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Department stores may be a losing concept these days, but



showed Tuesday it can still turn a sizeable profit.

In its fourth quarter ended Feb. 1, Federated earned $341 million,or $1.78 per share, on $5 billion in sales. In the same period a year ago,the retailer lost $447 million, or $2.27 a share, on $5.1 billion in sales.That period included a $770 million loss on its Fingerhut catalog business,which Federated has since sold.

Federated lowered its guidance last month, saying that due to store-closing costs, its earnings would come in between $1.73 and $1.83 per share. The company had previously been expecting earnings between $1.95 and $2.05 per share.

Wall Street analysts surveyed by Thomson Financial/First Call were expecting Federated to earn $1.95 per share. But the analyst estimates did not include Federated's store-closing costs in the quarter, said Karen Hoguet, Federated's chief financial officer, in a conference call with investors and analysts. Those costs decreased earnings by $68 million, or about 20 cents per share. Without those expenses, the company would have posted a profit of $1.99, which would have been in line with its initial guidance and Wall Street expectations, she said.

Federated operates the Macy's, Bloomingdale's and Rich's departmentstore chains. Such chains have been losing sales for years to the likes ofdiscounters like


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While Federated's overall fourth-quarter sales declined 2.2% comparedwith the same period a year ago, its comparable-store sales fell even further,dropping 3.9%. Same-store sales measure the results of shops open more thanone year and can be an indicator of a company's market share in particularareas.

Despite the sales decline, Federated did show some improvement with itsexpenses. Its gross margin rate, which compares what a company chargesfor its goods with what it pays for them, increased from39% of sales in the year-ago quarter to 39.9% in the just-completed period.The improvement was a result of lower inventory levels, and a decrease inlost inventory, or so-called shrink, Hoguet said.

In contrast to the gross margin improvement, Federated saw an increase in its sales, general and administrative costs. Such expensesincreased from $1.32 billion, or 25.7% of sales, in the year-ago period to$1.37 billion, or 27.3% of sales, in the just-completed quarter.

Included in sales and administrative costs were the store-closing costs,which amounted to $29 million in the year-ago period.

"Given the decline in sales, we are pleased with our SG&A performance,"Hoguet said.

Federated is looking at ways to try to reduce expenses, she said. Butthe company is concerned it might slow sales further by being overlyaggressive on expense cuts. Meanwhile, Federated will likely see an uptick in pension and medical and general insurance costs in 2003, Hoguet said.

"Many of you hoped that we would be able to reduce expense more aggressively than this due to our track record, but that is getting more difficult," Hoguet said.

Instead of cost controls, Federated is focusing on boosting its sales,she said. Federated is aiming to have same-store sales growth of 2% to 3% inthe near future, she said. Like many of its competitors, the company hasbeen experimenting with new store concepts and designs to try to improvesales.

Results Later

Still, the company doesn't foresee the experiments paying off this year.Federated expects its comparable-store sales to come in between flat and off1.5% for the year. In the first quarter, the company expects same-storesales to drop 2% to 3%.

Despite the expected same-store sales decline, Federated projects thatits bottom line will continue to improve this year. The company expects toearn between $3.05 and $3.25 for the year, 14 cents to 19 cents of that inthe first quarter.

Separately on Tuesday, Federated announced the promotion of fiveexecutives. Terry J. Lundgren, the company's president, chief operatingofficer and chief merchandising officer, will replace James Zimmerman asFederated's chief executive officer on Wednesday. Zimmerman will retain hisrole as the company's chairman.

Under a new corporate structure, the company will have five vice chairpersons reporting to Lundgren. Thomas Cody, vice president of legal and human resources; Tom Cole, head of the company's logistics and credit services divisions; Janet Grove, head of the company's merchandising operations; and Susan Kronick, president of the regional department stores, were all named vice chairs on Tuesday with similar responsibilities as before. Ronald Tysoe, head of the company's finance and real estate operations, has served as a vice chair since 1990.

The promotions were expected, Hoguet said.

"We don't see this as a major change," she said.