Updated from 11:39 a.m. EDT

Federated Department Stores

announced Friday that it was cutting 550 jobs, or about a quarter of the workforce, at its ailing

Fingerhut

catalog business, a subsidiary blamed for pulling down the company's overall profits.

Credit card delinquencies among Fingerhut customers, who tend to have lower incomes than those who shop at Federated's

Bloomingdale's

and

Macy's

department stores, had risen lately, contributing to a 54% fall in the company's second-quarter earnings.

Imposing tighter credit standards and targeting better customers, now top priorities for the company's management, are expected to reduce sales, making cost-cutting initiatives even more significant, according to the company.

Shares of Federated, which have suffered since the company in July told Wall Street about the bad-debt problems that had plagued its Fingerhut business, were trading up $3.50, or 13%, at $29.44 Friday afternoon.

Cincinnati-based Federated, which bought Fingerhut in 1999 to take advantage of its electronic-commerce capabilities and vast customer database, said it hopes the restructuring efforts will save about $40 million a year, beginning in 2001.

"We believe the best strategy for us to pursue at this time is to make the Fingerhut core catalog operations a smaller, profitable and financially more viable business," Ronald Tysoe, the company's vice chairman, said in a statement.

Yet trying to wring benefits out of Fingerhut in a tough environment of rising interest rates and higher fuel and heating oil prices is a challenge, said Jeff Stinson, who tracks the company for

Midwest Research

.

"It's not too surprising that the Fingerhut customers were pinched first," said Stinson, who rates Federated stock a neutral. The lower- to moderate-income customers targeted by Fingerhut "are simply more vulnerable" to economic conditions, he added.

Federated said some of the positions would be eliminated by the end of this month, while the rest of the cuts will be carried out in January. The move is expected to slice into Fingerhut's employee base of 2,300 people working at its headquarters, data center and electronic-commerce operation, which are all at different sites in Minnesota.

As a result of the move, Federated said it expects to take one-time pretax charges totaling $75 million to $100 million in the third and fourth quarters of the fiscal year ending in February 2001. In addition, the company likely will take a non-cash writedown of goodwill and other assets totaling about $740 million in the third quarter ending Oct. 28.

Still, the company's department stores, which generate about 90% of its annual revenues, remain financially healthy, James Zimmerman, Federated's chairman and chief executive, said in a statement. In addition, Federated said the credit delinquency problems among Fingerhut customers are not expected to mount, but warned that it is still too early to make any predictions.

The

Arizona Mail Order

,

Figi's

and

Popular Club

catalog operations, all of which are Fingerhut subsidiaries, are expected to continue operating with little impact from the Fingerhut downsizing, according to the company.

Fingerhut-owned e-commerce sites, including

myjewelry.com

,

outdoorspirit.com

,

atomicliving.com

and

andysauction.com

, will either be integrated into

fingerhut.com

or discontinued, according to Federated.