updated 5/10/2005 2:49:05 PM ET 2005-05-10T18:49:05

May Department Stores Co., which has agreed to be bought by Federated Department Stores Inc. for $11 billion, reported on Tuesday a 46 percent drop in first-quarter earnings as it struggled with weak sales of its adult apparel and seasonal clearance markdowns. The results missed Wall Street expectations.

The St. Louis-based operator of Lord & Taylor, Famous-Barr, The Jones Store, Filene's and other regional department stores said its net income was $41 million, or 13 cents per share, for the three months ended April 30. That compares with $76 million, or 24 cents per share, a year earlier.

Excluding costs of $9 million, or 2 cents per share, related to its previously announced divestiture of nearly three dozen underperforming stores, May earned $47 million, or 15 cents per share, in the latest quarter.

Analysts surveyed by Thomson Financial were looking for earnings of 16 cents per share in the latest quarter.

"Our 2005 first-quarter results did not meet our expectations," said John Dunham, May's chairman, president and CEO.

Sales rose 13.7 percent to $3.37 billion from $2.96 billion last year. The results were slightly below the $3.44 billion figure that analysts had expected. Sales at stores open at least a year decreased 5.1 percent for the quarter.

May said its proprietary ladies' and men's apparel brands were among its weakest-performing categories, and the company took incremental first-quarter markdowns to keep its proprietary apparel inventories current.

"In our quest to reach out to a younger customer, we made some of the product geared to the more mature customers a little too fashion-forward," largely on the women's side, Thomas Fingleton, May's executive vice president and chief financial officer, told analysts in a conference call.

May said the latest quarter includes incremental markdowns of about $18 million at cost, or 4 cents per share, to facilitate seasonal clearance. Those actions would continue in the unfolding quarter, if necessary, Fingleton said.

The 2005 quarter also includes the benefit of a $14 million, or 5 cents per share, income tax provision reduction due to the resolution of various federal and state income tax issues. May also said it recorded about $4 million, or 1 cent per share, of merger-related costs in the 2005 period.

May and Cincinnati-based Federated — operator of the Macy's and Bloomingdale's chains — announced in February they would join forces in a widely anticipated deal that would create a powerhouse better able to compete against discounter Wal-Mart Stores Inc. and upscale merchants. The combined company would boast nearly 1,000 department stores and $30 billion in annual sales.

May, which expects the deal to be finalized later this year, said Tuesday it recorded about $4 million, or a penny per share, of first-quarter expenses related to the planned merger.

"Prior to the transaction being completed, we're operating our company and they're operating their company independently of each other," Fingleton said.

Bob Buchanan, a retail analyst with St. Louis-based A.G. Edwards, said the pending hookup with Federated may be distracting May, and "the sooner the deal gets consummated, the better for everyone — May, Federated and American shoppers."

"I think it was an ugly quarter" for May, Buchanan said. "I think they are struggling to stay focused ahead of the acquisition by Federated. I think ahead of that, they've been aggressively marking down their mistakes. That's the good news. The bad news is they're making mistakes."

May, which last year bought more than five dozen Marshall Field's department stores and nine Mervyn sites for $3.24 billion from Minneapolis-based Target Corp., said the integration of Marshall Field's continues on track, and all system conversions were completed last month.

The latest period includes Marshall Fields' startup integration expenses of $21 million, or 5 cents per share.

Adding the Marshall Field's sites boosted May's stores to nearly 500 sites, also including such names as Foley's, Hecht's, Kaufmann's, Meier & Frank, Robinsons-May and Strawbridge's. The company also operates David's Bridal, After Hours Formalwear and Priscilla of Boston stores.

May announced in a regulatory filing Monday that it would reissue its financial statements for the past fiscal year ending Jan. 29, citing its discovery last week of a misclassification of property and equipment.

The changes will not affect net income or net earnings per share, the company said.

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