April Sales, May Stores Dampen Federated Q1

by MR Magazine Staff

NEW YORK – Blaming a poor April and the continuing failure of former May units to perform under the Macy’s banner, Federated Department Stores Wednesday reported first quarter sales that missed its own estimates and earnings that fell short of Wall Street’s.

The largest department store group in the US also broadened the range of its second quarter estimates to allow for ongoing softness.

Despite the weakness, the quarter did reverse a year-ago loss. During the 13 weeks ended May 5, Federated registered net income of $36 million, or $.08 per diluted share, versus a net loss of $52 million, or $0.09, in the year-ago quarter. Eliminating discontinued operations and May Company integration costs, EPS finished at $0.16, below the consensus estimate of $0.19 but within Federated’s guidance of $0.15 to $0.20.

However, sales in the quarter failed to meet Federated’s plan, decreasing 0.2% to $5.92 billion versus the company’s plan of $6 billion to $6.1 billion and the 2006 quarter’s total of $5.93 billion. Same-store sales, which eliminate both new stores and those closed by the company, rose 0.6%.

Gross margin moved up to 39.8% from 38.8% a year ago.

“Sales in the quarter were soft, particularly in April,” said Terry Lundgren, Federated’s chairman, president and chief executive officer. “For the quarter as a whole, we were pleased with sales in the legacy Macy’s and Bloomingdale’s stores. However, sales in the new Macy’s locations were disappointing in the quarter.”

In a research note, Deborah Weinswig, broadlines analyst at Citigroup, advised her clients, “We would remain on the sidelines as we continue to have a tempered stance on this stock due to underperformance at new Macy’s doors and the home business, which we view as the core issues.”

While taking a cautious stance on general economic conditions, Lundgren voiced an optimistic note about the future of the May-to-Macy’s conversions. “While April has given us some concern about the consumer and the economic environment, we remain optimistic that our trends will improve, particularly in the back half of the year as we reach the first anniversary of the Macy’s brand conversion.”

In the near term, however, Federated left itself wiggle room, expanding its second quarter earnings guidance to $0.35 to $0.45, excluding integration costs, versus previous guidance of $0.40 to $0.45. Sales expectations were lowered to $6 billion to $6.1 billion from a range of $6.1 billion to $6.2 billion, and same-store sales are now slated to be flat to up 2%, versus earlier estimates of a 1.5% to 2.5% gain.

“The revised second quarter guidance reflects management’s concern about uncertainty in the economic environment,” the company’s press release concluded.

Following the earnings report, Federated’s shares finished the New York Stock Exchange session at $39.65, down $0.29 or 0.7%.

The quarterly results mark the end of an era. Pending approval of shareholders at the firm’s annual meeting on Friday, the company will become Macy’s Group on June 1.