That Internet thing didn't work out the way

Federated Department Stores

planned.

Less than three years after it shelled out $1.4 billion for direct marketer Fingerhut, Federated said Wednesday it would shut the unit down, calling it worthless. The decision closes an embarrassing chapter for the department store retailer, which bought Fingerhut just as credit problems and demographic shifts conspired to pull the rug out from under Fingerhut's low-end direct-shipping business.

Investors applauded the move. In after-hours trading on Island, Federated shares traded at $41.31, up from their closing price of $40.74.

Firings

In a statement released after the close of trading, Federated said closing the business would result in the loss of about 6,000 jobs in Minnesota and Tennessee. Fingerhut bled cash throughout its stint under Federated, weighing heavily on Federated's earnings and stalling its growth.

TheStreet Recommends

The company said finding a buyer for the business is unlikely, and that it is preparing to wind it down and collect outstanding receivables.

"We have determined that there is no strategic value to Federated in retaining Fingerhut's operations, and we have no expectation that these businesses would contribute meaningfully to the company's future financial performance," James Zimmerman, Federated's chief executive officer, said in a statement.

Guidance

At the same time, Federated, which operates the Bloomingdale's and Macy's chains, issued a separate release that gave earnings guidance for the fourth quarter and 2002. The company offered a range of expectations, and earnings could potentially fall short of what analysts had been expecting.

For the fourth quarter, which Federated is scheduled to report on Feb. 13, the company expects to earn between $1.80 and $1.90 a share, compared with consensus expectations of $1.92, according to Thomson Financial/First Call. For the full year of 2002, the company expects earnings between $3.25 and $3.50, compared with a consensus estimate of $3.44.

Disposing of Fingerhut's assets is expected to generate $1.1 billion to $1.3 billion after taxes over the next four years. The company said it expects to take $800 million to $950 million in expenses from shutting the operation down, including $150 million to $200 million in cash.

Federated paid $1.4 billion in cash plus the assumption of about $300 million in debt in February 1999 for Fingerhut, a direct marketer that also has an Internet business. At the time the deal was seen as a way for Federated to jump aboard the Internet shopping bandwagon.

The next year, however, the deal began to fall apart. Rising delinquencies in Fingerhut's credit business resulted in Federated taking a $150 million cut from its second-quarter earnings in 2000.

The company plans a conference call with the investment community at 9 a.m. EST Thursday.