Company Review: Federated Department Stores (FD)

Company Profile: Federated Department Stores (FD) (obtained via Google Finance)

 

Federated Department Stores, Inc. (Federated) is a retail company operating department stores that sell a range of merchandise, including men’s, women’s and children’s apparel and accessories, cosmetics, home furnishings and other consumer goods. During the fiscal year ended January 28, 2006 (fiscal 2005), the Company, through its divisions, operated 868 retail stores located in 45 states, the District of Columbia, Puerto Rico and Guam. During fiscal 2005, the stores were operated under the names Macy’s and Bloomingdale’s, and under the May nameplates, which included Famous-Barr, Filene’s, Foley’s, Hecht’s, Kaufmann’s, L.S. Ayres, Marshall Field’s, Meier & Frank, Robinsons-May, Strawbridge’s and The Jones Store. On August 30, 2005, pursuant to an agreement and plan of merger, dated as of February 27, 2005, by and among Federated, The May Department Stores Company (May), and Milan Acquisition LLC (a subsidiary of the Company), May merged with and into Milan Acquisition LLC.

 

Business and Management Review
1) Is the business simple and understandable?

Given the nature of the retail industry, this business is very simple. The company analyzes the market to determine purchase requirements, markets their goods, and finishes with a point of sale.

2) Does the business have a consistent operating history?

Federated has a long and fruitful history as they have become one of the largest retailers in the United States. The industry shares this legacy and continues to move forward in an attractive fashion.

3) Does the business have favorable long term prospects?

Even with increased online competition, a business line such as Federated is protected with their higher ticket goods and the type of cliental they serve. We feel confident that they will continue to enjoy the level of success of their past.

4) Is management rationale?

Management seems to be rationale in their decision making process. Particularly the acquisition of Marshall Fields under the Macy’s nameplate we feel will have long term growth potential for the company.

5) Is management candid with its shareholders?

Investor relations are in depth and comprehensive containing all relevant information a savvy investor might require.

6) Does management resist the institutional imperative?

We see no reason to question management’s decisions and are confident in saying that they do resist the institutional imperative.

Financial and Value Review
Defensive:

1) Size of firm

The firm’s market capitalization is above the $2 billion requirement. Pass.

2) Strong financial condition

With a current ratio around 1.30 the company is short of the 2.00 requirement. Fail.

3) Earnings stability

There has not been positive net income for the past ten years. Fail.

4) Dividend record

The firm has failed to pay a dividend consistently for the past ten years. Fail.

5) Earnings growth

Federated has increased their EPS by one third over the past ten years. Pass.

6) Price to earnings analysis

With a P/E ratio around 17.80 the company is below the 20 requirement. Pass.

7) Price to book analysis

The companies P/B ratio is at 1.63 which is below the 2.5 requirement. Pass.

Conclusion:

Scoring 4/8 this firm fails the test for the defensive investor and would not be recommended to be placed in that investor’s portfolio.

Enterprising:
1) Strong financial condition

Current ratio below 1.5. Fail.

2) Earnings stability

There has been positive net income for the past five years. Pass.

3) Dividend record

Company currently pays a dividend. Pass.

4) Earnings growth

Earnings are greater than five years ago. Pass.

Conclusion:

Scoring 3/4 the company passes the test for the enterprising investor and should be considered for this classification of investor.

Valuation:

 

We find a fair market price for Federated Department Stores to be around $52.

Opinion:

 

Given a current price of around $41 we would feel comfortable allowing the enterprising investor to include this security in their portfolio. We see continued growth potential and management’s decisions are in line with our long term goals.

Neither of us held a position in Federated Department Stores at the time of publication.  Also, please read our disclaimer and Our Methods.

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