FEDERATED 1ST QUARTER BEATS FORECASTS

Byline: Thomas J. Ryan

NEW YORK — Riding a robust department store business, Federated Department Stores reported first-quarter earnings handily topped Wall Street estimates.
Earnings inched ahead only 2.3 percent, weighed down by losses and higher interest costs tied to the March 1999 acquisition of Fingerhut. Operating income climbed 12.4 percent to $253 million as solid same-store sales, good inventory control and fewer markdowns led to a better than expected 12.8 percent gain in department store earnings. “The department stores had a solid sales quarter and they really beat out their key competitors,” said Stephen Kernkraut, an analyst at Bear Stearns.
In the quarter ended April 29, earnings reached $89 million, or 41 cents a share, up from $87 million, or 40 cents, a year ago, and 4 cents ahead of Wall Street’s consensus estimate of 37 cents. Sales increased 12 percent to $4.03 billion from $3.6 billion.
On a dismal day on Wall Street, Federated closed up 1/4 to finish the day at 36 5/8. Its 52-week range covers a low of 31 5/8 to a high of 57 1/16.
By operating segment:
Department store operating income increased to $308 million from $273 million, while sales nudged up 3 percent to $3.54 billion from $3.43 billion and gained 2.9 percent on a same-store basis. Gross margins improved due to reduced shrinkage and markdowns while expenses benefited from lower depreciation and sales leverage. Store inventories were up less than 4 percent on a comp-store basis, in line with plan. Chains include Bloomingdale’s, Bon Marche, Burdines, Goldsmith’s, Lazarus, Macy’s, Rich’s and Stern’s.
The direct-to-customer segment, which includes catalog and e-commerce operations, saw losses widen to $23 million from $2 million. Sales increased to $491 million from $163 million, reflecting the Fingerhut addition. The division includes the macys.com and bloomingdales.com Web sites, as well as the catalogs Bloomingdale’s by Mail, Macy’s by Mail, Outdoor Living, Arizona Mail Order, Bedford Fair, Popular Club and Figi’s.
James M. Zimmerman, chairman and chief executive, said in a statement, “We were especially happy with the 13 percent increase we experienced in operating income, which was driven by a strong performance in our department stores.”
Federated told analysts that ready-to-wear was weak, as many department stores had indicated, but “not a disaster by any means.” Officials said 1999 rtw sales were driven by trends such as capris and three-quarter lengths, but no clear trend emerged this year. But officials said leather and new launches should boost fall sales in rtw. Top categories during the quarter were furniture, women’s shoes and men’s apparel.
Direct-to-customer sector results reflect Fingerhut’s inclusion in the full quarter compared with just one month following its March acquisition last year, as well as increased e-commerce spending. E-commerce sales reached $28 million in the quarter versus $5 million.
The bottom line was helped by a gain of between $7 million and $8 million, or between 2 to 3 cents a share, from venture capital gains in dot-com firms, partly offsetting a hike in interest expense to $99 million from $75 million.
Given the strong performance, several investment firms raised estimates on Federated for 2000, including PaineWebber, by 12 cents to $4.12, and Lehman Bros., by 5 cents to $4.05. Federated earned $3.62 in 1999.
Analysts seemed impressed with Federated’s ability to lead most department store players in same-store sales while increasing gross margins to 40.6 percent of sales from 39.6 percent. Federated’s 2.9 percent same-store increase outperformed Saks’, up 1.4 percent; May’s, flat; Dillard’s, down 2 percent, and J.C. Penney’s, off 3.1 percent.
Wall Street credited Federated’s inventory management and successful private label program, which includes brands such as INC, Alfani, Charter Club and Style & Co.
Kernkraut said Federated had spent the last decade “nurturing” its private label stable, including brands received in its R.H. Macy acquisition.
“They started off with a solid private label foundation and over the last five years have made them huge,” Kernkraut said. “You as a consumer buy INC in much the same way that you buy a Banana Republic product. They’ve learned lessons from seeing what Gap and Ann Taylor do best.”
Federated officials told analysts its private label business, which analysts estimate accounts for between 16 and 18 percent of sales, “performed well” during the quarter, though rtw was soft.
Kernkraut said Federated’s overall promotional stance, including coupons and one-day sales, is helping them steal customers.
Joe Grillo, at BT Alex. Brown, said that although private label clearly helps, the robust sales gains and lean markdowns indicate Federated is also doing a good job selling national brands.
“Federated’s merchants are buying well and buying right and getting it into the stores at the right time,” Grillo said.
Jeff Stein, at McDonald & Co. Investments, based in Cleveland, also praised Federated’s execution.
“I think that they did well because of what this company always does best, which is controlling expenses and improving efficiencies of businesses they acquired in the past. They did it when they acquired R.H. Macy and Broadway, and now they’re doing it with Fingerhut.”
Regarding e-commerce, Federated officials told analysts sales should approach $170 million in 2000 versus $60 million in 1999. Top e-commerce sellers currently are bridal and jewelry. Macys.com and bloomingdales.com will be relaunched in early fall. Total direct-to-consumer sales are expected to increase by 20 percent this year, with operating earnings projected to reach $125 million. That includes about $100 million in e-commerce investments.
Grillo said the $170 million e-commerce would place Federated among the leaders on the Internet, but it still represents less than 1 percent of sales this year. “What is really driving Federated’s success is the base department store business,” said Grillo.
But Lehman Bros.’ Jeff Feiner called Federated “the first fully functioning and best positioned click-and-mortar retailer,” and believes Fingerhut, Macy’s by Mail and macys.com businesses provide the basis for 15 percent earnings growth in the future and more diversity in sales and earnings.