Credit-card business sale gives retailer huge profits

* FEDERATED DEPARTMENT STORES

Federated Department Stores Inc., the owner of Macy’s and Bloomingdale’s, said profit surged from the sale of its creditbusiness and revenue jumped 64 per cent after the acquisition of May Department Stores Inc.

Third- quarter net income exceeded analysts’ estimates and rose to $436 million ( U. S.), or $ 1.79 a share, from $74 million, or 42 cents, a year earlier. Total sales increased to $ 5.79 billion from $ 3.53 billion, the Cincinnaticompany said yesterday.

Federated posted a $380 million gain in the quarter from the sale of 17 million credit- card accounts to Citigroup Inc. The May purchase, engineered by chief executive Terry Lundgren to expand Macy’s into a national presence, added 490 stores to make Federated the secondlargest U.S. department-store company.

“ The acquisition is a wealth of opportunity for Federated,” said Dan Popowics, who helps manage about $30 billion including Federated shares at Cincinnatibased Fifth Third Asset Management. Same-store sales increased less than 1 per cent, hurt by three hurricanes in Florida and Louisiana that closed 41 outlets and will keep five Macy’s locations shut for the rest of the year. Sales were also crimped by warm weather and a weak demand for home goods. The first half of next year will be “ particularly challenging” as Federated changes its merchandise and promotions and adapts computer systems to integrate the May stores, chief financial officer Karen Hoguet said. With the purchase of May, Lundgren is expanding Macy’s to 730 locations as Federated’s comparable store sales have lagged behind J. C. Penney and outperformed Saks Inc.

Lundgren, 53, is adding upscale merchandise, such as Dooney & Bourke handbags and Polo Ralph Lauren apparel, and is expanding private label brands to May store locations as he converts them to Macy’s starting next year. Lundgren is also cutting 6,200 jobs, shedding the May 700- store bridal unit and selling or closing 82 stores. The May acquisition increased sales and Federated’s margin in the quarter. Gross margin, or the percentage of sales left after subtracting the costs of goods sold, widened to 40.4 per cent of sales from 39.8 per cent.

Selling, general and administrative expenses widened to 35.5 per cent from 34.8 per cent, because of costs incurred by the centralization of Macy’s home stores. On Oct. 24, Federated obtained $ 2.7 billion of the $ 4.9 billion it expects from the sale of the credit- card accounts to Citigroup. The transaction will be completed in two additional stages next year. Same- store sales at Federated rose 0.6 per cent, crimped by the store closings and power outages caused by hurricanes Katrina, Rita and Wilma. The comparable sales increase is less than half the average quarterly gain this year. The same- store sales figure includes sales of Macy’s and Bloomingdale’s that have been open for more than a year. The total sales figure excludes results at the bridal stores. Same- store sales will rise 1 to 2 per cent in the fourth quarter, Lundgren said Nov. 2.

Federated has outperformed most rivals so far this year.

Federated Department Stores, owner of Macy’s outlets including this one in New York City, had an outstanding third quarter after selling its credit-card business and acquiring May stores.