Sun, Jul 08, 2001 page11

• Bear Stearns says buy Federated for Christmas

  • BLOOMBERG
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  Federated Department Stores Inc shares are set to rebound when consumers start spending their tax rebates and savings from lower gas prices at the end of this year, said Bear, Stearns & Co's Steven Kernkraut.

  The analyst raised his rating on the owner of the Macy's and Bloomingdale's retail chains to "buy" from "accumulate," just a day after Federated cut its fiscal second-quarter profit forecast because consumers are spending less on clothing in a slowing economy. The stock fell 6 percent after the announcement.

  "The current pace at which investors are selling Federated shares is, frankly, a little too late," Kernkraut wrote in a note to clients. "Many investors are missing the big picture." Kernkraut's call on Cincinnati-based Federated differs from those of his rivals, who don't see consumers taking their extra money to Federated and other mid-priced and upscale department stores. Morgan Stanley Dean Witter & Co's Bruce Missett yesterday trimmed his rating on the company to "neutral" from "outperform." Goldman, Sachs & Co. analyst George Strachan cut his rating to "market perform" from ``recommended list,'' the firm's highest rating.

  Federated today rose US$0.23 to US$38.24. Kernkraut expects the stock to rise to US$52 in the next 12 months, which would be a 36 percent gain.

  Kernkraut said Federated's well-known brand names and selection of private label clothing will draw more customers into the stores as soon as this year's holiday shopping season, which runs from the end of November through New Year's day.

  About 95 million US consumers are expected to get US$300 tax rebates beginning this month, part a US$1.35 trillion tax cut plan that also includes lower tax withholding rates.

  Consumers also may have more disposable income because gas prices that reached an average US$1.71 a gallon in mid-May fell to US$1.47 by July 2, according to the Energy Information Administration.

  The combination of these, together with lower interest rates "can be a catalyst for consumer spending," Kernkraut wrote in the note accompanying his rating change.

  Many retailers earn the bulk of their profits in December because of the Christmas and Hanukkah shopping seasons. Federated typically generates 70 percent of its profit in the year's second half.

  Some investors and analysts said they need evidence business is picking up before looking to department store shares.

  "We would want to wait until sales started get stronger before we would step in," Christian Stadlinger, a portfolio manager at Blackrock Inc, which sold Federated shares in May.

  Still, Federated's recent price decline means the stock is "getting more attractive." Goldman's Strachan also lowered his rating on Federated's biggest competitor, May Department Stores Co, which operates Lord & Taylor and Hecht's stores.

  "We believe that both May and Federated stocks already reflect a difficult second-fiscal quarter earnings environment, but we see no catalyst to draw investors to them in the near term," he wrote.

  Strachan agrees consumers will spend more money in the second half of the year, helped by the tax cut and lower gas prices. He expects the boost to go to other retailers though, including discounters Target Corp, Wal-Mart Stores Inc. and Kohl's Corp as well as Tiffany & Co, which sells jewelry and gifts.

  Competition from discounters, especially for Bloomingdale's customers, isn't a major obstacle for Federated, said Jim Leach, a portfolio manager at Strong Capital Management Inc. in Indianapolis, which holds Federated shares.

  Leach said he agrees with Kernkraut's view that Federated's private label business will help it draw customers and profits.

  Sales of private label merchandise typically provide higher margins because the stores don't have to split profits with an apparel maker.

  "A lot of their private label brands are well known, people come there especially to get those brands," Leach said.

  Of the 20 analysts with investment recommendations on Federated, 11 rate it "buy" and nine rate it "hold."
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