FEDERATED DEPARTMENT STORES, INC. $71 (New York symbol FD; WSSF Rating: Average) operates around 990 department stores in 45 states.
In August 2005, Federated paid $11.7 billion in cash and stock for rival May Department Stores Co. Thanks to the merger, Federated’s sales rose 65.7% in its third fiscal quarter ended October 29, 2005, to $5.8 billion from $3.5 billion. On a same-store basis (excluding the May stores), Federated’s third quarter sales grew just 0.6%.
Federated had to borrow the cash to buy May. That increased its long-term debt from 0.4 times equity at the end of fiscal 2005 to 0.7 times.
It aims to pay down this extra debt by selling some of May’s non-core assets, such as its 710-store bridal and formal wear chain and its 55-store Lord & Taylor chain. The company also plans to close or sell about 80 May stores, mostly those located near a Federated store.
Federated will also convert the remaining May stores to either the Bloomingdale’s or Macy’s banners. Cutting the number of brands will let Federated advertise and cross-promote more effectively.
Federated estimates that it will take three years to absorb these new operations, and cost $1 billion. But the company should reach its goal of $450 million in yearly cost cuts by 2007.
The stock now trades at 15.2 times the $4.66 a share that Federated will probably earn in fiscal 2006. The $1.00 dividend yields 1.4%.
Federated is a buy.
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