It doesn't garner the headlines that larger discount retailers like
, or faster-growing luxury shops like
Federated Department Stores
is a retail giant in its own right.
After combining with May Department stores in 2005, the company now has 850 locations across the country, generating about $27 billion of revenue.
Federated sold its bridal division earlier this year, but still operates the Macy's and Bloomingdales chains, which includes many former Robinsons-May and Lord & Taylor stores, which have been rebranded since the purchase. Next month, investors will vote at the annual meeting to change the company's name to Macy's and adopt a coveted single-letter ticker symbol: M.
At Tuesday's closing price of $45.22, the stock is up 18.9% year to date. With that in mind, I'm here to answer readers' questions: Should I do it? Will Federated shares continue to press higher, or should investors ring the register?
The company said April 12 that March same-store sales grew 2.3% from the previous year, which fell short of the 3.8% consensus analyst estimate. Federated was also cautious about future numbers, saying that fiscal first-quarter (ending April) total revenue would be at the low end of its previous guidance of $6 billion to $6.1 billion.
This follows a disappointing earnings report Feb. 27, covering the company's fiscal fourth quarter (ended January). Federated guided fiscal 2008 earnings to $2.45 to $2.60 a share, compared with the consensus analyst estimate of $2.83 a share.
The former May-owned stores struggled, and the fact that it has taken Federated this long to try to unify everything under the Macy's umbrella must be frustrating for some investors.
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Even so, the consensus estimate remains at $2.82 a share today, as the investment community believes the company's merger synergies and $4 billion (88 million shares) stock-buyback authorization will prove management's guidance conservative.
Despite the market's optimistic outlook, I believe that Federated's fiscal 2008 guidance will ultimately land somewhere between analyst expectations and the company's guidance.
That's because I believe we're seeing an environment in which lines drawn on the retail map are disappearing. Stores like
are offering more upscale brands, such as names under the
At the same time, on the premium end, more top brands are opening their own boutiques, offering a larger selection and better service than the mega-sized department stores. As a result, Federated is stuck in the middle of this merchandising shift, which isn't a situation that can be remedied overnight.
At current levels, Federated trades at 16 times expected fiscal 2008 earnings of $2.82 a share. Meanwhile, J.C. Penney, which posted double-digit comp-sales improvement in March and has delivered more consistent organic growth over the past several quarters, currently sells for just 14.8 times full-year consensus analyst earnings estimates.
With the U.S. department store market largely saturated, what's the next move for Federated?
Take the Macy's brand global, according to a speech by CEO Terry Lundgren at last month's World Retail Congress in Spain. The latest numbers show that Federated still has plenty of work to do improving profitability in the U.S. before its embarks on building an overseas empire.
Besides, not even retail giants like Wal-Mart,
have had much success growing outside of the domestic market.
Readers should avoid Federated shares at current levels. The stock has already enjoyed a solid run in 2007, and I believe the retailer still has a lot of work to do to get its dozen different brands working more efficiently as one company.
Add the fact that consensus earnings estimates are so much higher than the company's guidance, and I believe the near-term risk to this stock is weighted to the downside.
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David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;
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