Federated Profit Rises on Sales of Own Labels

Federated Department Stores Inc., which is buying May Department Stores Co., said first-quarter profit rose 27%, exceeding analysts’ estimates, on sales of private-label merchandise and fewer markdowns.

Net income climbed to $123 million, or 71 cents a share, from $97 million, or 53 cents, a year earlier. Sales rose 2.5% to $3.61 billion, the Cincinnati-based company said Wednesday.

Federated increased sales of private-label goods, such as INC and Charter Club apparel, helping widen margins. The company cut inventory by 2.4% and offered fewer discounted items as same-store sales rose 2.6% in the quarter. Chief Executive Terry Lundgren converted 400 regional stores to Macy’s and expenses fell compared with a year earlier when Federated spent $15 million on store closings.

Shares of Federated declined 62 cents to $63.28 on the New York Stock Exchange. Earlier in the day they fell as much as 2.9% after the company confirmed that it expected second-quarter same-store sales to rise a more modest 1%.

“They are now telling analysts to stand down and look for slower sales growth,” said David Dreman, chairman of Dreman Value Management in Jersey City, N.J.

Bernard Sosnick, an analyst with Oppenheimer & Co. in New York, also cut his rating Wednesday on Federated to “neutral” from “buy” on the risk that an investigation into vendor markdowns at Saks Inc. might widen to include Federated and May.

Should the investigation spread to Federated and May, “the repercussions might have an adverse influence on the timing, or outcome,” of Federated’s acquisition of May, Sosnick said in a report. Federated, the owner of Macy’s and Bloomingdale’s, agreed to buy May for $11 billion to become the second-largest U.S. department-store company, after Sears Holdings Corp.

The Securities and Exchange Commission and the U.S. attorney’s office are investigating vendor allowances at Saks, the Birmingham, Ala.-based retailer has said.

Federated spokeswoman Carol Sanger said the retailer had received no inquiries from the SEC or U.S. attorney’s office about its vendor practices.

Federated’s first-quarter profit surpassed the 67 cents forecast by analysts surveyed by Thomson First Call. The company reiterated its forecast of earnings of as much as 85 cents for the second quarter, which ends July 30. It earned 43 cents in the second quarter of 2004.