Tuesday, February 21, 2006

Is Federated Stuck in the Mud?

Department store behemoth Federated (FD) could be looking down the barrel of a shotgun.

Federated operates 950 department stores that sell family apparel, accessories, cosmetics, home furnishings, and other consumer goods under the Macy's and Bloomingdale's titles.

Federated will report today at 10:30 AM.

Given the competitive milieu from specialty retailers, discounters, and other department stores, we remain cautiously bearish on Federated's prospects.

Revenue growth has been flat for the past five years, as rivals department stores have chewed through the market share of larger chains like Federated:

With so many options, consumers have the power when it comes to purchasing apparel, accessories, and home goods, making it more difficult for old-line department stores to differentiate themselves and retain market share. We don't expect these challenges to go away anytime soon and believe the Federated-May combination is really no better off in the long run... (Morningstar)

With not much of a top line story to look forward to in 2006, and Federated still as leveraged as it is (it has twice the debt-equity ratio as peers Saks [SKS] and Nordstrom [JWN]), we have no other choice but to conclude that 2006 will most likely be a turbulent year for Federated stores.

Department stores did indeed see their valuations pop (mostly on M&A activity) in 2005, but we fear that, unless that pattern persists in 06, businesses like Federated will remain at market perform levels.

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