Federated cuts costs for 2Q gains

Don Hogsett, August 20, 2001

CINCINNATI — Launching an earnings recovery in a weakened retail environment, Federated Department Stores parlayed deep cuts in costs and a big cut in its tax bill into a sharply higher second-quarter profit, up 74.6 percent from last year, to $110 million from $63 million last year.

In a big lift to the bottom line, the nation's largest department store retailer hacked away at its overhead, reducing its costs by 15.8 percent to $1.2 billion from $1.5 billion last year, a big $231 million cash savings. Measured as a percentage of sales, the expense ratio improved by 300 basis points, to 33.1 percent from 36.1 percent a year ago.

In another major prop to earnings, the retailer's tax bill was cut to just $1 million during the quarter, dropping from $49 million last year, steering $48 million to the bottom line.

Reflecting the earlier closing of its Stern's division and the downsizing of Fingerhut, sales fell off by 8.2 percent, to $3.7 billion from $4.1 billion a year ago, a shortfall of $333 million. Same-store sales declined by 4.8 percent in a perilous environment for department stores.

Scoping out the year, ceo James Zimmerman forecast a same-store decline of 1 percent to 2 percent for the fall season. And given a weak retail environment, he modestly lowered his earnings forecast for all of this year to a range of $3.60 to $3.80, down from an earlier forecast of $3.60 to $3.90.

Federated Department Stores

Qtr. 8/4 (x000) 2001 2000 % CHG
a-Second-quarter results include a $7 million inventory valuation adjustment related to the Stern's closing; a $28 million restructuring charge; and an income-tax provision of $1 million, compared to $49 million the year before. b-Six-month results include the $7 million Stern's inventory adjustment; a $55 million restructuring charge; and an income-tax provision of $43 million vs. $114 million a year ago.
Sales $3,732,000 $4,065,000 -8.2
Oper. income (EBIT) 239,000 220,000 8.6
Net income 110,000a 63,000a 74.6
Per share (diluted) 0.55 0.30 83.3
Average gross margin 39.7% 41.5%
SG&A expenses 33.1% 36.1%
Six months
Sales 7,554,000 8,097,000 -6.7
Oper. income (EBIT) 463,000 473,000 -2.1
Net income 168,000b 152,000b 10.5
Per share (diluted) 0.83 0.72 15.3
Average gross margin 39.9% 41.0%
SG&A expenses 33.5% 35.2%

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