When Federated (NYSE:FD) unveiled its forecast for fiscal 2006, the market was less than pleased -- shares of the department store outfit immediately slumped 5% in heavy trading. Though the figures cited in Thursday's release may seem less than optimal, remember that Federated has a lot of housecleaning to do following its acquisition of May Department Stores. In the end, those who exercise patience could be rewarded.
The Cincinnati-based company indicated that it expects FY 2006 earnings between $3.45 and $3.70 per share, excluding one-time integration costs and the sale of credit receivables. The EPS figures are below various analysts' estimates, but in light of all of the changes afoot at Federated, it's understandable that these forecasts are off.
In fact, Federated itself acknowledged the difficulty of projecting near-term results, given that 2006 will be a transition year. A couple of items will certainly dampen the forecast: The David's Bridal and Lord & Taylor divisions (which are up for sale) and 68 May stores scheduled for closure won't be included in 2006 reported sales.
It's also fairly clear that a lot of the pain of the Federated-May merger will be felt in 2006. Of the expected $1 billion in cash over three years associated with integration costs, between $650 million and $775 million will fall during this year. As various systems get integrated and stores are rebranded, the company's capital expenditures will reach $1.6 billion in 2006. However, they will then fall to between $1.1 billion and $1.2 billion in subsequent years.
The benefits from the merger, meanwhile, will grow substantially after 2006. Federated anticipates achieving cost synergies of just $175 million in 2006, but annual synergies of at least $450 million in 2007 "and beyond."
Federated certainly has its work cut out for it, and in the short term, results aren't going to be pretty. But if the company is successful in its integration and restructuring efforts, it will have a national presence with lots of buying clout once the dust settles. That factor has helped discounters such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) achieve great success. As a result, Federated remains a company worth watching.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
