahead 1.6 percent. In its direct-to-consumer division, sales fell 25.9 percent to $575 million.
The fourth-quarter charges include $54 million related to the Stern’s closing, $42 million for the downsizing of Fingerhut and $71 million in non-cash write-downs of certain Internet-related and other minority investments.
For the new year, Hoguet said the firm would change its segment reporting to better reflect how it is operating. Going forward, it will report two segments — department stores, which will include related catalog and e-commerce operations, and Fingerhut.
Still, the company said while 2001 will not be easy, it should be consistent with its previously targeted $4 to $4.25 per share earnings estimate. Those projections assume earnings per share of 37 to 42 cents in the first quarter, 75 to 80 cents in the second and $2.90 to $3.05 in the second half. It also said it expects a 2 percent comparable-store increase for the spring, fall and full year and plans to open nine new stores and two furniture stores.
For the year, one-time charges of $927 million pushed the net loss to $184 million, or 90 cents a share, compared to earnings of $795 million, or $3.62. Excluding charges, earnings per share were $3.08. Sales rose 3.9 percent to $18.4 billion from 17.7 billion.
Department store sales during the year increased 3.9 percent to $16.5 billion from $15.9 billion and rose 2 percent on a comparable-store basis.
“Our department stores are a good business and we are clearly one of, if not the, leader in the industry,” Hoguet said.
She attributed the sales growth to its assortment of private labels. She said women’s apparel got significantly stronger in the second half of 2000, and she said she hopes the area can continue to offset challenges in the men’s and home departments.
J.P. Morgan’s Shari Schwartzman Eberts said she continues to be encouraged by Federated’s performance, particularly with department stores. She said its ability to move gross margins up 30 basis points was attributable to strong inventory management and cited private label lines as a key factor that differentiates Federated from competitors.
Referring to the dramatically negative impact of Fingerhut, Robert Buchanan with A.G. Edwards & Sons said, “I just think it is a shame. Federated was doing so well in its core business. Yet they continue to have difficulties in the direct-to-customer segment.”
Buchanan said the department stores are doing a “superior job” of developing their private label programs, which include brands like I.N.C. and Alfani, as well as editing the assortments on the floor. “They present a conviction in their merchandise about what they are going after by setting the floor with a narrow and deep offering, especially when compared to some of their competitors, like May Department Stores.”