Federated shrugs off May's sales drop

Mary Jo Feldstein
St. Louis Post-Dispatch

May Department Stores Co.'s sales have sagged this year, but Federated Department Stores Inc. still expects that the two chains eventually will fare better as one than either could have on its own.

"They did perform worse, up until the time we bought them, than we anticipated, so in some ways we are starting at a lower base, but we see so much opportunity we're not concerned," Karen Houget, Federated's chief financial officer, told investors during a conference call on Thursday.

Federated assumes that May department stores open at least a year will see sales decline 5 percent to 6 percent in the remainder of the third quarter and in the fourth quarter. That's a 1 percent to 2 percent steeper decline than was projected in August.

The newly combined company missed its sales expectations for the month, saying hurricanes, high gasoline prices, dampened consumer confidence and soft sales in its home business contributed to the weakness.

The conference call was to update investors on the May acquisition, Federated's upcoming sale of its credit business and earnings guidance.

Federated, of Cincinnati, said in February that it would buy St. Louis-based May. The deal closed in August.

Federated, which operates the Macy's and Bloomingdale's chains, has said it will make most of May's stores into Macy's, including Famous-Barr. Federated also will sell May's bridal division and possibly Lord & Taylor.

Those changes will lead to the closure of May's corporate offices downtown and the elimination of 1,700 jobs here. Federated will operate a divisional office in St. Louis.

Federated doesn't expect to make any operating changes to the May division this fall, and shoppers probably will see few changes in the spring, Houget said. No jobs will be cut until March.

Houget said the company has put incentives in place to entice May management to meet sales goals.

"But as you might imagine, this is a difficult time to be operating, particularly in the four divisions that will go away," Houget said, speaking of Famous-Barr and May's other divisions that will become Macy's in fall 2006.

Federated still expects to see $175 million in cost savings next year and $450 million in 2007 and beyond, Houget said. Those savings will come from enhanced buying power from vendors and in advertising as well as eliminating overlapping divisions.

Federated said it's still confident it can "significantly improve" May's business, but those improvements probably won't come until all the stores are moved under the Macy's name.

Houget said she understood investors' desire to use short-term results to determine the success of the deal, but cautioned investors against judging the combined company too quickly.

"You also need to recognize that until the names are changed next fall and the new divisions have a chance to implement change, it will be difficult to really make that judgment," Houget said. "That does not mean we are not focused on short-term performance, because we are."

Federated estimates the deal will cost the company $50 million to $250 million in the remainder of this year. The biggest items will be retention expenses, asset write-downs from Federated stores that will be sold because of the sale and other transition costs.