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Federated warns on 2Q
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July 5, 2001: 5:09 p.m. ET
Department store chain also slashes 2001 estimates as slow sales continue
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NEW YORK (CNNfn) - Federated Department Stores Inc. warned Thursday its second-quarter and full-year 2001 earnings will fall far short of Wall Street estimates as weak sales and inventory overhang weigh on the company's profit.
This is the company's second warning on the quarter in a month. When it first warned on June 7, Federated (FD: Research, Estimates) said achieving full-year estimates would be difficult unless the retail environment changed.
Federated stock ended down $2.37 at $38.01 Thursday following the warning and a ratings downgrade to market perform from market outperform by Bear Stearns.
Analyst George Strachan also reduced Federated estimates to $3.60 per share from $3.97 for fiscal 2001 and to $4.00 from $4.40 for fiscal 2002.
"We expect heavy clearance activity over the balance of the July fiscal quarter as managements clean up the selling floor in advance of fall receipts," he wrote in a research note.
The Cincinnati-based department store operator, parent of such chains as Bloomingdale's and Macy's, said it expects second-quarter earnings of between 40 and 50 cents a share, compared with its previous guidance of 70-to-75 cents a share. Analysts polled by earnings tracker First Call expected Federated to earn 70 cents a share.
Federated also cut its full-year 2001 estimate to between $3.60 and $3.90 a share from the previous estimate of $4.00-to-$4.25 a share. Analysts expected earnings of $4.02 a share, according to First Call.
Later in the day, Merrill Lynch lowered its second-quarter earnings estimates on the company to 45 cents a share saying it believes sales weakness will continue into the third quarter.
"(Federated's warning) is not a surprise, but the magnitude is a surprise," Eric Beder, a retail analyst with Ladenberg Thalman & Co., told CNNfn's Street Sweep Thursday.
In its June 7 warning, Federated said bad spring weather and an economic slowdown had cut into sales and that it would incur charges related to shuttering its Sterns department stores. Now the company is trying to mark down and get rid of its backlog of unsold goods, another drain on its profitability.
Federated, which has annual sales of about $18.4 billion, also cut its forecast for fall sales growth in stores open at least a year to between minus 1 percent and minus 2 percent. Its previous expectation was for comparable-store sales to remain flat or increase by 1 percent.
"I don't think Federated will be alone in talking down earnings expectations for the quarter and also the second half of this year," retail analyst Jeff Stinson of Midwest Research said. "You look at the things impacting Federated and they are industry and consumer-related issues, not company issues."
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Department stores in particular have struggled in recent quarters. Tough economic times have driven consumers to discount chains such as Wal-Mart (WMT: Research, Estimates), Kmart (KM: Research, Estimates), and Target (TGT: Research, Estimates) in search of bargains.
But consumer spending, which makes up two-thirds of the U.S. economy, has been surprisingly resilient, thanks in part to six interest-rate cuts by the Federal Reserve. Federated said it expects sales will strengthen and inventories will be at an "appropriate" level by the second half of 2001.
"Can consumer spending continue to run the engine of retailing? I think the answer to that is as long as people feel secure in their jobs they will continue to spend," said Rick Gallagher, vice president of the National Retail Federation and publisher of Stores, the trade group's official publication. "I don't think that we've seen consumer psychology change even though unemployment numbers are higher."
Analysts expect more warnings on July 12, when most retailers report monthly sales data for June. 
From staff and wire reports
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