As was widely expected, Federated Department Stores (NYSE:FD) reported a strong first quarter this morning. Earnings per share jumped 34% to $0.71 on a modest 2.5% sales increase. CEO Terry J. Lundgren should probably get the award for the most penetrating retail insight I have heard this year: the company's first quarter demonstrates that "focusing on sales is right for our business," he said.
OK, sorry -- I shouldn't be sarcastic when a company is making the right moves. And Federated has been hoofing it quite nimbly of late. Early in the year, the company set initial EPS guidance for the first quarter between $0.45 and $0.50. Last week, it upped those figures to $0.65-$0.70. Since then, the shares have hopped forward by nearly 10%. Perhaps instilling a bit of this sales focus will add a fashionable bounce to the step of May Department Stores (NYSE:MAY).
Federated earned its stripes this quarter in true retail fashion, by grinding it out. Same-store sales were up 2.6% -- a fairly impressive number, given that the company was facing a strong 6.9% leap last year. Sales were strong in apparel and accessories but soft in large-ticket home merchandise such as furniture.
Margins improved by 30 basis points -- excluding unusual items from the prior year -- with lower markdowns being the major contributor. The company is reaping the benefits of improved inventory-management software that focuses on marking down slow sellers quickly and reallocating purchases to quick-selling items.
Inventories ended the quarter down more than 2% compared with the prior year's quarter. The company believes that in upcoming quarters, it can deliver further gains in inventory turnover, particularly as it digs deeper into safety stock levels. This is an enormously fruitful area for retailers to explore, as big-box discounters like Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and Best Buy (NYSE:BBY) have discovered.
Selling, general and administrative expenses were slightly higher than last year, but they were 30 basis points lower as a percentage of sales. Interest expense was also favorable thanks to a 5% reduction of outstanding debt.
All in all, Federated delivered a strong performance and appears to be hitting on all cylinders. The company's brand-leverage initiatives in 2003-2004, including the renaming of its stores, are paying dividends to shareholders. Applying this same approach to the multiple nameplates of May is likely to be a little trickier, assuming the acquisition culminates as planned in the third quarter. But with results like this, there's a chance it might work. And then there's that focus on sales -- I like the idea.
Keep up to speed on recent retail happenings here:
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- Learn everything you always wanted to know about inventory turnover.
Fool contributor Timothy M. Otte grinds it out daily in Atlanta. He welcomes comments on his articles and owns shares of Wal-Mart. The Fool has a disclosure policy.
