Federated Forecast Surprises

The department store giant sees a first-quarter loss as it struggles with its merger integration.
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Federated Department Stores

(FD)

signaled Thursday that executing its giant merger is going to be more difficult than Wall Street expected.

The department store giant surprised investors by projecting a loss for the first quarter of 2006 as it juggles declining market share and a huge acquisition of its former rival. The company labeled 2006 a "transition year."

The Cincinnati-based parent of Macy's and Bloomingdale's chains said it now expects a loss of 5 cents to 15 cents a share in the quarter, with sales of $5.75 billion to $6 billion. Analysts on Wall Street were expecting a profit of 70 cents a share for that quarter, according to estimates compiled by Thomson First Call.

For all of fiscal 2006, Federated predicts earnings of $3.45 to $3.70 a share, well below analysts' expectations for earnings of $5.06 a share.

"We believe this initial earnings guidance for 2006 reflects the fact that the integration of May is going to be

a more challenging and longer-term risk than some investors had expected," said Credit Suisse analyst Michael Exstein in a research report.

Shares of Federated were recently down $1.16, or 1.5%, to $69.75.

"We expect significant improvement in 2007 and a return to our historical peak levels of profitability, adjusted for the impact of the sale of credit portfolios, by the 2008-2009 period," Federated said.

The company acquired May Department Stores, whose business was in a tailspin, last year. Investors predicted that achieving greater scale would enable the department stores to match the buying clout of their discounting, big-box competitors like

Wal-Mart

(WMT) - Get Report

and

Target

(TGT) - Get Report

. Meanwhile, specialty chains like

Chico's

(CHS) - Get Report

and

Nordstrom

(JWN) - Get Report

continue to lure customers away.

Federated said it expects same-store sales, or sales at stores open at least a year, to decline between 0.5% to 1.5% for the first quarter. The company also predicted same-store sales would rise between 2% and 3% for the full year.

Federated excluded its Bridal Group and Lord & Taylor chains from its forecasts, since it plans to sell those divisions. The company is also expected to sell off underperforming stores and other assets.

For its fourth quarter of 2005, Federated is expected to report earnings of $2.41 a share, down from $2.55 a share in last year's holiday quarter.

"While we view the consolidation of Federated and May an appropriate long-term strategy, investors need to be prepared for

near-term disappointments along the way, and today is a clear reflection of that," Exstein wrote in the report (he does not own shares in Federated, but his firm has an investment banking relationship with the retailer and it makes a market in its shares).