Federated Department Stores Inc <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FD)") else Response.Write("(NYSE: FD)") end if %>

151 West 34th Street

New York, NY 10001

(212) 695-4400

UNION CITY, Ca., August 22, 1996/FOOLWIRE/ --- Federated Department Stores released Q2 1996 results on August 14th. The company reported sales of $3.28 billion, up 7.8% from the $3.05 billion a year ago. They reported a net loss of -$0.13 per share compared to a loss of -$0.37 per share a year ago.

The $27.2 million loss was attributable to costs associated with integrating the California-based Broadway Stores group into Federated. Sales rose almost 8%, but comparable store sales were unchanged during Q2. This was lower than expected and was attributed to low inventory levels and, thus, fewer late-summer clearance sales, and the Olympics. They do not think any of the slowdown in sales is due to a loss of market share. As they have gone through it market by market they are comparing very well. They think it was a combination of market mix of what they called the Olympics impact and the weaker Home store which, because it's a bigger percentage of their sales impacts them worse. To some degree they are losing some market share in the home store, being less promotional, but they don't think that is a major factor.

Expense performance in the quarter was very strong as their divisions reacted to the lower sales performance by reducing expense. They also benefitted earlier than expected from the improvements in their logistics or distribution function. They have centralized the distribution function under one organization based in New Jersey. As that organization has gone in and put in best practices across the company they are getting some early savings that they had not anticipated to this degree in Q2. They expected to see it more in Q3 and Q4. The second stage of this will be the consolidation of physical facilities, some of which have been announced and some of which have not. But they will be reducing the number of distribution facilities they have, roughly in half, between now and the end of 1998. In that time period they expect to take roughly 1/3 out of their distribution cost or roughly $100 million so there is still a significant amount of savings yet to come in that function.

EBITDA excluding one-time costs in the quarter was $175 million, or 5.3% of sales. This represents a 50% increase versus last year in dollars and a 1.5 point improvement in rate as a percent of sales. Interest expense in the quarter was $116 million and taxes before one time costs were $26 million. This resulted in net income of $32.9 million or $0.16 per share before one-time costs. This compares to $0.01 a year ago.

Business integration and consolidation expense for the quarter was $99 million. So far this year in the first 6 months they have booked $176 million of one-time costs of the $300 million that they still anticipate for this year. Most of the integration expenses incurred so far related to clearance and inventory markdowns. They think they have most of that out of the way. The one-time costs related to the Broadway integration going forward will mostly be in the SG&A category. They are very pleased with the quarter's profits, particularly in light of the weaker sales.

Broadway integration continues to proceed on track and the rest of the company continues to perform up to expectations. Broadway was somewhat of a depressant on gross margins but less than they anticipated. They feel that they are pretty close now to having the merchandise mix in the stores that they want to be carrying. 50 stores were under rennovation in some way in Q2 and most of those are just about complete or will be over the next couple of weeks and at that point the merchandise mix will be relatively close. They will still go in and do major remodels over time to get the spacing perfect, but it will be pretty close for this Fall.

They will open 4 Bloomingdale's in early to mid-November with a 5th opening next March. They will start promotional activity related to these store openings and introducing Bloomingdale's to the California market in September. The promotional activity will include solicitation to open credit accounts.

Their credit operation continues to run on plan. While they have shared some of the concerns of their peers regarding bad debt in concept, the impact on their numbers has not been anywhere close to what it seems others are reporting.

Inventories are in very good shape at the end of the quarter in terms of quality, aging, and also quantity.

FORECASTS FOR THE REST OF THE YEAR

As they look now to the all-important Fall season, these are some of their assumptions:

Starting with the top lines, they are still comfortable with the $15.4 billion sales assumptions for the full year. Although, given the weak second quarter, sales may in fact only reach $15.3 billion. They expect Q3 sales on a comp store basis to be up 4-5% while the 4th quarter comp store increase is assumed up 2-2.5%. Total sales are assumed to increase roughly 11% in Q3 and roughly 8% in Q4 over last year's numbers, excluding Broadway.

The company told analysts that as they build their models and expectations for the second half of the year, they urged people to focus on last year's analytical results excluding Broadway because those are going to be the comparisons that are most easy to understand and to make meaningful. Obviously including Federated plus Broadway, the sales comparisons would be less favorable but other comparisons would be significantly more favorable. But, again, it is somewhat deceiving.

For total sales increases, they said the 8% as opposed to 11% in Q3 due to the fact that there is one less week in the quarter this year versus a year ago. This extra week is worth approximately 3 points. Their July sales trends have caused them some concern. They are still hopeful that they will be able to deliver these kinds of sales increases in the Fall season.

Their assumption and their hope is that gross margin trend will continue to be above a year ago. Again here, comparing margins versus a year ago, they urged people to focus on last year's analytical results because if you look at it including Broadway, the margins will be up significantly but they think that is less significant.

SG&A is still assumed to increase approximately 10% over last year's numbers, excluding Broadway again, in each of the third and fourth quarters. This is a slightly higher increase than in the first half of the year due in part to four new Bloomingdale's in California as well as the year-rounding on both the Rich's/Lazarus consolidation and the Macy's synergy savings that were almost completly in place by the third quarter a year ago.

Interest expense is still expected to be about $120 million in Q3, although now that they have refined their assumptions for Q4, they are assuming a little more interest expense, approximately $125 million in Q4.

Taxes in future quarters can continue to be estimated assuming roughly a 39.5% rate on pre-tax income plus goodwill amortization of $6.8 million per quarter.

They are assuming the average number of shares of 207.7 million for the remainder of 1996.

If these assumptions come to pass they will be very pleased with their performance this year.

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* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.

(c) Copyright 1996, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

Transmitted: 8/22/96

Copyright 1996, The Motley Fool
All Rights Reserved. This material is for personal use only.
Republication and redissemination, including posting to news groups,
is expressly prohibited without the prior written consent of The Motley Fool.