Federated Gets a Markdown from Citigroup

The firm downgraded the department store chain's stock Dec. 1 following disappointing sales news

When Federated Department Stores (FD) CEO Terry J. Lundgren announced his $17 billion acquisition of The May Department Stores Company in 2005, he said the deal would create the opportunity to grow. But Citigroup's analyst Deborah Weinswig recently downgraded the company to hold from buy, noting that the honeymoon is over on the integration of May and Federated this year.

The New York company, which operates Macy's and Bloomingdales, fell 4.1% in value to $40.36 per share in afternoon trading on the New York Stock Exchange Dec 1.

Weinswig says former May stores are going to enter Federated's base of sales at stores open more than a year in February 2007 - and their performance has been weaker than expected, so they could be a drag on the overall company. She also thinks that rivals such as JC Penney (JCP), Kohl's (KSS), and Nordstrom (JWN) could be stealing customers away from former May stores in key regions like the Midwest and the West. "We may have underestimated how much time it would take for the former May stores to gain traction with the consumer following the Macy's rebranding," Weinswig said in a research note Nov. 30.

Federated early Nov. 30 announced that its sales fell 8.9% to $2.385 billion during the four weeks ended Nov. 25 compared to the same period last year. The company has closed 78 stores over the past year. Sales at stores open more than a year gained 8.5% in November compared to last year.

"While we continue to be disappointed in the performance of former May Company locations, particularly in home merchandise categories, we remain confident that our ongoing strategy for success is sound," Lundgren said in a press release. He said the company didn't repeat the "intense promotional activity" that it had done last year. He also forecast that in December sales at stores open more than a year will be up by 5 to 8%, instead of his earlier guidance for a 3 to 5% increase.

Citigroup seeks and does business with Federated, but Weinswig certified that her views on the stock are accurate reflections of her beliefs and that her compensation is not related to her recommendation on the stock.

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