Federated's Not Finding a Reason to Celebrate

Federated shares closed Friday at $28.73. The company's shares are down more than a quarter for the year to date.

Federated has been struggling for a while to turn around its sales. The company has posted flat or declining same-store sales in 11 out of the last 12 months. Last year, the company's same-store sales declined by 5.3% from 2000.

Federated has done a good job of cutting back on costs, noted Ulysses Yannas, who covers consumer stocks for Buckman Buckman & Reid. In its fiscal quarter ended Nov. 2, for instance, the company posted $188 million in operating income and $106 million in net income on $3.5 billion in sales. Although revenue was essentially flat compared with Federated's third quarter last year, operating income was up from $126 million in the year-ago period and net income was up from $3 million.

But the company has done a weak job of marketing its products, Yannas said. Meanwhile, its cutbacks in personnel have begun to affect customer service, he said. The company is too focused on making its quarterly numbers and not enough on its long-term viability, Yannas said.

"By cutting back so much on personnel, they are destroying themselves," he said. "Does it surprise me that sales are down? No, it doesn't surprise me."

Turnof, who earlier this month lowered her earnings expectation 2 cents to $1.94 per share for the company's fourth quarter, attributed the company's troubles to broader trends. Not only are consumers worried about the current economy, but department stores such as Macy's and Bloomingdale's have been hurt by the trend of consumers increasingly shopping at discounters such as Wal-Mart (WMT Quote), Target (TGT Quote) and Kohl's (KSS Quote), she said.

"Federated, along with other traditional department stores, is going to be under pressure on sales and earnings in the short run," Turnof said.