SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal quarter ended
August 4,November 3, 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 Delaware 1-13536 13-3324058 State of (Commission File No.) (I.R.S. Employer of Incorporation)
FEDERATED DEPARTMENT STORES, INC. |
Delaware | 1-13536 | 13-3324058 |
(State of Incorporation | (Commission File No.) | (I.R.S. Employer |
The Registrant has filed all reports required to be filed by Section 12, 13 or 15(d)15 (d) of the Act during the preceding 12 months and has been subject to such filing requirements for the past 90 days.
192,676,172
191,676,076 shares of the Registrant's Common Stock, $.01 par value, were outstanding as of SeptemberDecember 1, 2001.
PART I -- FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Income
Operations
(Unaudited)
(millions,
(millions, except per share figures)
13 Weeks Ended 26 Weeks Ended
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
Net Sales $3,732 $4,065 $7,554 $8,097
Cost
13 Weeks Ended | 39 Weeks Ended | |||||||
November 3, | October 28, | November 3, | October 28, | |||||
Net Sales | $3,775 | $4,195 | $11,329 | $12,292 | ||||
Cost of sales: | ||||||||
Recurring | 2,288 | 2,515 | 6,826 | 7,289 | ||||
Inventory valuation adjustments | 9 | 35 | 35 | 35 | ||||
Total cost of sales | 2,297 | 2,550 | 6,861 | 7,324 | ||||
Selling, general and administrative |
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Asset impairment and restructuring |
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Operating Income (Loss) | 126 | (591) | 534 | (118) | ||||
Interest expense | (102) | (113) | (303) | (323) | ||||
Interest income | 2 | 2 | 6 | 5 | ||||
Income (Loss) Before Income Taxes |
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Federal, state and local income tax |
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Income (Loss) Before Extraordinary |
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Extraordinary Item -- loss on early |
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Net Income (Loss) | $ 3 | $ (668) | $ 171 | $ (516) | ||||
(continued) | ||||||||
PART I -- FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of sales:
Recurring 2,251 2,379 4,538 4,774
Inventory valuation adjustments
related to Stern's closure 7 - 26 -
Total cost of sales 2,258 2,379 4,564 4,774
Selling, general and
administrative expenses 1,235 1,466 2,527 2,850
Restructuring charges 28 - 55 -
Operating Income 211 220 408 473
Interest expense (101) (110) (202) (210)
Interest income 1 2 5 3
Income Before Income Taxes 111 112 211 266
Federal, state and local income
tax expense (1) (49) (43) (114)
Net Income $ 110 $ 63 $ 168 $ 152
Basic earningsOperations
(Unaudited)
(millions, except per share $ .56 $ .31 $ .85 $ .73
Diluted earnings per share $ .55 $ .30 $ .83 $ .72
figures)
13 Weeks Ended | 39 Weeks Ended | |||||||
November 3, | October 28, | November 3, | October 28, | |||||
Basic earnings (loss) per share: | ||||||||
Income (loss) before extraordinary |
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Extraordinary item | (.05) | - | (.05) | - | ||||
Net income (loss) | $ .02 | $(3.32) | $ .88 | $(2.50) | ||||
Diluted earnings (loss) per share: | ||||||||
Income (loss) before extraordinary item |
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Extraordinary item | (.05) | - | (.05) | - | ||||
Net income (loss) | $ .02 | $(3.32) | $ .86 | $(2.50) | ||||
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
Consolidated Balance Sheets
(Unaudited)
(millions)
August 4, February 3, July 29,
2001 2001 2000
ASSETS:
Current Assets:
Cash $ 330 $ 322 $ 296
Accounts receivable 3,427 4,072 3,818
Merchandise inventories 3,994 3,812 3,932
Supplies and prepaid expenses 221 200 231
Deferred income tax assets 310 294 183
Total Current Assets 8,282 8,700 8,460
Property and Equipment - net 6,735 6,830 6,757
Intangible Assets - net 942 896 1,703
Other Assets 659 586 655
Total Assets $16,618 $17,012 $17,575
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Short-term debt $ 801 $ 1,722 $ 1,714
Accounts payable and accrued liabilities 2,903 2,903 2,992
Income taxes 116 244 97
Total Current Liabilities 3,820 4,869 4,803
Long-Term Debt 5,163 4,374 4,452
Deferred Income Taxes 1,306 1,393 1,458
Other Liabilities 559 554 548
Shareholders' Equity 5,770 5,822 6,314
Total Liabilities and Shareholders'
Equity $16,618 $17,012 $17,575
November 3, | February 3, | October 28, | ||||
2001 | 2001 | 2000 | ||||
ASSETS: | ||||||
Current Assets: | ||||||
Cash | $ 296 | $ 322 | $ 303 | |||
Accounts receivable | 3,392 | 4,072 | 3,826 | |||
Merchandise inventories | 4,933 | 3,812 | 5,045 | |||
Supplies and prepaid expenses | 239 | 200 | 269 | |||
Deferred income tax assets | 306 | 294 | 255 | |||
Total Current Assets | 9,166 | 8,700 | 9,698 | |||
Property and Equipment -- net | 6,710 | 6,830 | 6,808 | |||
Intangible Assets -- net | 955 | 896 | 913 | |||
Other Assets | 703 | 586 | 627 | |||
Total Assets | $17,534 | $17,012 | $18,046 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY: | ||||||
Current Liabilities: | ||||||
Short-term debt | $ 1,990 | $ 1,722 | $ 2,593 | |||
Accounts payable and accrued liabilities | 3,558 | 2,903 | 3,859 | |||
Income taxes | 111 | 244 | 3 | |||
Total Current Liabilities | 5,659 | 4,869 | 6,455 | |||
Long-Term Debt | 4,266 | 4,374 | 4,033 | |||
Deferred Income Taxes | 1,301 | 1,393 | 1,485 | |||
Other Liabilities | 562 | 554 | 548 | |||
Shareholders' Equity | 5,746 | 5,822 | 5,525 | |||
Total Liabilities and Shareholders' Equity | $17,534 | $17,012 | $18,046 |
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(millions)
26 Weeks Ended 26 Weeks Ended
August 4, 2001 July 29, 2000
39 Weeks Ended | 39 Weeks Ended | ||
Cash flows from operating activities: | |||
Net income (loss) | $ 171 | $ (516) | |
Adjustments to reconcile net income (loss) to net cash | |||
Depreciation and amortization | 512 | 486 | |
Amortization of intangible assets | 37 | 62 | |
Amortization of financing costs | 6 | 5 | |
Amortization of unearned restricted stock | 3 | 5 | |
Asset impairment and restructuring charges | 113 | 795 | |
Loss on early extinguishment of debt | 10 | - | |
Changes in assets and liabilities: | |||
Decrease in accounts receivable | 707 | 489 | |
Increase in merchandise inventories | (1,066) | (1,489) | |
Increase in supplies and prepaid expenses | (36) | (39) | |
Increase in other assets not separately |
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Increase in accounts payable and accrued |
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Decrease in current income taxes | (127) | (220) | |
Increase (decrease) in deferred income taxes | (59) | 52 | |
Increase (decrease) in other liabilities not |
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Net cash provided by operating activities | 623 | 268 | |
Cash flows from investing activities: | |||
Purchase of property and equipment | (428) | (490) | |
Acquisition of Liberty House, Inc., net of cash |
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Capitalized software | (68) | (62) | |
Investments in companies | - | (31) | |
Disposition of property and equipment | 56 | 62 | |
Net cash used by investing activities | (615) | (521) | |
Cash flows from financing activities: | |||
Debt issued | 1,041 | 802 | |
Financing costs | (21) | (4) | |
Debt repaid | (932) | (50) | |
Increase in outstanding checks | 128 | 101 | |
Acquisition of treasury stock | (299) | (551) | |
Issuance of common stock | 49 | 40 | |
Net cash provided (used) by financing |
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(continued)
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Cash flows from operating activities:
Net income $ 168 $ 152
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 337 322
Amortization of intangible assets 25 42
Amortization of financing costs 3 4
Amortization of unearned restricted stock 2 3
Restructuring charges 81 -
Changes in assets and liabilities:
Decrease in accounts receivable 673 499
Increase in merchandise inventories (124) (340)
Increase in supplies and prepaid expenses (19) (1)
Decrease in other assets not separately
identified (25) (32)
Decrease in accounts payable and accrued
liabilities not separately identified (152) (74)
Decrease in current income taxes (128) (126)
Increase (decrease) in deferred income taxes (68) 1
Increase (decrease) in other liabilities not
separately identified 3 (6)
Net cash provided by operating activities 776 444
Cash flows from investing activities:
Purchase of property and equipment (222) (251)
Acquisition of Liberty House, Inc.,
net of cash acquired (173) -
Capitalized software (45) (37)
Investments in companies - (31)
Disposition of property and equipment 27 53
Net cash used by investing activities (413) (266)
Cash flows from financing activities:
Debt issued 500 350
Financing costs (10) (3)
Debt repaid (662) (57)
Increase in outstanding checks 39 2
Acquisition of treasury stock (270) (431)
Issuance of common stock 48 39
Net cash used by financing activities (355) (100)
Net increase in cash 8 78
Cash at beginning of period 322 218
Cash at end of period $ 330 $ 296
Supplemental cash flow information:
Interest paid $ 200 $ 196
Interest received 5 3
Income taxes paid (net of refunds received) 219 242
Schedule of non cash investing and financing
activities:
Debt assumed in acquisition 17 -
Flows
(Unaudited)
(millions)
39 Weeks Ended | 39 Weeks Ended | ||
Net increase (decrease) in cash | (26) | 85 | |
Cash at beginning of period | 322 | 218 | |
Cash at end of period | $ 296 | $ 303 | |
Supplemental cash flow information: | |||
Interest paid | $ 312 | $ 317 | |
Interest received | 6 | 5 | |
Income taxes paid (net of refunds received) | 222 | 251 | |
Schedule of non cash investing and financing | |||
Debt assumed in acquisition | 17 | - | |
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 February 3, 2001 (the "2000 10-K"). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 2000 10-K.
Substantially all department store merchandise inventories are valued by the retail method and stated on the LIFO (last-in, first-out) basis, which is generally lower than market. Fingerhut 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 and 2639 weeks ended August 4,November 3, 2001 and July 29,October 28, 2000 (which do not include the Christmas season) are not indicative of such results for the fiscal year.
The Consolidated Financial Statements as of and for the 13 and 2639 weeks ended August 4,November 3, 2001 and July 29,October 28, 2000, 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.
Effective February 4, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") 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 material impact on the Company's consolidated financial position, results of operations or cash flows.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," effective for all business combinations initiated after June 30, 2001 and for fiscal years beginning after December 15, 2001, respectively. SFAS No. 141 eliminates the pooling of interests method of accounting for business combinations with limited exceptions for transactions initiated prior to July 1, 2001 and broadens the criteria for recording intangible assets separate from goodwill. Under the provisions of SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their estimated lives.
Application of the nonamortization provisions of SFAS No. 142, beginning in the first quarter of 2002, is expected to result in an increase in annual net income of approximately $27 million. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets and has not yet determined what effect, if any, the results of these tests will have on the Company's consolidated financial position or results of operations.
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121 but retains many of its fundamental provisions. Additionally, this Statement expands the scope of discontinued operations to include more disposal transactions. The provisions of the Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company has not yet completed its evaluation of the impact this Statement will have when adopted.
2.Acquisition
On July 9, 2001, the Company completed its acquisition of Liberty House, Inc. ("Liberty House"), a department store retailer operating 11 department stores and seven resort and specialty stores in Hawaii and one department store in Guam. The total purchase price of the Liberty House acquisition was approximately $200 million, including the assumption of $17 million of borrowed indebtedness. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of operations of Liberty House have been included in the Company's results of operations from the date of acquisition and the purchase price has been allocated to Liberty House's assets and liabilities based on their estimated fair values as of that date. Based upon management's initial estimates, the amount of goodwill related to the Liberty House acquisition amounted to $68$93 million at August 4,November 3, 2001. Such goodwill will not be amortized, in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets."
3.Asset Impairment and Restructuring Charges
The Company recorded $81$113 million of restructuring charges during 2001 primarily related to the closure of the Stern's department store division and the Macy's West integration of Liberty House, including $26$35 million of inventory valuation adjustments as a part of cost of sales. The remaining $55$78 million of restructuring charges includes $15$21 million of costs associated with converting the Stern's stores to Macy's (including advertising, credit card issuance and promotion and other name change expenses), $10$11 million of costs to close and sell certain Stern's stores, $9 million of Stern's duplicate central office costs, and $15$16 million of severance costs related to the Stern's closure. Of the $15closure, $3 million of Liberty House duplicate central office costs, $1 million for Liberty House data processing conversion costs and $9 million related to the disposition of a Fingerhut warehouse. The $16 million of Stern's severance costs, incurred, covering approximately 2,2502,300 employees, $14 million had beenwas paid to employees and $1
million was accrued as of August 4,during 2001.
With respect to the Fingerhut restructuring initiated in 2000 and the $10 million of severance costs which had been accrued at February 3, 2001, $7$8 million was paid to employees during 2001 and $3$2 million remains accrued as of August 4,November 3, 2001.
During the 13 and 39 weeks ended October 28, 2000, the Company recorded asset impairment and restructuring charges related to its Fingerhut businesses totaling $795 million, $35 million of which are included in cost of sales. 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 and also recorded restructuring costs related to the downsizing of the Fingerhut core catalog operations including $9 million of severance costs during the 13 and 39 weeks ended October 28, 2000.
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
4.Extraordinary Item
The extraordinary item for the 13 and 39 weeks ended November 3, 2001 represents costs of $16 million, net of income tax benefit of $6 million, associated with the repurchase of the $350 million 6.125% Term Enhanced ReMarketable Securities.
5.Taxes
In connection with the Stern's restructuring, income tax expense for 2001 reflects a $44 million benefit related to the recognition of the effect of the difference between the financial reporting and tax bases of the Company's investment in Stern's Department Stores, Inc. upon disposition.
5.
6.Accounts Receivable
Accounts receivable consists of $1,274$1,246 million of Fingerhut accounts receivable, net of $483$443 million of allowance for doubtful accounts and $2,153$2,146 million of other Federated accounts receivable, net of $73$76 million of allowance for doubtful accounts as of August 4,November 3, 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 $1,660$1,618 million of Fingerhut accounts receivable, net of $511$571 million of allowance for doubtful accounts and $2,158$2,208 million of other Federated accounts receivable, net of $57$59 million of allowance for doubtful accounts as of July 29,October 28, 2000.
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
6. Financing - Subsequent Event
On August 23, 2001, the Company issued $500 million of 6.625%
Senior Notes due 2008. The proceeds were used to repurchase
the $350 million 6.125% Term Enhanced ReMarketable Securities
("TERMS"), repay short-term borrowings and for general
corporate purposes. As a result, $350 million of short-term
debt was reclassified to long-term debt as of August 4, 2001.
On September 4, 2001, the $350 million TERMS were repurchased
and as a result, the Company will record an extraordinary item
of approximately $9 million, net of the income tax benefit, in
the 13-week period ending November 3, 2001.
7.Segment Data
The Company conductsreports its business operations through two segments, department stores and 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. 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 income or expense associated with the corporate office and certain items managed on a company-wide basis (e.g., intangibles, financial instruments, investments, retirement benefits and properties held for sale or disposition).
The financial information for each segment is reported on the basis used internally by the Company to evaluate performance and allocate resources. At the beginning of Fiscal 2001, the Company reorganized its business segments for making operating decisions and assessing performance. Certain reclassifications were made to prior period amounts to conform with the classifications of such amounts for the most recent period.
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
13 Weeks Ended 26 Weeks Ended
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
(millions)
Net Sales:
Department Stores $3,488 $3,679 $7,044 $7,252
Fingerhut 244 386 510 845
Total $3,732 $4,065 $7,554 $8,097
Operating income:
Department Stores $ 232 $ 413 $ 443 $ 701
Fingerhut 7 (168) 37 (171)
Corporate and other (28) (25) (72) (57)
Total $ 211 $ 220 $ 408 $ 473
For the 13 and 26 weeks ended August 4, 2001, the
13 Weeks Ended | 39 Weeks Ended | ||||||||
November 3, | October 28, | November 3, | October 28, | ||||||
(millions) | |||||||||
Net Sales: | |||||||||
Department Stores | $3,475 | $3,782 | $10,519 | $11,034 | |||||
Fingerhut | 300 | 413 | 810 | 1,258 | |||||
Total | $3,775 | $4,195 | $11,329 | $12,292 | |||||
Operating income (loss): | |||||||||
Department Stores | $ 154 | $ 300 | $ 597 | $ 1,001 | |||||
Fingerhut | 8 | (109) | 45 | (280) | |||||
Corporate and other | (36) | (782) | (108) | (839) | |||||
Total | $ 126 | $ (591) | $ 534 | $ (118) | |||||
The operating income for the department store segment(loss) data presented above includes costsasset impairment and expensesrestructuring charges associated with the closure of the Stern's department store division, the integration of Liberty House into Macy's West and the Fingerhut write-down and downsizing (see Note 3).
Depreciation and amortization
expense:
Department Stores $ 159 $ 151 $ 319 $ 302
Fingerhut 7 8 16 18
Corporate and other 15 23 29 47
Total $ 181 $ 182 $ 364 $ 367
Depreciation and amortization Department Stores $ 165 $ 155 $ 484 $ 457 Fingerhut 9 9 25 27 Corporate and other 14 22 43 69 Total $ 188 $ 186 $ 552 $ 553
expense:
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
8.Earnings (Loss) Per Share
The following tables set forth the computation of basic and diluted earnings per share:
13 Weeks Ended
August 4, 2001 July 29, 2000
(millions, except(loss) per share data) Income Shares Income Shares
Netbased on income and average number
of shares outstanding $110 194.0 $ 63 206.1
Sharesbefore extraordinary item:
13 Weeks Ended | |||||||
November 3, 2001 | October 28, 2000 | ||||||
Income | Shares | Loss | Shares | ||||
(millions, except per share data) | |||||||
Net income (loss) before extraordinary |
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Shares to be issued under deferred |
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13 | 192.9 | (668) | 201.1 | ||||
Basic earnings (loss) per share | $ .07 | $(3.32) | |||||
Effect of dilutive securities: | |||||||
Warrants | - | .8 | - | - | |||
Stock options | - | .9 | - | - | |||
$ 13 | 194.6 | $(668) | 201.1 | ||||
Diluted earnings (loss) per share | $ .07 | $(3.32) | |||||
39 Weeks Ended | |||||||
November 3, 2001 | October 28, 2000 | ||||||
Income | Shares | Loss | Shares | ||||
(millions, except per share data) | |||||||
Net income (loss) before extraordinary |
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Shares to be issued under deferred |
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181 | 195.1 | (516) | 206.8 | ||||
Basic earnings (loss) per share | $ .93 | $(2.50) | |||||
Effect of dilutive securities: | |||||||
Warrants | - | 2.1 | - | - | |||
Stock options | - | 2.2 | - | - | |||
$181 | 199.4 | $(516) | 206.8 | ||||
Diluted earnings (loss) per share | $ .91 | $(2.50) | |||||
FEDERATED DEPARTMENT STORES, INC.
Notes to be issued under deferred
compensation plans - .6 - .5
110 194.6 63 206.6
Basic earnings per share $ .56 $ .31
Effect of dilutive securities:
Warrants - 2.5 - 1.0
Stock options - 2.5 - .9
$110 199.6 $ 63 208.5
Diluted earnings per share $ .55 $ .30
26 Weeks Ended
August 4, 2001 July 29, 2000
(millions, except per share data) Income Shares Income Shares
Net income and average number
of shares outstanding $168 195.7 $152 209.2
Shares to be issued under deferred
compensation plans - .6 - .5
168 196.3 152 209.7
Basic earnings per share $ .85 $ .73
Effect of dilutive securities:
Warrants - 2.7 - 1.5
Stock options - 2.8 - 1.2
$168 201.8 $152 212.4
Diluted earnings per share $ .83 $ .72
Consolidated Financial Statements
(Unaudited)
In addition to the warrants and stock options reflected in the foregoing tables for the 13 and 39 weeks ended November 3, 2001, stock options to purchase 10.1 million and
12.716.8 million shares of common stock, at prices ranging from $34.38$33.13 to $79.44 per share, were outstanding at August 4,November 3, 2001
and July 29, 2000, 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.
For the 13 and 39 weeks ended October 28, 2000, warrants and stock options to purchase 34.2 million shares of common stock at prices ranging from $11.63 to $79.44 per share were outstanding at October 28, 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.
FEDERATED DEPARTMENT STORES, INC.
Management'sDiscussion and Analysis
of Financial Condition and Results of Operations
For purposes of the following discussion, all references to "second"third quarter of 2001" and "second"third quarter of 2000" are to the Company's 13-week fiscal periods ended August 4,November 3, 2001 and July 29,October 28, 2000, respectively, and all references to "2001" and "2000" are to the Company's 26-week39-week fiscal periods ended August 4,November 3, 2001 and July 29,October 28, 2000, respectively.
Results of Operations
Comparison of the 13 Weeks Ended August 4,November 3, 2001 and July 29,October 28, 2000
Net sales for the secondthird quarter of 2001 totaled $3,732$3,775 million, compared to net sales of $4,065$4,195 million for the secondthird quarter of 2000, a decrease of 8.2%, in part
reflecting10.0%. The sales decrease reflects the difficult economic climate, the events of September 11th and resulting further economic weakness, the strategic downsizing of Fingerhut and the closing of Stern's. Net sales for department stores for the secondthird quarter of 2001 were $3,488$3,475 million, compared to net sales of $3,679$3,782 million for the secondthird quarter of 2000, a decrease of 5.2%8.1%. On a comparable store basis (sales from stores in operation throughout 2000 and 2001), net sales for department stores for the secondthird quarter of 2001 decreased 4.8%8.6% compared to the secondthird quarter of 2000. Net sales for Fingerhut totaled $244$300 million for the secondthird quarter of 2001 compared to $386$413 million for the secondthird quarter of 2000, reflecting the strategic downsizing of that business.
On July 5,October 18, 2001, the Company lowered its fall comparable store sales projections for the fourth quarter to minus 1-27-10 percent and, as a result of continued weak salesthe September 11th terrorist attacks and subsequent economic downturn. The Company, noting the difficulties of forecasting performance for the remainder of the year in its department store segment,the current climate of uncertainty, lowered earnings expectations for fiscal 2001 to between $3.60$2.85 and $3.90$3.00 a share, excluding the extraordinary item and restructuring charges. Subsequently,
the Company noted, due to the current economic climate, that
it is unlikely that the Company would deliver earnings at the
higher end of that range and as such lowered the top end of
the range to $3.80 a share.
Cost of sales was 60.5%60.8% of net sales for the secondthird quarter of 2001 compared to 58.5% for the second quarter ofand 2000. Cost of sales as a percent of net sales for department stores, excluding the $7$9 million Stern's restructuring charges,and Liberty House inventory valuation adjustments, was 61.0%61.4% in the secondthird quarter of 2001, an increase of 1.90.7 percentage points compared to the same period a year ago, reflecting higher markdowns taken in the secondthird quarter of 2001 which enabledwere needed, given the Companylarge decline in sales, to keepreduce inventories both
current and atto more appropriate levels. Cost of sales as a percent of net sales for Fingerhut was 50.3%51.2% in the secondthird quarter of 2001, a decrease of 3.11.9 percentage points from the same period a year ago, excluding the 2000 inventory valuation adjustments, primarily due to a shift in the 2001 sales mix to 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 33.1%35.3% of net sales for the secondthird quarter of 2001 compared to 36.1%35.2% for the secondthird quarter of 2000. Department store SG&A expenses decreased 2.0% in actual dollars compared to the third quarter of 2000, however, due to the lower sales level, department store SG&A expenses increased 1.72.1 percentage points to 31.4%33.5% as a percent of department store net sales in the second quarter of 2001,
reflecting relatively flat operating expenses on the decreased
sales level.sales. Fingerhut's SG&A expenses as a percent of net sales were 46.9%42.9%, a decrease of 43.115.3 percentage points, primarily as a result of the higher bad debt expenses recorded in the second quarter of 2000.
same period a year ago.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
The Company recorded $35$32 million of restructuring charges during the secondthird quarter of 2001 primarily related to the closure of the Stern's department store division and the Macy's West integration of Liberty House, including $7$9 million of inventory valuation adjustments as a part of cost of sales. The remaining $28$23 million of restructuring charges includes $8$6 million of costs associated with converting the Stern's stores to Macy's (including advertising, credit card issuance and promotion and other name change expenses), $10$2 million of costs to close and sell certain Stern's stores, $1$2 million of Liberty House duplicate central office costs, $1 million for Liberty House data processing conversion costs and $7$9 million of
severance related to the Stern's closure.disposition of a Fingerhut Warehouse. As previously communicated, the Company anticipates incurring approximately $15$40 - $50 million of additional restructuring charges related to the closure of Stern's and approximately $50-$60 million of
additional restructuring charges related to the Macy's West integration of Liberty House during the remainder of 2001.
20 01.
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.
Net interest expense was $100 million for the secondthird quarter of 2001, compared to $108$111 million for the secondthird quarter of 2000, primarily due tobenefiting from lower interest rates and the lower levels of borrowings.
The Company's effective income tax rate of 48.8% for the secondthird quarter of 2001 differs from the federal income tax statutory rate of 35.0% principally because of the effect of the disposition of
a subsidiary, state and local income taxes and permanent differences arising from the amortization of intangible assets. Income tax expense
The extraordinary item for the secondthird quarter of 2001 reflects a $44 million benefit related torepresents the recognitionafter-tax expenses associated with the repurchase of the effect of the difference between the financial reporting
and tax bases of the Company's investment in Stern's
Department Stores, Inc. upon disposition.
$350 million 6.125% Term Enhanced ReMarketable Securities.
Comparison of the 2639 Weeks Ended August 4,November 3, 2001 and July 29,October 28, 2000
Net sales for 2001 totaled $7,554$11,329 million, compared to net sales of $8,097$12,292 million for 2000, a decrease of 6.7%, in part
reflecting7.8%. The sales decrease reflects the difficult economic climate, the events of September 11th and resulting further economic weakness, the strategic downsizing of Fingerhut and the closing of Stern's. Net sales for department stores for 2001 were $7,044$10,519 million, compared to net sales of $7,252$11,034 million for 2000, a decrease of 2.9%4.7%. On a comparable store basis (sales from stores in operation throughout 2000 and 2001, including Stern's stores in operation throughout the first quarter of 2000 and 2001), net sales for department stores for 2001 decreased 3.1%5.0% compared to 2000. Net sales for Fingerhut totaled $510$810 million for 2001 compared to $845$1,258 million for 2000, reflecting the strategic downsizing of that business.
Cost of sales was 60.4%60.6% of net sales for 2001, compared to 59.0%59.6% for 2000. Cost of sales as a percent of net sales for department stores, excluding the $26$35 million Stern's restructuring charges,and Liberty House inventory valuation adjustments, was 60.8%61.0% in 2001, an increase of 1.21.0 percentage pointspoint compared to the same period a year ago, reflecting higher markdowns taken in 2001 which enabledwere needed, given the Companylarge decline in sales, to keepreduce inventories both current and atto more appropriate levels. Cost of sales as a percent of net sales for Fingerhut was 49.4%50.1% in 2001, a decrease of 3.73.0 percentage points from the same period a year ago, excluding the 2000 inventory valuation adjustments, primarily due to a shift in the 2001 sales mix to 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.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
SG&A expenses were 33.5%34.0% of net sales for 2001 compared to 35.2% for 2000. Department store SG&A expenses increased 1.11.5 percentage points to 31.8%32.4% as a percent of department store net sales in 2001, reflecting slightly higherrelatively flat operating expenses on the decreased sales level. Fingerhut's SG&A expenses as a percent of net sales were 43.4%43.2%, a decrease of 23.721.0 percentage points, primarily as a result of the higher bad debt expenses recorded in 2000.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
The Company recorded $81$113 million of restructuring charges during 2001 primarily related to the closure of the Stern's department store division and the Macy's West integration of Liberty House, including $26$35 million of inventory valuation adjustments as a part of cost of sales. The remaining $55$78 million of restructuring charges includes $15$21 million of costs associated with converting the Stern's stores to Macy's (including advertising, credit card issuance and promotion and other name change expenses), $10$11 million of costs to close and sell certain Stern's stores, $9 million of Stern's duplicate central office costs, and $15$16 million of severance costs related to the Stern's closure.
closure, $3 million of Liberty House duplicate central office costs, $1 million for Liberty House data processing conversion costs and $9 million related to the disposition of a Fingerhut Warehouse.
During 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.
Net interest expense was $197$297 million for 2001, compared to $207$318 million for 2000, primarily due tobenefiting from lower interest rates and the lower levels of borrowings.
The Company's effective income tax rate for 2001 differs from the federal income tax statutory rate of 35.0% principally because of the effect of the disposition of a subsidiary, state and local income taxes and permanent differences arising from the amortization of intangible assets. Income tax expense for 2001 reflects a $44 million benefit related to the recognition of the effect of the difference between the financial reporting and tax bases of the Company's investment in Stern's Department Stores, Inc. upon disposition.
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 2001 was $776$623 million, compared to $444$268 million for 2000, principally as a result of a greater decrease in accounts receivable and a smaller increase in merchandise inventories.
Net cash used by investing activities was $413$615 million for 2001, including the purchase of Liberty House. Investing activities for 2001 also included purchases of property and equipment totaling $222$428 million and capitalized software of $45$68 million. The Company opened oneeight full line department store in
Redding, California, onestores, two furniture gallery in Cherry Hill, New
Jerseygalleries and one furniture gallery in Queens, New York in Augustbedding store during 2001.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and plans to open eight additional department storesAnalysis
of Financial Condition and two
bedding stores during the remainderResults of 2001.
Operations (Continued)
Net cash used by the Company for all financing activities was $355$34 million in 2001. During 2001, the Company issued $500 million of 6.625% Senior Notes due 2011.2011 and $500 million of 6.625% Senior Notes due 2008. The Company repaid $662$932 million of borrowings during 2001, consisting principally of $547$441 million of net short-term borrowings, the $350 million 6.125% Term Enhanced ReMarketable Securities and $110 million of 10% Senior Notes. The Company purchased 6.47.4 million shares of its Common Stock under its stock repurchase program during 2001 at an approximate cost of $270$300 million. On May 18, 2001, the Board of Directors approved a $500 million increase to the current stock repurchase program increasing the authorization to $1,500 million. As of August 4,November 3, 2001, the Company had approximately $630$600 million of the $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 marketmarke t conditions, alternate uses of capital and other factors.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
On June 29, 2001, the Company entered into new bank credit agreements which replaced its existing bank credit agreements. The new credit agreements provide for a $1,200 million unsecured revolving credit facility with a termination date of June 29, 2006 and a $400 million unsecured revolving credit facility with a termination date of June 28, 2002. As of August 4,November 3, 2001, there were no revolving credit loans outstanding under the new bank credit agreements.
On August 23,November 29, 2001, the Company issued $500announced plans to streamline certain department store related mail catalog and electronic commerce businesses. The Company anticipates incurring approximately $50-60 million of 6.625%
Senior Notes due 2008. The proceeds were used to repurchase
the $350 million 6.125% Term Enhanced ReMarketable Securities
("TERMS"), repay short-term borrowings and for general
corporate purposes. As a result, $350 million of short-term
debt was reclassified to long-term debt as of August 4, 2001.
On September 4, 2001, the $350 million TERMS were repurchased
and as a result, the Company will record an extraordinary item
of approximately $9 million, net of the income tax benefit,restructuring charges in the 13-week period ending November 3, 2001.
fourth quarter of 2001 in connection with this reorganization, of which approximately $40 million would represent the non-cash write down of fixed assets and capitalized software.
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 existing 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")actions filed on behalf of persons who purchased shares of the Company between February 23, 2000 and July 20, 2000. The Complaints
wereOriginally filed onin 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.York, the actions have been consolidated into a single case and a consolidated amended complaint (the "Complaint") has been filed. The Complaints
allegeComplaint alleges violations 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 allegationsal legations contained in the ComplaintsComplaint are without merit and intends to defend vigorously against those allegations.
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," "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 subjects ubject to various risks and uncertainties, including (a) risks and uncertainties relating to the possible invalidity of the underlying beliefs and assumptions, (b) possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions, and (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.officials, and (d) attacks or threats of attacks by terrorists or acts of war. 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, reintegrationreinteg ration 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-
lookingforward-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-looking statements.
PART II -- OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
Item 6. Exhibits and Reports on Form 8-K
A.
(a)Exhibits
10.1 364-Day Credit Agreement,
4.1 Sixth Supplemental Trust Indenture dated as of June 29,August 23, 2001, by and among the Company as Borrower, the
Initial Lenders Named Herein, as Initial Lenders,
and Citibank, N.A., as Administrative Agent and as
Paying Agent, The Chase Manhattan Bank, as
Administrative Agent, Fleet National Bank, as
Syndication Agent, and Bank of America, N.A., The
Bank of New York and Credit Suisse First Boston,
as Documentation Agents.
10.2 Five Year Credit Agreement, dated as of June 29,
2001,Trustee (incorporated by and among the Company, as Borrower, the
Initial Lenders Named Herein, as Initial Lenders,
Citibank, N.A., as Administrative Agent and as
Paying Agent, The Chase Manhattan Bank, as
Administrative Agent, Fleet National Bank, as
Syndication Agent, and Bank of America, N.A., The
Bank of New York and Credit Suisse First Boston,
as Documentation Agents
10.3 First Amendment dated as of May 25, 2001reference to Exhibit 4 to the Amended and Restated Pooling and Servicing Agreement,
dated March 18, 1998, by and among Fingerhut Receivables,
Inc., as Transferor, Axsys National Bank, as Servicer,
and The Bank of New York (Delaware), as Trustee.
B. Company's Current
Report on Form 8-K filed on August 22, 2001).
(b)Reports on Form 8-K
1. Current Report on Form 8-K dated June 19,August 15, 2001 reporting matters under Item 5 and the
related exhibit under Item 7 thereof.
2. Current Report on Form 8-K dated July 9,August 16, 2001 reporting matters under Item 5 and the
related exhibit under Item 7 thereof.
3. Current Report on Form 8-K dated August 22, 2001 reporting matters under Item 5 and the
related exhibit under 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 September 18, 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)
FEDERATED DEPARTMENT STORES, INC. | |
Date December 18, 2001 | /s/ Dennis J. Broderick |
/s/ Joel A. Belsky |