NEW YORK — Federated Department Stores Inc. joined the ranks of retailers that appear poised for a joyous holiday season even though third-quarter earnings tumbled by more than a third, primarily on closing and consolidation costs.

This story first appeared in the November 13, 2003 issue of WWD. Subscribe Today.

Federated also took the opportunity to provide additional details about its plans to combine the Burdines and Macy’s nameplates in Florida and to officially announce groundbreaking for what will be its largest branch store, a five-level unit in San Francisco.

For the three months ended Nov. 1, the Cincinnati-based operator of the Macy’s and Bloomingdale’s nameplates, among others, said net income fell 36.8 percent to $67 million, or 36 cents a diluted share, which exceeded the Wall Street outlook by 1 cent and easily beat the firm’s most recent guidance, issued last month, of 30 to 33 cents. By comparison, last year Federated registered profits of $106 million, or 54 cents.

Excluding year-ago aftertax income from the discontinued Fingerhut operations of $31 million, or 16 cents, net income would have declined a more modest 10.7 percent from $75 million, or 38 cents.

But most encouraging were signs of revitalized top-line performance, including a fractional increase in net sales, which ticked up 0.2 percent to $3.49 billion, a 0.3 percent improvement in comparable-store sales and a 70 basis-point expansion in gross margin.

Only higher selling, general and administrative costs, which swelled 110 basis points to 35 percent of sales, negated any benefit to the bottom line. Those expenses were primarily due to $29 million, or 9 cents a share after taxes, to close and consolidate stores. Excluding those figures, SG&A would have been up 30 basis points, said the firm on a conference call with analysts.

Indeed, excluding special items in both years, earnings would have improved to 45 cents from 38 cents.

“We were pleased to see our sales trend improve in the third quarter and to exceed our expectation of profitability,” said chief financial officer Karen Hoguet on a morning conference call. “Sales in the quarter were particularly strong at Bloomingdale’s, but every division produced improved sales trends in the quarter. By family of business, sales were strong in women’s and men’s apparel, driven by career apparel and more contemporary fashions, jewelry, handbags and cosmetics. Furniture and bedding were also very strong.”

Although Wall Street’s immediate reaction was cool, as investors traded down Federated’s shares 52 cents, or 1 percent, to settle at $49.65 in Wednesday’s New York Stock Exchange session, a number of industry observers are increasingly bullish on the retailer’s prospects.

“I think [chief executive officer] Terry Lundgren is doing a good job of buying judiciously and taking his markdowns wisely when he has to,” said A.G. Edwards & Sons analyst Robert Buchanan. “Federated’s assortments at stores around the country — from San Francisco’s Union Square Macy’s to the Goldsmith’s at Hickory Ridge Mall in Memphis to the Burdines (soon to be Burdines/Macy’s) at Miami’s Dadeland Mall — are also very much in tune with the demographics and related fashions desires of the target audience,” he added in a research note.

Deborah Weinswig of Smith Barney, who on Tuesday upgraded Federated to “buy” with medium risk from “hold” with medium risk, pointed to a number of positive indicators, including “The Four ‘Ms’ — merchandising, marketing, markdown optimization and mall revitalization.”

Weinswig wrote that these factors “likely have armed Federated with the tools to ‘shatter the hourglass’ and fuel future sales and operating margin improvements. ‘Hourglass Theory’ for broadlines retail is our view that high-end retailers at the top and value-oriented concepts at the bottom are positioned better than those ‘stuck in the middle.’ In our view, Federated was ‘stuck in the middle,’ but recent merchandising, marketing, and technology initiatives are enabling the company to more effectively fight the competition.”

At Goldman Sachs, analyst George Strachan raised his fiscal 2004 estimate by 20 cents to $3.85, and wrote, “We believe that Federated is well positioned for holiday both in terms of inventory quantity and content. Federated remains our favorite traditional department store anchor because of its slightly upmarket positioning, strong battery of private brands and merchandising and store-format initiatives.”

For the nine months, Federated said net income fell by more than half, or 51.2 percent, to $233 million, or $1.25 a diluted share, from $477 million, or $2.37, a year ago. Net sales dipped 2 percent to $10.21 billion and comps sagged 2 percent as well.

In guidance, the company reaffirmed its fourth-quarter outlook of $2.15 to $2.20 a share with comps of positive to negative 1 percent.

As for those rebranding efforts mentioned by Buchanan, Federated also said on Wednesday it is pushing ahead with its conversion of Burdines and Macy’s stores in Florida to Burdines-Macy’s. Federated announced earlier this year that the Burdines and Florida Macy’s stores would begin operating as Burdines-Macy’s beginning Jan. 30 as part of its national branding strategy for Macy’s. Federated will convert six of seven Macy’s Florida stores to Burdines-Macy’s and close one Macy’s store in markets where Burdines and Macy’s stores overlap.

New store configuration plans are set for three south Florida malls with both a Burdines and a Macy’s.

At Adventura Mall, the current Burdines location will be converted to a Burdines-Macy’s store featuring men’s apparel, home merchandise and furniture. The current Macy’s store will be reconfigured to focus on fashion apparel for women and children. Renovations are scheduled to start as early as May.

At The Gardens of the Palm Beaches, the current Macy’s store will be converted to focus on women’s, men’s and children’s apparel and accessories, and the Burdines store will be converted to a home-oriented store that will also feature furniture. Those conversions should get under way in June.

At the Boynton Beach Mall, the Burdines store will continue operating as a full-line Burdines-Macy’s, while the Macy’s store will close in September. Macy’s four other Florida locations will be converted to the new Burdines-Macy’s nameplate, as will all of Burdines’ 56 stores in the state.

Carey Watson, senior vice president, marketing, at Burdines, said that, at Adventura and The Gardens of the Palm Beaches, “we’ll have much less duplicating assortments and can offer a broader assortment because we’ll have more room.”

Also, beginning Jan. 30, Burdines will assume buying and management responsibilities for Macy’s Florida operations.

One-time costs related to the store conversions and closings are expected to total approximately $35 million to $40 million. About $7 million of the one-time costs relate to markdowns, which will reduce gross margin, Federated said. Once the stores are converted, the company said it expects total sales to be reduced by approximately $50 million.

In related news, Federated said the groundbreaking for the previously announced Bloomingdale’s store in downtown San Francisco will occur today. The five-level, full-line store, with 337,000 square feet of retail space in Westfield San Francisco Centre, will be Bloomingdale’s largest branch and is scheduled to open in fall 2006.

In addition to Bloomingdale’s, the new 1.5 million-square-foot Centre will feature 200 specialty stores, a nine-screen cinema and upscale dining. Jointly owned by Westfield America and Forest City Development, the project is billed as the largest urban shopping center west of the Mississippi and is expected to attract 25 million visitors annually.

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