By Jennifer Allen
Los Angeles, July 5 (BridgeNews) - Federated Department Stores Inc.'s second-quarter profit will be more than 40% lower than the owner of Macy's and Bloomingdales expected because sales remain weak, forcing the business to cut prices to clear out old inventory.
The Cincinnati-based company said Thursday that excluding restructuring charges, it will earn between 40 and 50 cents per share in the second quarter, much less than the 70 to 75 cents it had predicted earlier. Analysts surveyed by Thomson Financial/First Call had expected a profit of 65 cents per share. "While a majority of the earnings miss can be attributed to the shortfall in sales, (the company) is also taking markdowns on existing inventory so that it will start the second half of the year in good shape," Federated said in a written statement. "Federated expects inventories at the end of July to be at appropriate levels to ensure a fresh flow of merchandise throughout the fall season."
Federated shares closed down $2.37, or 5.9%, at $38.01. The stock has traded as high as $49.90 and as low as $21.00 over the last year. The company also said it expects sales at stores open at least a year to decline by 1% to 2% this fall. Federated had expected the sales to rise by 1%, or at least remain steady from a year earlier.
Federated lowered its full-year earnings forecast to $3.60 to $3.90 per share. The company had predicted it would earn $4.00 to $4.25 per share, while analysts had expected a profit of $3.92. Federated earned $3.08 last year. Goldman Sachs responded to the news by removing Federated from its list of "recommended" stocks, listing it as a "market performer" instead. Goldman also downgraded May Department Stores to "market performer" from "market outperformer."
"We believe that both May and Federated stocks already reflect a difficult second-fiscal quarter earnings environment, but we see no catalyst to draw investors to them in the near term," Goldman analyst George Strachan said in a research note.
Shares of May Department Stores fell $1.34, or 4%, to $32.11. Strachan said inventories are still rising across the department store industry as a result of sluggish sales. Department stores are likely to keep cutting prices in order to clear out inventories for the rest of the quarter, he said.
Still, Strachan said, consumers are in relatively good shape. "We remain confident that a modest acceleration of spending growth will occur in the second half" of the year, he said.