Federated Department Stores'

catalog and e-commerce businesses continue to eat away at profits.

The company Tuesday

topped Wall Street estimates for fourth-quarter earnings, but the company is still plagued by credit problems at its

Fingerhut

catalog business. Federated did provide a sliver of hope for the ailing unit, saying delinquencies declined in the latest quarter and that Fingerhut should return to profit in 2001. The company also promised to give investors more information about its struggling non-department store businesses.

The moves come in the wake of a sharp profit decline for the Cincinnati-based retail giant. "I don't think I need to tell you what a difficult year 2000 was for Federated," said Karen Hoguet, the company's chief financial officer, at an analyst conference call Tuesday morning.

E-Commerce Worries

Federated, which operates

Macy's

,

Bloomingdale's

and other department store chains, said fourth-quarter earnings dropped to $322 million, or $2.15 a share, from $448 million, or $2.04 a share a year ago, when Federated had more shares outstanding. Latest-quarter earnings topped the

First Call/Thomson Financial

consensus estimate of $2.10 a share.

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Better-than-expected sales in department stores allowed the company to top estimates and overcome the dismal performance of its so-called direct-to-consumer businesses, including Fingerhut,

Bloomingdale's by Mail

and the e-commerce sites. Combined, these ventures took $392 million in loses in 2000, reversing operating income of $51 million in 1999.

For the quarter, delinquencies at Fingerhut declined from 24% to a still-high 21.5%. "It is still a lot," says Lee Backus, an analyst at

Buckingham Research

. "But at least it is better. They seem to have turned the corner at Fingerhut." By the end of the first quarter the company expects delinquencies to decline further, to the 18% to 19% range. This would get the delinquency level close to what it was in 1999, when Federated bought Fingerhut in a bid to take advantage of its vast customer base.

"I think they did the things they had to do" at Fingerhut, says Karen Sack, an analyst at

Standard & Poor's Equity Group

. In a bid to stop the bleeding at Fingerhut, Federated previously announced a round of layoffs. Sack is neutral on Federated shares, and her company does not do underwriting.

Lumpen Proletariat

The company said it would also alter its reporting practices to give analysts a better view of Fingerhut, which is currently lumped in with Federated's other direct-to-consumer businesses. The financial performance of its Web sites will now be included within the department store segment.

"We are viewing e-commerce more as part of our store business rather than as a separate business segment," Hoguet said in the conference call. The company's e-commerce division will take about $50 million to $60 million in losses in 2001, but should break even by 2003, the company said.

Backus, whose firm doesn't do underwriting, has a strong buy on Federated, partly because he says it is undervalued compared to its closest peer,

May Department Stores

(MAY)

. And he has a point: Federated trades at 11.5 times estimated 2001 earnings, compared with more than 13 for May, even though analysts expect Federated to show slightly stronger five-year growth, according to First Call estimates. Meanwhile, Federated reported a 2% increase in same-store sales last year, which measure activity in shops open at least a year, compared with a 0.5% rise for May.

Federated shares recently traded at $46.32, up 61 cents.