NEW YORK — Terry Lundgren’s strategic vision for Federated Department Stores is already paying off.
The retailer’s acquisition of May Department Stores reaped hefty profits from robust sales in the fourth quarter and the year, with earnings per share from continuing operations surging higher than either the company’s guidance or Wall Street’s consensus estimate. Meanwhile, net income rose 58.9 percent on a sales gain of 86.9 percent for the quarter ended Jan. 31. For the year-end period, results were equally spectacular with profits more than doubling.
Federated’s stellar results were bolstered by a strong sales performance in women’s sportswear and accessories, which exceeded the company’s expectations. Handbags, fragrance and dresses also performed well.
“I’m happy it turned out well,” said Lundgren, Federated’s chairman, president and chief executive officer, in a telephone interview.
Lundgren said May also had a better fourth quarter than it has had in some time, due in part to that operation having better execution and being more in-stock on key items during holiday.
Federated said its fourth-quarter net income rose to $699 million, or $2.52 a diluted share, from $440 million, or $2.55, a year ago. The lower EPS reflects a hefty jump in the share count to 277.1 million from 172.4 million a year ago. The company’s results include the contribution from May Department Stores, which Federated acquired on Aug. 30. Excluding merger-related costs and inventory valuation adjustments, diluted earnings per share from continuing operations were $2.74, which exceeded company guidance of between $2.60 and $2.65 and were also ahead of Wall Street’s expectation of $2.62. Sales for the retailer rose to $9.57 billion from $5.12 billion, while comps showed a gain of 1.1 percent.
For the year-end period, net income more than doubled to $1.41 billion, or $6.47 a diluted share, from $689 million, or $3.86, a year ago. Sales swelled 42 percent to $22.39 billion from $15.78 billion last year.
It’s important to note that in the third quarter of 2005, Federated booked $63 million worth of integration costs from the May deal. The company also recorded a $480 million pretax gain relating to the sale of its receivables to Citigroup.
At the market close on Tuesday, shares of Federated rose 1.7 percent to $70.40 on below average volume of 2.1 million trades. The stock’s 52-week intraday high is $78.05, and its 52-week low is $54.90.
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Because the holiday season was also better than expected, there’s been some hope by Chicagoans — as reported in local media — that Federated might keep the Marshall Field’s nameplate, despite the company’s plan to transition the May stores to Macy’s. Those hopes are for nought, however.
“We have not changed our position. We’ve said all along that we will change the name to Macy’s. I understand that it is a very emotional subject for the people in Chicago, but the business does need to move on. The [Marshall Field’s] division has not been a stellar performer,” Lundgren said.
The ceo also said the company was on course with its divestiture of the Bridal Group and Lord & Taylor operations by the end of 2006. Both were part of the May business that Federated acquired in August. While he gave no further details as to potential buyers for the two businesses, he did say there’s interest in the properties.
Looking ahead to spring, Lundgren expects to see continued strong sales of handbags and accessories, due in part to continued reinvention of the product. “Large-size apparel is also encouraging. There are fewer and fewer places where women can get fashion and brands in the 12 to 20 size range. That’s a growth area [for us] as well,” the ceo said.
Another growth area is men’s apparel, where Lundgren is starting to see more newness in tailored clothing. “It’s an area we’re very keen on for our company. Dress shirts and neckwear should grow along with the tailored opportunities for spring,” he added.
Karen Hoguet, executive vice president and chief financial officer, said during a conference call with analysts that “2005 was a big year for Federated,” one that included the completion of the May acquisition and the partnering with Citigroup on its credit card business. She said the company has positioned itself to compete more effectively going forward while at the same time enhancing its profitability and cash-flow generation. The cfo noted that 2006 will continue to be a transition year as Federated plans to invest $130 million over the next two years for infrastructure improvements and service enhancements that will enable it to grow the business.
Adrianne Shapira, analyst at Goldman Sachs & Co., wrote in a research note that the Federated-May “merger is tracking well to plan with divisional realignment completed [and the conversion of May] merchandising under way.”
Federated affirmed its guidance for 2006, which is for diluted EPS from continuing operations in the $3.45 to $3.70 range, excluding the one-time items such as the May merger integration costs. The company anticipates same-store sales to rise by 2 to 3 percent in 2006, with first-quarter sales of $5.75 billion to $6 billion.