May Weighs on Federated

The retailer indicates that third-quarter sales were soft at former May stores.
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Updated from 9:34 a.m. EST

Federated Department Stores

(FD)

continues to struggle with its mammoth acquisition of rival

May Department Stores

last year.

Federated, which operates the Macy's and Bloomingdale's chains, swung to a third-quarter loss due to ongoing costs from a big acquisition last year, while earnings before the charges missed analysts' expectation.

The company posted a loss of $3 million, or 1 cent a share, reversing a year-earlier profit of $436 million, or 91 cents a share. The results included about $90 million in after-tax costs related to the integration and inventory valuation adjustments related to the May acquisition.

Excluding charges, Federated's earnings from continuing operations were 20 cents a share, at the high end of the company's guidance of 15 cents to 20 cents. Wall Street, however, expected earnings of 25 cents a share, according to Thomson First Call.

Sales rose 6% to $5.89 billion from $5.56 billion last year. Same-store sales increased 5.9%, but that increase only accounted for the legacy Federated stores.

Federated indicated in a conference call that sales at the former May stores -- which have been converted from regional names like Hecht's and Filene's to the Macy's nameplate -- were softer than expected.

"While we would have liked to have seen more progress in the performance of our new Macy's or former May doors post-launch, we did see a lot of progress and reason to be confident about the future, especially in the soft goods part of the business," said Chief Financial Officer Karen Hoguet on the call.

Hoguet said private brand merchandise sold well both in the new and old Macy's stores, but sales of more hard-line goods were weak.

"In the new Macy's, it was the home store that was by far the most disappointing," she said.

Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm, expressed concern about Federated's ability to successfully assimilate the May chain into the company.

"When you buy the Titantic," he said, "it can hurt you very badly."

He said May had been losing money for years prior to Federated purchased the chain last year.

"Federated bought a company that appealed to Middle America," he said. "May was never as luxury-oriented as Federated. May was largely in the Midwest. Their customers were more conservative, more budget-oriented, and not so far out on the fashion curve. How is all this going to work? I have my doubts."

Davidowitz noted that billionaire investor Carl Icahn is a major shareholder in the company. Icahn, Davidowitz said, "is not known for his patience and goodwill."

"You put this all together and there may be some discomfort in the executive suites of Federated," he said.

Federated backed its fourth-quarter guidance for earnings of $1.40 to $1.50 a share, excluding merger costs. Analysts target earnings of $1.52 a share. The company expects same-store sales for the key holiday period to increase 3% to 5%.

"We should have expected it to be harder and take longer to turn around the May home business, but we do expect progress in the fourth quarter," Hoguet said.

Federated shares recently were down 36 cents to $39.98.