Federated’s Net Income Surges

Federated Department Stores Inc., on the brink of an acquisition that will dramatically expand its size, said Wednesday that fiscal second-quarter profit nearly doubled and that sales would increase at a greater rate in the year’s second half.

The Cincinnati-based parent of Macy’s and Bloomingdale’s said it expected sales at established stores in the two chains to grow about 3% in each of the next two quarters as they added more private-label goods and trumpeted the Macy’s brand during the upcoming holiday season.

That would be triple the rate of growth in the just-concluded second quarter, when sales at stores open at least a year -- a key measure of growth -- rose 1.1%.

And the estimate does not include the acquisition of its chief rival, St. Louis-based May Department Stores Co., for $11 billion.

The results announced Wednesday, which came against weak year-earlier numbers, give the company “momentum in their core business [that] will make it easier to integrate the May business,” said Jeff Stinson, an analyst with FTN Midwest Research.”Federated clearly is the best operator of U.S. department stores,” said Robert Buchanan, an analyst with A.G. Edwards & Sons. “It moves into the merger from a commanding position.”

Federated said profit totaled $148 million, or 84 cents a share, in the quarter ended July 30, up from $78 million, or 43 cents, in the year-earlier period.

Last year’s results included one-time costs, including the repurchase of debt, worth about 31 cents a share.

Sales rose 1.2% to $3.6 billion.

The results contrast sharply with those of May, which on Tuesday said second-quarter profit fell by half because of disappointing sales and acquisition-related costs.

Federated’s acquisition of May is scheduled to be completed by the end of October, and company executives said they wouldn’t be issuing earnings guidance until after the deal closed.

A consensus of analysts polled by Thomson Financial expects earnings of 56 cents a share in the third quarter and $2.75 in the fourth quarter, increases of 33% and 8%, respectively.

The marriage of the two department store companies will dramatically alter the retail landscape in Southern California, where Federated plans to close 21 stores and erase the Robinsons-May name altogether.

In California, 28 malls have both Macy’s and Robinsons-May stores.

Nationwide, Federated has pinpointed 68 locations it plans to close.

The combination also is expected to have broad implications for a number of national chains as Macy’s reach stretches across the nation and 490 May-owned stores, with names such as Lord & Taylor and Famous-Barr and Filene’s, are upgraded and converted into Macy’s. The deal will create the nation’s second-largest department store chain, with nearly 1,000 locations before the closures and annual revenue of about $30 billion. Only Sears Holdings Corp., created when Kmart Holding Corp. bought Sears, Roebuck & Co. for $12.3 billion in March, would be bigger.

“It’s going to create the United States of Federated with a national chain and ... stores that are highly rejuvenated and tougher competitors,” said Bill Dreher, an analyst with Deutsche Bank.

Retailers including Target Corp. and Nordstrom Inc. are likely to pick up some of the vacated slots, analysts say.

J.C. Penney Co., which has stores in many of the malls where Federated and May operate, should benefit as more frugal shoppers gravitate toward its stores after Robinsons-May stores are shuttered or transformed into a more upscale Macy’s or Bloomingdale’s.

Nordstrom, which attracts many of the same shoppers as Federated’s stores, will face heightened competition, analysts say. Although the purchase will mark what Federated Chief Executive Terry J. Lundgren called “the beginning of a new era” for the company, shoppers won’t notice any difference until next year when stores begin to close, the company said.

“We have been careful not to disrupt or distract the Federated or May organizations so they can remain committed to achieving plans for the third and fourth quarters,” Lundgren said in a statement.

Federated’s stock closed Wednesday at $73.69, up 93 cents.