SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal quarter ended
October 28, 2000.May 5, 2001.
FEDERATED DEPARTMENT STORES, INC.
7 West Seventh St.
Cincinnati, Ohio 45202
(513) 579-7000
and
151 West 34th Street
New York, New York 10001
(212) 494-1602
and
7 West Seventh St.
Cincinnati, Ohio 45202
(513) 579-7000
Delaware 1-13536 13-3324058
(State of (Commission File No.) (I.R.S. Employer
Incorporation) Identification Number)
The Registrant has filed all reports required to be filed by
Section 12, 13 or 15 (d) of the Act during the preceding 12
months and has been subject to such filing requirements for the
past 90 days.
198,739,448194,892,944 shares of the Registrant's Common Stock, $.01 par
value, were outstanding as of November 25, 2000.June 2, 2001.
PART I -- FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(MILLIONS, EXCEPT PER SHARE FIGURES)
13 Weeks Ended 3913 Weeks Ended
October 28, October 30, October 28, October 30,May 5, 2001 April 29, 2000 1999 2000 1999
Net Sales $ 4,1953,822 $ 4,137 $12,292 $11,7434,032
Cost of sales:
Recurring 2,515 2,454 7,289 6,9472,287 2,395
Inventory valuation adjustments
related to Fingerhut restructuring 35 - 35Stern's closure 19 -
Total cost of sales 2,550 2,454 7,324 6,9472,306 2,395
Selling, general and
administrative expenses 1,476 1,381 4,326 3,951
Asset impairment and
restructuring1,292 1,384
Restructuring charges 760 - 76027 -
Operating Income (loss) (591) 302 (118) 845197 253
Interest expense (113) (95) (323) (260)(101) (100)
Interest income 2 4 5 91
Income (Loss) Before Income Taxes (702) 211 (436) 594100 154
Federal, state and local income
tax benefit (expense) 34 (88) (80) (247)expense (42) (65)
Net Income (loss) $ (668)58 $ 123 $ (516) $ 34789
Basic earnings (loss) per share $ (3.32).30 $ .59 $ (2.50) $ 1.65.42
Diluted earnings (loss) per share $ (3.32).29 $ .56 $ (2.50) $ 1.58.41
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(MILLIONS)
October 28, JanuaryMay 5, February 3, April 29,
October 30,2001 2001 2000 2000 1999
ASSETS:
Current Assets:
Cash $ 303 218519 $ 595322 $ 249
Accounts receivable 3,826 4,313 3,7313,656 4,072 4,031
Merchandise inventories 5,045 3,589 4,7414,050 3,812 3,869
Supplies and prepaid expenses 269 230 269196 200 217
Deferred income tax assets 255 172 162290 294 176
Total Current Assets 9,698 8,522 9,4988,711 8,700 8,542
Property and Equipment - net 6,808 6,828 6,7396,710 6,830 6,741
Intangible Assets - net 913 1,735 1,771884 896 1,720
Other Assets 627 607 551618 586 652
Total Assets $ 18,046 $ 17,692 $ 18,559$16,923 $17,012 $17,655
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Short-term debt $ 2,5931,399 $ 1,2841,722 $ 2,0781,352
Accounts payable and
accrued liabilities 3,859 3,043 3,6882,946 2,903 3,006
Income taxes 3 225 84104 244 83
Total Current Liabilities 6,455 4,552 5,8504,449 4,869 4,441
Long-Term Debt 4,033 4,589 4,6584,792 4,374 4,757
Deferred Income Taxes 1,485 1,444 1,3451,359 1,393 1,448
Other Liabilities 558 554 548 555 582
Shareholders' Equity 5,525 6,552 6,1245,765 5,822 6,461
Total Liabilities and
Shareholders' Equity $ 18,046 $ 17,692 $ 18,559$16,923 $17,012 $17,655
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)FLOWs
(UNSUDITED)
(MILLIONS)
3913 Weeks Ended 3913 Weeks Ended
October 28,May 5, 2001 April 29, 2000 October 30, 1999
Cash flows from operating activities:
Net income (loss) $ (516)58 $ 34789
Adjustments to reconcile net income
(loss)
to net cash provided by operating
activities:
Depreciation and amortization 486 493170 161
Amortization of intangible assets 62 5712 21
Amortization of financing costs 5 51 2
Amortization of unearned restricted stock 5 1 Asset impairment and restructuring3
Restructuring charges 79546 -
Changes in assets and liabilities:
Decrease in accounts receivable 489 109418 284
Increase in merchandise inventories (1,489) (1,317)
Increase(237) (277)
Decrease in supplies and
prepaid expenses (39) (67)4 13
Increase in other assets not
separately identified (44) (18)
Increase(4) (13)
Decrease in accounts payable and
accrued liabilities not
separately identified 688 741(58) (78)
Decrease in current income taxes (220) (64)(140) (142)
Increase (decrease) in deferred
income taxes 52 17(29) 1
Increase (decrease) in other
liabilities not separately
identified 1 (6) 3
Net cash provided by operating
activities 268 307243 58
Cash flows from investing activities:
Purchase of property and equipment (490) (470)(53) (69)
Capitalized software (62) (34)(28) (15)
Investments in companies (31) (90)
Acquisition of Fingerhut Companies, Inc.,
net of cash acquired - (1,539)(35)
Disposition of property and equipment 62 32- -
Net cash used by investing
activities (521) (2,101)(81) (119)
Cash flows from financing activities:
Debt issued 802 2,055500 237
Financing costs (4) (10)(7) -
Debt repaid (50) (158)(402) (1)
Increase in outstanding checks 101 14060 36
Acquisition of treasury stock (551) -(147) (218)
Issuance of common stock 40 5531 38
Net cash provided by financing
activities 338 2,08235 92
Net increase in cash $ 85 $ 288197 31
Cash at beginning of period 322 218 307
Cash at end of period $ 303519 $ 595249
Supplemental cash flow information:
Interest paid $ 317112 $ 259108
Interest received 5 82 1
Income taxes paid
(net of refunds received) 251 278
Schedule of noncash investing and
financing activities:
Debt assumed in acquisition - 125
Equity issued in acquisition - 12
Consolidation of net assets and debt of
previously unconsolidated subsidiary - 1,132205 210
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A description of the Company's significant accounting policies
is included in the Company's Annual Report on Form 10-K for
the fiscal year ended January 29, 2000February 3, 2001 (the "1999"2000 10-K"). The
accompanying Consolidated Financial Statements should be read
in conjunction with the Consolidated Financial Statements and
notes thereto in the 19992000 10-K.
Because of the seasonal nature of the retail business, the results
of operations for the 13 and 39 weeks ended October 28, 2000 and
October 30, 1999 (which do not include the Christmas season) are not
indicative of such results for the fiscal year.
Substantially all department store merchandise inventories are
valued by the retail method and stated on the LIFO (last-in,
first-
out)first-out) basis, which is generally lower than market.
Direct-to-
customerFingerhut merchandise inventories are stated at the lower of
FIFO (first-in, first-out) cost or market.
Because of the seasonal nature of the retail business, the
results of operations for the 13 weeks ended May 5, 2001 and
April 29, 2000 (which do not include the Christmas season) are
not indicative of such results for the fiscal year.
The Consolidated Financial Statements for the 13 and 39 weeks ended
October 28,May 5, 2001 and April 29, 2000, and October 30, 1999, in the opinion of management,
include all adjustments (consisting only of normal recurring
adjustments) considered necessary to present fairly, in all
material respects, the consolidated financial position and
results of operations of the Company and its subsidiaries.
Certain reclassifications were made to prior period amounts to
conform with the classifications of such amounts for the most recent
periods.
2. ACQUISITION
On March 18, 1999,Effective February 4, 2001, the Company purchased Fingerhut Companies, Inc.
("Fingerhut")adopted Statement of
Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended,
which establishes the accounting and financial reporting
requirements for derivative instruments. The adoption of this
standard did not have a purchase price of approximately $1,720 million,
including the assumption of $125 million of debt. The Fingerhut
acquisition is being accounted for under the purchase method of
accounting. Accordingly,material impact on the Company's
consolidated financial position, results of operations do not
include Fingerhut's results of operations for any period prior to
March 18, 1999, and the purchase price has been allocated to
Fingerhut's assets and liabilities based on the estimated fair value
of these assets and liabilities as of March 18, 1999.
3. ASSET IMPAIRMENT ANDor cash
flows.
2. RESTRUCTURING CHARGES
In the 13 weeks ended October 28, 2000, theThe Company recorded asset
impairment and$46 million of restructuring charges
during the first quarter of 2001 related to its Fingerhut
businesses totaling $795 million, $35the closure of the
Stern's department store division, including $19 million of
which are included
ininventory valuation adjustments as a part of cost of sales.
In responseThe remaining $27 million of restructuring charges includes $8
million of duplicate central office costs, $8 million of
severance costs and $4 million of advertising costs. Of the
$8 million of severance costs incurred, covering approximately
300 employees, $5 million had been paid to a significant credit delinquency problem associated
with Fingerhut's core catalog operations,employees and $3
million was accrued as of May 5, 2001.
With respect to the Company reevaluatedFingerhut restructuring initiated in 2000
and the long-term operating projections$10 million of severance costs which had been accrued
at February 3, 2001, $5 million was paid to employees during
the first quarter of 2001 and performed an asset
impairment analysis for, each Fingerhut business. This analysis
included projected future undiscounted and discounted cash flows
disaggregated for each Fingerhut business unit under a variety$5 million remains accrued as of
operating assumptions.May 5, 2001.
FEDERATED DEPARTMENT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Using undiscounted projected future cash flows, management
determined that an impairment existed for one3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the Fingerhut
businesses, and a write-down of certain fixed assets and goodwill
was recorded in accordance with Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Using
discounted projected cash flows at a discount rate commensurate with
the Company's cost of capital, management determined that an
impairment existed at several other Fingerhut businesses, including
the core catalog business, and a write-down of goodwill and credit
file intangibles was recorded in accordance with Accounting
Principles Board Opinion No. 17, "Intangible Assets."
As a result of the above, the Company recorded asset write-downs of
$673 million for goodwill and credit file intangibles and $18
million for fixed assets in the 13 weeks ended October 28, 2000.
During this same period, the Company recorded a write-down of $60
million for certain non-public Internet-related investments as a
result of the Company's determination, based on uncertain financing
alternatives and comparisons with market values of similar publicly
traded businesses, that these equity investments were permanently
impaired.
The Company also recorded restructuring costs during the 13 weeks
ended October 28, 2000 related to the downsizing of the Fingerhut
core catalog operations, consisting of $35$1,408 million of inventory
valuation adjustments included in costFingerhut
accounts receivable, net of sales and $9$531 million of severance costs. The severance costs cover approximately 250
employeesallowance for
doubtful accounts and $2,248 million of which $2other Federated
accounts receivable, net of $70 million had been paid to employees and $7
million was accruedof allowance for
doubtful accounts as of October 28,May 5, 2001; $1,637 million of
Fingerhut accounts receivable, net of $584 million of
allowance for doubtful accounts and $2,435 million of other
Federated accounts receivable, net of $71 million of allowance
for doubtful accounts as of February 3, 2001; and $1,879
million of Fingerhut accounts receivable, net of $327 million
of allowance for doubtful accounts and $2,152 million of other
Federated accounts receivable, net of $57 million of allowance
for doubtful accounts as of April 29, 2000.
4. SEGMENT DATA
The Company conducts its business through two segments,
department stores and direct-to-customer.Fingerhut. The department store
segment, through store locations and related mail catalog and
electronic commerce businesses, sells a wide range of
merchandise, including men's, women's and children's apparel
and accessories, cosmetics, home furnishings and other
consumer goods. The direct-to-customer segment (Fingerhut,
Bloomingdale's By Mail, bloomingdales.com, Macy's By Mail, macys.com
and certain other direct marketing activities)Fingerhut sells a broad range of products and
services directly to consumers via catalogs, direct marketing
and the Internet. "Corporate and other" consists of the
assets and liabilities, and related income or expense associated with the corporate office and
certain items managed on a company-
widecompany-wide basis (e.g.,
intangibles, financial instruments, investments,
income taxes, retirement
benefits and properties held for sale or disposition).
FEDERATED DEPARTMENT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The financial information for each segment is reported on the
basis used internally by the Company to evaluate performance
and allocate resources. 13 Weeks Ended 39 Weeks Ended
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
(millions)
Net Sales:
Department Stores $3,742 $3,646 $10,927 $10,652
Direct-to-Customer 453 491 1,365 1,091
Total $4,195 $4,137 $12,292 $11,743
Operating income (loss):
Department Stores $ 329 $ 328 $ 1,065 $ 999
Direct-to-Customer (138) 25 (344) (4)
CorporateAt the beginning of Fiscal 2001, the
Company reorganized its business segments for making operating
decisions and other (782) (51) (839) (150)
Total $ (591) $ 302 $ (118) $ 845
Forassessing performance. Certain
reclassifications were made to prior period amounts to conform
with the 13 and 39 weeks ended October 28, 2000, the operating lossclassifications of such amounts for the direct-to-customer segment includes restructuring costs
related to the downsizing of the Fingerhut core catalog operations,
consisting of $35 million of inventory valuation adjustments and $9
million of severance costs as well as an asset impairment charge of
$18 million for fixed assets of another Fingerhut business. For the
13 and 39 weeks ended October 28, 2000, the operating loss for the
corporate and other segment includes asset impairment charges of
$673 million for goodwill and credit file intangibles and $60
million for certain Internet-related investments.
Depreciation and amortization expense:
Department Stores $ 153 $ 157 $ 451 $ 461
Direct-to-Customer 11 11 33 28
Corporate and other 22 23 69 62
Total $ 186 $ 191 $ 553 $ 551most recent
period.
FEDERATED DEPARTMENT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
October 28, October 30,13 Weeks Ended
May 5, April 29,
2001 2000
1999
(millions)
Total assets for each segment at the end
of the reporting period were as follows:Net Sales
Department Stores $13,852 $13,604
Direct-to-Customer 2,512 2,582$3,556 $3,573
Fingerhut 266 459
Total $3,822 $4,032
Operating income
Department Stores $ 211 $ 288
Fingerhut 30 (3)
Corporate and other 1,682 2,373(44) (32)
Total $18,046 $18,559
5. EARNINGS (LOSS) PER SHARE
The following tables set forth$ 197 $ 253
For the computation13 weeks ended May 5, 2001, the operating income for
the department store segment includes costs and expenses
associated with the closure of basicthe Stern's department store
division (see Note 2).
Depreciation and diluted
earnings (loss) per share:
13 Weeks Ended
October 28, 2000 October 30, 1999
Loss Shares Income Shares
(millions, except per share data)
Net income (loss)amortization expense
Department Stores $ 160 $ 151
Fingerhut 9 10
Corporate and average
number of shares outstanding $(668) 200.5other 14 24
Total $ 123 210.0
Shares to be issued under deferred
compensation plans - .6 - .4
$(668) 201.1183 $ 123 210.4
Basic earnings (loss) per share $(3.32) $ .59
Effect of dilutive securities:
Warrants - - - 7.3
Stock options - - - 2.2
$(668) 201.1 $ 123 219.9
Diluted earnings (loss) per share $(3.32) $ .56185
FEDERATED DEPARTMENT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
395. EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share:
13 Weeks Ended
October 28,May 5, 2001 April 29, 2000 October 30, 1999
Loss Shares Income Shares
(millions, except per share data) Income Shares Income Shares
Net income (loss) and average number of
shares outstanding $(516) 206.3 $347 209.3$ 58 197.5 $ 89 212.3
Shares to be issued under
deferred compensation plans - .5 - .4
$(516) 206.8 $347 209.7.5
$ 58 198.0 $ 89 212.8
Basic earnings (loss) per share $(2.50) $1.65$ .30 $ .42
Effect of dilutive securities:
Warrants - 2.9 - - 7.31.9
Stock options - 3.2 - - 2.4
$(516) 206.8 $347 219.41.6
$ 58 204.1 $ 89 216.3
Diluted earnings (loss) per share $(2.50) $1.58
For$ .29 $ .41
In addition to the 13 and 39 weeks ended October 28, 2000, warrants and stock options reflected in the
foregoing table, stock options to purchase 34.24.6 million and 9.6
million shares of common stock at prices ranging from $11.63$38.06
to $79.44 per share were outstanding at October
28,May 5, 2001 and April
29, 2000, but were not included in the computation of diluted
earnings per share because, as a result of the Company's net loss
during these periods, their inclusion would have been antidilutive.
In addition to the stock options reflected in the foregoing tables
for the 13 and 39 weeks ended October 30, 1999, stock options to
purchase 4.7 million shares of common stock at prices ranging from
$46.75 to $79.44 per share were outstanding at October 30, 1999,respectively, but were not included in the
computation of diluted earnings per share because the exercise
price thereof exceeded the average market price and their
inclusion would have been antidilutive.
FEDERATED DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For purposes of the following discussion, all references to
"third"first quarter of 2000"2001" and "third"first quarter of 1999"2000" are to the
Company's 13-
week13-week fiscal periods ended October 28,May 5, 2001 and April
29, 2000, and October 30, 1999,
respectively, and all references to "2000" and "1999" are to the
Company's 39-week fiscal periods ended October 28, 2000 and October
30, 1999, respectively.
RESULTS OF OPERATIONS
COMPARISON OF THE 13 WEEKS ENDED OCTOBER 28,MAY 5, 2001 AND APRIL 29, 2000 AND OCTOBER 30, 1999
Net sales for the thirdfirst quarter of 20002001 totaled $4,195$3,822
million, compared to net sales of $4,137$4,032 million for the thirdfirst
quarter of 1999, an increase2000, a decrease of 1.4%.5.2%, in part reflecting the
strategic downsizing of Fingerhut. Net sales for department
stores for the thirdfirst quarter of 2001 were $3,556 million,
compared to net sales of $3,573 million for the first quarter
of 2000, were $3,742 million compared to $3,646 million
for the third quartera decrease of 1999, an increase of 2.6%0.5%. On a comparable store basis
(sales from stores in operation throughout 1999the first quarter
of 2000 and 2000)the first quarter of 2001), net sales for
department stores for the thirdfirst quarter of 2001 decreased 1.5%
compared to the first quarter of 2000. Net sales for
Fingerhut totaled $266 million for the first quarter of 2001
compared to $459 million for the first quarter of 2000,
increased 1.9%reflecting the strategic downsizing of that business.
On June 7, 2001, the Company reported that May department
store sales were down 3.3%, on a comparable store basis,
compared to the third quarter of 1999. Netsame period last year. The Company believes
that, unless the department store sales trend improves, it is
likely that earnings for the direct-to-
customer segment were $453 millionsecond quarter will fall below
expectations. The Company still hopes to attain its projected
earnings of $4.00 to $4.25 a share for the third quarter of 2000
comparedfiscal 2001, although
it may be difficult to $491 million for the third quarter of 1999, a decrease
of 7.6%, reflecting credit tightening policies at Fingerhut.achieve unless there is sales improvement.
Cost of sales was 60.8%60.3% of net sales for the thirdfirst quarter of
2000,2001, compared to 59.3%59.4% for the thirdfirst quarter of 1999.2000. Cost
of sales as a percent of net sales for department stores,
increased 0.2excluding the $19 million Sterns restructuring charges, was
60.7% in the first quarter of 2001, an increase of 0.5
percentage points ascompared to the same period a result ofyear ago,
reflecting higher markdowns taken throughin the thirdfirst quarter of 2000,2001
which enabled the Company to keep in-store
inventories fresh.both current and
at appropriate levels. Cost of sales for the direct-to-customer segment
increased 11.2 percentage points as a percent of net
sales duringfor Fingerhut was 48.6% in the thirdfirst quarter of 2000,2001, a
decrease of 4.3 percentage points, primarily asdue to a result ofshift in
the $35 million
of inventory valuation adjustments relatedsales mix to the Fingerhut
restructuring.higher margin product categories. The
valuation of department store merchandise inventories on the
last-in, first-out basis did not impact cost of sales in
either period.
Selling, general and administrative ("SG&A") expenses were
35.2%33.8% of net sales for the thirdfirst quarter of 20002001 compared to
33.4%34.3% for the thirdfirst quarter of 1999.2000. Department store SG&A
expenses increased 0.5 percentage points to 32.2% as a percent
of department store net sales in the first quarter of 2001,
reflecting slightly higher operating expenses on the
decreased sales level. Fingerhut's SG&A expenses as a percent
of net sales were flat40.2%, a decrease of 7.6 percentage points,
primarily as a result of lower bad debt expenses and higher
finance charge income in the first quarter of 2001 compared to
the same period
a year ago. Higher pre-opening expenses associated with the large
number of store openings planned for the fall season were offset by
lower other non-payroll expenses during the thirdfirst quarter of 2000.
SG&A expenses forThe Company recorded $46 million of restructuring costs during
the direct-to-customer segment in the thirdfirst quarter of 2000 were negatively impacted by higher bad debt expenses
resulting from increased credit delinquencies at Fingerhut. The
higher credit related expenses in the direct-to-customer segment
during the third quarter of 2000 and increased costs2001 related to the macys.comclosure of the
Stern's department store division, including $19 million of
inventory valuation adjustments as a part of cost of sales.
The remaining $27 million of restructuring costs includes $8
million of duplicate central office costs, $8 million of
severance costs and bloomingdales.com businesses contributed to the 1.8
percentage point increase in the overall SG&A expense rate for the
third quarter$4 million of 2000.
During the third quarter of 2000,advertising costs. As
previously communicated, the Company recorded asset
impairment andanticipates incurring
approximately $30-$50 million of additional restructuring
charges related to its Fingerhut
businesses. The Company recorded asset write-downsthe closure of $673 million
for goodwill and credit file intangibles, $18 million for fixed
assets and $60 million for certain Internet-related investments.
The Company also recorded $9 million of severance costs related to
the downsizing of the Fingerhut core catalog operations. The Company
anticipates incurring an additional $30-$55 million of restructuring
chargesStern's during the remainder
of the fiscal year. In fiscal year
2001, amortization expense of intangible assets will be
approximately $29 million lower as a result of the write-down of
goodwill and credit file intangibles.
FEDERATED DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS2001.
Net interest expense was $111$97 million for the thirdfirst quarter of
2000,2001, compared to $91$99 million for the third quarter of 1999. The higher
interest expense for the third quarter of 2000 is due primarily to
the increased outstanding debt resulting from the consolidation of
the Fingerhut Master Trust for financial reporting purposes, and to
a lesser extent the higher interest rate environment.
The income tax benefit was $34 million for the thirdfirst quarter of 2000.
This amountThe Company's effective income tax rate of 41.8% for the
first quarter of 2001 differs from the amount computed by applying the federal income tax
statutory rate of 35.0% to the loss before income
taxesprincipally because of permanent differences arising from the write-off
and amortization of intangible assets and the effect of
state and local income taxes.
COMPARISON OF THE 39 WEEKS ENDED OCTOBER 28, 2000 AND OCTOBER 30, 1999
Net sales for 2000 totaled $12,292 million, compared to net sales of
$11,743 million for 1999, an increase of 4.7%. Net sales for
department stores for 2000 were $10,927 million compared to $10,652
million for 1999, an increase of 2.6%. On a comparable store basis,
net sales for 2000 increased 2.3% compared to 1999. Net sales for
the direct-to-customer segment were $1,365 million for 2000 (which
includes Fingerhut for the entire period) compared to $1,091 million
for 1999 (which includes Fingerhut fromtaxes and after the March 18, 1999
acquisition date).
Cost of sales was 59.6% of net sales for 2000, compared to 59.2% for
1999. Cost of sales as a percent of net sales for department stores
increased 0.2 percentage points as a result of higher markdowns
taken throughout 2000, which enabled the Company to keep in-store
inventories fresh. Cost of sales for the direct-to-customer segment
increased 3.9 percentage points as a percent of net sales during
2000, primarily as a result of the $35 million of inventory
valuation adjustments related to the Fingerhut restructuring taken
in the third quarter of 2000. The valuation of department store
merchandise inventories on the last-in, first-out basis did not
impact cost of sales in either period.
SG&A expenses were 35.2% of net sales for 2000, compared to 33.6%
for 1999. Department store SG&A expenses improved 0.5 percentage
points as a percent of department store net sales, reflecting the
impact of lower non-payroll expenses, including depreciation
expense, and higher finance charge income. SG&A expenses for the
direct-to-customer segment in 2000 were negatively impacted by
higher bad debt expenses resulting primarily from increased credit
delinquencies at Fingerhut during 2000. The higher credit related
expenses in the direct-to-customer segment during 2000, increased
costs related to the macys.com and bloomingdales.com businesses and
increased amortization expense resulting from the Fingerhut
acquisition combined to offset the improvement in the department
store SG&A expense rate and produce a 1.6 percentage point increase
in the overall SG&A expense rate for 2000.
During the third quarter of 2000, the Company recorded asset
impairment and restructuring charges related to its Fingerhut
businesses. The Company recorded asset write-downs of $673 million
for goodwill and credit file intangibles, $18 million for fixed
assets and $60 million for certain Internet-related investments.
The Company also recorded $9 million of severance costs related to
the downsizing of the Fingerhut core catalog operations.
FEDERATED DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net interest expense was $318 million for 2000 compared to $251
million for 1999. The higher interest expense for 2000 is due
primarily to the increased outstanding debt resulting from the
Fingerhut acquisition and the consolidation of the Fingerhut Master
Trust for financial reporting purposes.
Income tax expense was $80 million for 2000. This amount differs
from the amount computed by applying the federal income tax
statutory rate of 35.0% to the loss before income taxes because of permanent differences arising
from the write-off and amortization of intangible assets and the effect of state and local income taxes.assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash from
operations, cash on hand and certain available credit
facilities.
Net cash provided by operating activities in 2000the first quarter
of 2001 was $268 million,
a decrease of $39$243 million, compared to the $307$58 million provided
in 1999. This reflectsthe first quarter of 2000, reflecting a greater decreasesdecrease in
2000 in non-merchandise
accounts payable and accrued liabilitiesreceivable due to the timingstrategic downsizing of the
Fingerhut acquisition and greater decreases in income tax
liabilities. The impact on net income resulting from higher
reserves for bad debt at Fingerhut was offset by greater decreases
in 2000 in accounts receivable. The greater increases in 2000 in
merchandise inventories were offset by greater increases in
merchandise accounts payable.business.
Net cash used by investing activities was $521$81 million for 2000.the
first quarter of 2001. Investing activities for 2000the first
quarter of 2001 included purchases of property and equipment
totaling $490$53 million and capitalized software of $62 million
and investments in companies engaged in complementary businesses
totaling $31$28 million.
The Company opened four new department
stores and one new furniture gallery during 2000. In addition, five
department stores were opened in November and the Company plans to open two additional9 new department stores, 3 new
furniture galleries beforeand 2 new bedding stores during the
endremainder of the fiscal
year.2001.
Net cash provided to the Company by all financing activities
was $338$35 million in 2000.for the first quarter of 2001. During 2000,the
first quarter of 2001, the Company issued debt totaling
$802$500 million consisting of
$4526.625% Senior Notes due 2011. The Company repaid $402 million
of borrowings underduring the Company's commercial paper program and receivables backed commercial
paper and $350first quarter of 2001, consisting
principally of $290 million of 8.5%net short-term borrowings and
$110 million of 10% Senior Notes due 2010.Notes. The Company purchased 16.03.4
million shares of its Common Stock under its stock repurchase
program during 2000the first quarter of 2001 at aan approximate
cost of $549$140 million. On August
25, 2000,May 18, 2001, the Board of Directors
approved a $500 million increase to the current stock
repurchase program increasing the authorization to $1 billion.$1,500
million. As of October 28, 2000,May 5, 2001, including the effect of the
May 18, 2001 authorization, the Company had $451approximately $750
million of the $1 billion authorization$1,500 million stock repurchase program
remaining. The Company may continue or, from time to time,
suspend repurchases of shares under its stock repurchase
program, depending on prevailing market conditions, alternate
uses of capital and other factors. Also during 2000, the
Company issued 1.0 million shares of its Common Stock and received
$35 million in proceeds from the exercise of the Company's Series B
Warrants, which expired on February 15, 2000.
On December 7, 2000, the Company's wholly owned, special purpose
subsidiary, Prime Receivables Corporation, completed a public
offering of $400 million principal amount of 6.70% asset backed
certificates issued by the Prime Credit Card Master Trust, with a
expected final payment date of November 15, 2005. The proceeds from
the offering were used for general corporate purposes.
FEDERATED DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management believes the department store business and other
retail businesses will continue to consolidate. Accordingly,
the Company intends from time to time to consider additional
acquisitions of, and investments in, department stores,
Internet-related companies, catalog companies and other
complementary assets and companies.
Management believes that, with respect to its current
operations, cash on hand and funds from operations, together
with its credit facilities, will be sufficient to cover its
reasonably foreseeable working capital, capital expenditure
and debt service requirements. Acquisition transactions, if
any, are expected to be financed through a combination of cash
on hand and from operations and the possible issuance from
time to time of long-term debt or other securities. Depending
upon conditions in the capital markets and other factors, the
Company will from time to time consider the issuance of debt
or other securities, or other possible capital markets
transactions, the proceeds of which could be used to refinance
currentexisting indebtedness or for other corporate purposes.
PART II -- OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
ITEM 1. LEGAL PROCEEDINGS
The Company and certain members of its senior management
have been named defendants in five substantially identical
purported class action complaints (the "Complaints") filed
on behalf of persons who purchased shares of the Company
between February 23, 2000 and July 20, 2000. The Complaints
were filed on August 24, August 30, September 15, September
26 and October 6, 2000, in the United States District Court
for the Southern District of New York. The Complaints
allege violationviolations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and Rule 10b-5 thereunder,
on the basis that the Company, among other things, made
false and misleading statements regarding its financial
condition and results of operations and failed to disclose
material information relating to the credit delinquency
problem at Fingerhut. The plaintiffs are seeking
unspecified amounts of compensatory damages and costs,
including legal fees. Management believes that the
allegations contained in the Complaints are without merit
and intends to defend vigorously defendagainst those allegations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's stockholders was held on
May 18, 2001. The Company's stockholders voted on the
following items at such meeting:
i. The stockholders approved the election of four
Directors for a three-year term expiring at the 2004
Annual Meeting of the Company's stockholders. The
votes for such elections were as follows: Sara
Levinson - 130,813,501 votes in favor and 42,715,707
votes withheld; Joseph Neubauer - 130,811,728 votes in
favor and 42,717,480 votes withheld; Joseph A. Pichler
- 130,815,878 votes in favor and 42,713,330 votes
withheld; and Karl M. von der Heyden - 130,816,318
votes in favor and 42,712,890 votes withheld. There
were no broker non-votes on this item.
ii. The stockholders ratified the employment of KPMG LLP as
the Company's independent accountants for the fiscal
year ending February 2, 2002. The votes for the
ratification were 170,478,162, the votes against the
allegations contained inratification were 1,942,374, the Complaints.votes abstained were
1,109,122, and there were no broker non-votes.
iii. The stockholders approved a stockholder's proposal
seeking the adoption of a system for the annual
election of directors. The votes for the proposal were
103,783,592, the votes against the proposal were
42,363,283, the votes abstained were 13,573,954, and
there were 13,808,379 broker non-votes.
PART II -- OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
ITEM 5. OTHER INFORMATION
This report and other reports, statements and
information previously or subsequently filed by the
Company with the Securities and Exchange Commission
(the "SEC") contain or may contain forward-looking
statements. Such statements are based upon the beliefs
and assumptions of, and on information available to,
the management of the Company at the time such
statements are made. The following are or may
constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act
of 1995: (i) statements preceded by, followed by or
that include the words "may," "will," "could,"
"should," "believe," "expect," "future," "potential,"
"anticipate," "intend," "plan," "estimate,"think," "estimate" or
"continue" or the negative or other variations thereof
and (ii) statements regarding matters that are not
historical facts. Such forward-looking statements are
subject to various risks and uncertainties, including
(i)(a) risks and uncertainties relating to the possible
invalidity of the underlying beliefs and assumptions,
(ii)(b) possible changes or developments in social,
economic, business, industry, market, legal and
regulatory circumstances and conditions, and (iii)(c)
actions taken or omitted to be taken by third parties,
including customers, suppliers, business partners,
competitors and legislative, regulatory, judicial and
other governmental authorities and officials.
Furthermore, future results of the operations of the
Company could differ materially from historical results
or current expectations because of a variety of factors
that affect the Company, including transaction costs
associated with the renovation, conversion and
transitioning of retail stores in regional markets; the
outcome and timing of sales and leasing in conjunction
with the disposition of retail store properties; the
retention, reintegration and transitioning of displaced
employees; and competitive pressures from department
and specialty stores, general merchandise stores,
manufacturers' outlets, off-price and discount stores,
and all other retail channels; and general consumer-
spending levels, including the impact of the
availability and level of consumer debt, and the
effects of the weather. In addition to any risks and
uncertainties specifically identified in the text
surrounding such forward-looking statements, the
statements in the immediately preceding sentence and
the statements under captions such as "Risk Factors"
and "Special Considerations" in reports, statements and
information filed by the Company with the SEC from time
to time constitute cautionary statements identifying
important factors that could cause actual amounts,
results, events and circumstances to differ materially
from those reflected in such forward-
lookingforward-looking
statements.
PART II -- OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Third Amendment to Series 1998-3 Supplement,4.1 Fifth Supplemental Trust Indenture dated as of
August 28, 2000,March 27, 2001, by and among Fingerhut Receivables,
Inc., as Transferor, Axsys National Bank (formerly named
Fingerhut National Bank), as Servicerthe Company and
The Bank of
New York (Delaware), as Trustee.
10.2 Third Amendment Agreement to Fingerhut Receivables, Inc.
Security Purchase Agreement, dated as of August 28, 2000,
by and among Fingerhut Receivables, Inc., Quincy Capital
Corporation, Falcon Asset Securitization Corporation, Four
Winds Funding Corporation, Bank of America, N.A., Bank One,
NA (Main Office Chicago), and Commerzbank Aktiengesellschaft,
Chicago Branch.
10.3 Assignment and Assumption Agreement, dated as of August 28,
2000, by and among Fingerhut Receivables, Inc., as Tranferor,
certain Purchasers and Managing Agents parties thereto, and
Bank of America,Citibank, N.A., as Administrative Agent for such
Purchasers.
10.4 Reassignment of Receivables, dated as of October 27, 2000,Trustee (incorporated by
and between Fingerhut Receivables, Inc. and The Bank of
New York.
27 Financial Data Schedule
(b) Report on Form 8-Kreference to Exhibit 4 to the Company's Current
Report on Form 8-K dated August 29, 2000, reporting
matters under Items 5 and 7 thereof.filed on March 26, 2001).
(b) Reports on Form 8-K
1. Current Report on Form 8-K dated October 16, 2000filed on March 22, 2001
reporting matters under ItemsItem 5 and Item 7 thereof.
2. Current Report on Form 8-K filed on March 26, 2001
reporting matters under Item 5 and Item 7 thereof.
FEDERATED DEPARTMENT STORES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunder duly authorized.
FEDERATED DEPARTMENT STORES, INC.
Date December 12, 2000June 19, 2001 /s/ Dennis J. Broderick
Dennis J. Broderick
Senior Vice President, General
Counsel and Secretary
/s/ Joel A. Belsky
Joel A. Belsky
Vice President and Controller
(Principal Accounting Officer)