Federated’s Profit Falls 35% on Costs

Federated Department Stores Inc., the owner of Macy’s and Bloomingdale’s, said Wednesday that its fiscal second-quarter earnings fell 35% because of costs to pay down debt and close stores. The company raised its annual profit forecast.

Net income dipped more than analysts expected, to $78 million, or 43 cents a share, from $120 million, or 64 cents, a year earlier. Sales in the three months ended July 31 rose 3.3% to $3.55 billion, the Cincinnati-based company said.

The results were reduced by 20 cents a share from the repurchase of $273 million in debt and by 11 cents because of store closures.

The retailer said it expected annual profit of as much as $3.80 a share, higher than a previous forecast of $3.70.

Federated is keeping inventory low to try to avoid profit-eroding discounts, said FTN MidWest Research analyst Jeffrey Stinson in Cleveland.

“They’ll manage inventory pretty close to the vest in the third quarter,” Stinson said. “They’re very focused on making sure they have everything well-positioned for the holiday season.”

The company was expected to have profit of 46 cents a share, the average estimate of 16 analysts surveyed by Thomson First Call.

Excluding debt payment costs, the company said, the quarter’s per-share profit exceeded its forecast of at least 62 cents. Analysts expected annual profit of $3.82 a share, Thomson First Call said.

Shares of Federated fell $1.52, or 3%, to $44.50 on the New York Stock Exchange, the biggest drop in almost seven months. They have declined 5.6% this year.

Selling, general and administrative costs rose to 34.2% of revenue from 33.3%. The increase was more than what was expected by some analysts, including Stacy Turnof at Merrill Lynch in New York.

Sales at stores open at least a year, a key measure of retail health, increased 3.3%. They are expected to rise as much as 3% in the second half of the year, Federated said.

Bloomingdale’s was one of the better-performing chains during the quarter, Chief Financial Officer Karen Hoguet said.