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Federated Gets the Nod Over May

A UBS analyst likes the developments at the owner of Bloomingdale's and Macy's.

Federated Department Stores'


strategy is coming together, according to a UBS analyst, and the company might continue to gain market share at the expense of rival

May Department Stores



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"Federated is at the 'tipping point,'" analyst Linda Kristiansen wrote in a research note. The company's strategy has resulted in lower inventory and investments in more fashion-forward private brands, which are having a good impact on merchandising.

May, however, seems to be stalled in its merchandising and private brands strategies, she said. On this basis, Kristiansen upgraded Federated Friday to buy from neutral and downgraded May to reduce from neutral.

"We believe that relative to May, Federated shares remain undervalued and are advocating a pairs trade with Federated as the long," she said.

Specifically, the two companies pricing strategies contrast "with Federated 'dialing down' promotional tempo while May is implementing a more clearance-driven strategy on a day in, day out basis," said Kristiansen. Earnings in 2005 could reflect these differences with Federated experiencing a better top line and expense leverage, but May seeing margin pressure.

For full-year 2005, Kristiansen raised her estimates for Federated to $3.59 a share from $3.47 a share. The consensus estimate is $3.54 a share. She lowered May's estimates to $1.85 a share from $1.93 a share. Analysts expect $1.92 a share, on average.

Overall, Kristiansen sees the retail industry improving in early 2004 and said Federated's management has essentially eliminated the performance gap with May. "Federated is now poised to overtake May, which in part may reflect Federated's comfort and experience with significant change while May has been more comfortable with the status quo."