Federated 1Q Earnings Exceed Prior Forecasts; Company Raises Sales and Earnings Guidance, Excluding Home Store Centralization Costs

Business Wire, May 12, 2004

Business Editors

CINCINNATI--(BUSINESS WIRE)--May 12, 2004

Federated Department Stores, Inc. (NYSE:FD)(PCX:FD) today reported diluted earnings per share of 52 cents for the fiscal first quarter of 2004, reflecting strong sales and margin performance in the first 13 weeks of the retail year. Earnings per share in the quarter exceeded the company's prior guidance of 45-48 cents a diluted share, and compares favorably to diluted earnings per share of 24 cents for the first quarter of 2003.

Terry J. Lundgren, Federated's chairman, president and chief executive officer, said Federated is very pleased with the underlying strength of the business, as reflected in the company's first quarter earnings performance.

"The economy has improved and our customers are responding to our ongoing efforts to improve the shopping experience, as well as to our merchandising, pricing and marketing strategies," Lundgren said. "As a result of the effective execution of these four priorities, Federated has experienced an exceptionally strong start to the year, and we now expect that this momentum will continue through the remainder of 2004. For this reason, we are raising our sales and earnings guidance for the second quarter and the fall season, excluding the impact of costs related to the centralization of our home store businesses." (See Home Store Centralization section below.)

Operating Income/Cash Flow

Operating income in the first quarter ended May 1, 2004, was $216 million or 6.1 percent of sales. This compares to operating income of $146 million or 4.4 percent of sales for the first quarter of 2003.

Cash flow from operating activities was $34 million in the first quarter, compared to $204 million in the same period last year. Last year's cash flow from operating activities benefited from lower income tax payments, reflecting the use of Fingerhut net operating losses. After first-quarter investing activities of $71 million this year and $52 million last year, cash used before financing activities was $37 million compared to $152 million of cash provided before financing activities in the same period last year.

Federated's first quarter earnings included store closing and consolidation costs of $19 million, including $7 million related to the Macy's Home Store centralization. Of the $19 million, $15 million is included in selling, general and administrative expenses (SG&A) and $4 million is included in cost of sales related to the Burdines-Macy's consolidation in Florida.

The company used approximately $90 million to repurchase 1.7 million shares of Federated common stock in the first quarter.

Sales

Sales for the first quarter of 2004 totaled $3.517 billion, an increase of 6.9 percent from sales of $3.291 billion in the same period last year. On a same-store basis, Federated's year-to-date sales also were up 6.9 percent.

Federated opened two new Bloomingdale's stores in the quarter, the SoHo store in New York City and the Roosevelt Field furniture gallery in Garden City, NY. The company also closed two small Macy's bedding store locations in New York during the period.

Home Store Centralization

Federated announced plans in early February to accelerate sales by improving and further differentiating its assortments of home furnishings through the creation of a centralized organization, responsible for national strategy development, merchandising and marketing of home-related businesses in the 423 stores across the country that currently bear the Macy's nameplate.

To implement the home store centralization, Federated today said it anticipates incurring expenses of about $40 million in fiscal 2004, in addition to markdowns on discontinued home merchandise lines of approximately $30 million - an estimate the company expects to further refine as the year progresses.

While the company expects these costs to have a negative impact on fiscal 2004 earnings of about $70 million or 24 cents a diluted share, Lundgren said that, "We are very excited about the long-term advantages inherent in our strategy of consolidating home store operations for all of our Macy's-brand department stores. We are confident that the real benefits of this move will begin to be seen in improved sales and gross margin, and reduced expense in our home-related businesses in fiscal 2005 and beyond."

Looking Ahead

Federated today raised its sales and earnings expectations for the second quarter and fiscal 2004, excluding the previously undetermined impact of the home store centralization.

Federated now anticipates same-store sales for the year to be up 3-4 percent - up 2-4 percent in the second quarter and 1.5 to 3 percent for the combined third and fourth quarters of the fall season. This compares to the prior forecast of a second-quarter increase of 2-3 percent same-store sales, and 1.5-2 percent in the fall season.

For the second quarter, which ends July 31, 2004, Federated now expects earnings of 57-62 cents a diluted share. This includes expected costs of $29 million for the home store centralization and $11 million of store closing and consolidation costs.