SECURITIES AND EXCHANGE COMMISSION
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
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
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.
194,892,944 shares of the Registrant's Common Stock, $.01 par
value, were outstanding as of June 2, 2001.
PART I -- FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(MILLIONS, EXCEPT PER SHARE FIGURES)
13 Weeks Ended 13 Weeks Ended
May 5, 2001 April 29, 2000
Net Sales $ 3,822 $ 4,032
Cost of sales:
Recurring 2,287 2,395
Inventory valuation adjustments
related to Stern's closure 19 -
Total cost of sales 2,306 2,395
Selling, general and
administrative expenses 1,292 1,384
Restructuring charges 27 -
Operating Income 197 253
Interest expense (101) (100)
Interest income 4 1
Income Before Income Taxes 100 154
Federal, state and local income
tax expense (42) (65)
Net Income $ 58 $ 89
Basic earnings per share $ .30 $ .42
Diluted earnings per share $ .29 $ .41
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(MILLIONS)
May 5, February 3, April 29,
2001 2001 2000
ASSETS:
Current Assets:
Cash $ 519 $ 322 $ 249
Accounts receivable 3,656 4,072 4,031
Merchandise inventories 4,050 3,812 3,869
Supplies and prepaid expenses 196 200 217
Deferred income tax assets 290 294 176
Total Current Assets 8,711 8,700 8,542
Property and Equipment - net 6,710 6,830 6,741
Intangible Assets - net 884 896 1,720
Other Assets 618 586 652
Total Assets $16,923 $17,012 $17,655
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Short-term debt $ 1,399 $ 1,722 $ 1,352
Accounts payable and
accrued liabilities 2,946 2,903 3,006
Income taxes 104 244 83
Total Current Liabilities 4,449 4,869 4,441
Long-Term Debt 4,792 4,374 4,757
Deferred Income Taxes 1,359 1,393 1,448
Other Liabilities 558 554 548
Shareholders' Equity 5,765 5,822 6,461
Total Liabilities and
Shareholders' Equity $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
(UNSUDITED)
(MILLIONS)
13 Weeks Ended 13 Weeks Ended
May 5, 2001 April 29, 2000
Cash flows from operating activities:
Net income $ 58 $ 89
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 170 161
Amortization of intangible assets 12 21
Amortization of financing costs 1 2
Amortization of unearned restricted stock 1 3
Restructuring charges 46 -
Changes in assets and liabilities:
Decrease in accounts receivable 418 284
Increase in merchandise inventories (237) (277)
Decrease in supplies and
prepaid expenses 4 13
Increase in other assets not
separately identified (4) (13)
Decrease in accounts payable and
accrued liabilities not
separately identified (58) (78)
Decrease in current income taxes (140) (142)
Increase (decrease) in deferred
income taxes (29) 1
Increase (decrease) in other
liabilities not separately
identified 1 (6)
Net cash provided by operating
activities 243 58
Cash flows from investing activities:
Purchase of property and equipment (53) (69)
Capitalized software (28) (15)
Investments in companies - (35)
Disposition of property and equipment - -
Net cash used by investing
activities (81) (119)
Cash flows from financing activities:
Debt issued 500 237
Financing costs (7) -
Debt repaid (402) (1)
Increase in outstanding checks 60 36
Acquisition of treasury stock (147) (218)
Issuance of common stock 31 38
Net cash provided by financing
activities 35 92
Net increase in cash 197 31
Cash at beginning of period 322 218
Cash at end of period $ 519 $ 249
Supplemental cash flow information:
Interest paid $ 112 $ 108
Interest received 2 1
Income taxes paid
(net of refunds received) 205 210
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 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 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 weeks ended
May 5, 2001 and April 29, 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 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.
2. RESTRUCTURING CHARGES
The Company recorded $46 million of restructuring charges
during the first quarter of 2001 related to the closure 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 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 employees and $3
million was accrued as of May 5, 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, $5 million was paid to employees during
the first quarter of 2001 and $5 million remains accrued as of
May 5, 2001.
FEDERATED DEPARTMENT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of $1,408 million of Fingerhut
accounts receivable, net of $531 million of allowance for
doubtful accounts and $2,248 million of other Federated
accounts receivable, net of $70 million of allowance for
doubtful accounts as of 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 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
May 5, April 29,
2001 2000
(millions)
Net Sales
Department Stores $3,556 $3,573
Fingerhut 266 459
Total $3,822 $4,032
Operating income
Department Stores $ 211 $ 288
Fingerhut 30 (3)
Corporate and other (44) (32)
Total $ 197 $ 253
For the 13 weeks ended May 5, 2001, the operating income for
the department store segment includes costs and expenses
associated with the closure of the Stern's department store
division (see Note 2).
Depreciation and amortization expense
Department Stores $ 160 $ 151
Fingerhut 9 10
Corporate and other 14 24
Total $ 183 $ 185
FEDERATED DEPARTMENT STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share:
13 Weeks Ended
May 5, 2001 April 29, 2000
(millions, except per share data) Income Shares Income Shares
Net income and average number of
shares outstanding $ 58 197.5 $ 89 212.3
Shares to be issued under
deferred compensation plans - .5 - .5
$ 58 198.0 $ 89 212.8
Basic earnings per share $ .30 $ .42
Effect of dilutive securities:
Warrants - 2.9 - 1.9
Stock options - 3.2 - 1.6
$ 58 204.1 $ 89 216.3
Diluted earnings per share $ .29 $ .41
In addition to the warrants and stock options reflected in the
foregoing table, stock options to purchase 4.6 million and 9.6
million shares of common stock at prices ranging from $38.06
to $79.44 per share were outstanding at May 5, 2001 and April
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.
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
"first quarter of 2001" and "first quarter of 2000" are to the
Company's 13-week fiscal periods ended May 5, 2001 and April
29, 2000, respectively.
RESULTS OF OPERATIONS
COMPARISON OF THE 13 WEEKS ENDED MAY 5, 2001 AND APRIL 29, 2000
Net sales for the first quarter of 2001 totaled $3,822
million, compared to net sales of $4,032 million for the first
quarter of 2000, a decrease of 5.2%, in part reflecting the
strategic downsizing of Fingerhut. Net sales for department
stores for the first quarter of 2001 were $3,556 million,
compared to net sales of $3,573 million for the first quarter
of 2000, a decrease of 0.5%. On a comparable store basis
(sales from stores in operation throughout the first quarter
of 2000 and the first quarter of 2001), net sales for
department stores for the first 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,
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 same period last year. The Company believes
that, unless the department store sales trend improves, it is
likely that earnings for the second quarter will fall below
expectations. The Company still hopes to attain its projected
earnings of $4.00 to $4.25 a share for fiscal 2001, although
it may be difficult to achieve unless there is sales improvement.
Cost of sales was 60.3% of net sales for the first quarter of
2001, compared to 59.4% for the first quarter of 2000. Cost
of sales as a percent of net sales for department stores,
excluding the $19 million Sterns restructuring charges, was
60.7% in the first quarter of 2001, an increase of 0.5
percentage points compared to the same period a year ago,
reflecting higher markdowns taken in the first quarter of 2001
which enabled the Company to keep inventories both current and
at appropriate levels. Cost of sales as a percent of net
sales for Fingerhut was 48.6% in the first quarter of 2001, a
decrease of 4.3 percentage points, primarily due to a shift in
the 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
33.8% of net sales for the first quarter of 2001 compared to
34.3% for the first quarter of 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 40.2%, 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 first quarter of 2000.
The Company recorded $46 million of restructuring costs during
the first quarter of 2001 related to the closure 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 $4 million of advertising costs. As
previously communicated, the Company anticipates incurring
approximately $30-$50 million of additional restructuring
charges related to the closure of Stern's during the remainder
of 2001.
Net interest expense was $97 million for the first quarter of
2001, compared to $99 million for the first quarter of 2000.
The Company's effective income tax rate of 41.8% for the
first quarter of 2001 differs from the federal income tax
statutory rate of 35.0% principally because of the effect of
state and local income taxes and permanent differences arising
from the amortization of intangible 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 the first quarter
of 2001 was $243 million, compared to the $58 million provided
in the first quarter of 2000, reflecting a greater decrease in
accounts receivable due to the strategic downsizing of the
Fingerhut business.
Net cash used by investing activities was $81 million for the
first quarter of 2001. Investing activities for the first
quarter of 2001 included purchases of property and equipment
totaling $53 million and capitalized software of $28 million.
The Company plans to open 9 new department stores, 3 new
furniture galleries and 2 new bedding stores during the
remainder of 2001.
Net cash provided to the Company by all financing activities
was $35 million for the first quarter of 2001. During the
first quarter of 2001, the Company issued $500 million of
6.625% Senior Notes due 2011. The Company repaid $402 million
of borrowings during the first quarter of 2001, consisting
principally of $290 million of net short-term borrowings and
$110 million of 10% Senior Notes. The Company purchased 3.4
million shares of its Common Stock under its stock repurchase
program during the first quarter of 2001 at an approximate
cost of $140 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 May 5, 2001, including the effect of the
May 18, 2001 authorization, the Company had approximately $750
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 market conditions, alternate
uses of capital and other factors.
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") 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 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
allegations contained in the Complaints are without merit
and intends to defend vigorously against 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
ratification were 1,942,374, the 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," "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
(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.
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-looking
statements.
PART II -- OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Fifth Supplemental Trust Indenture dated as of
March 27, 2001, by and among the Company and
Citibank, N.A., as Trustee (incorporated by
reference to Exhibit 4 to the Company's Current
Report on Form 8-K filed on March 26, 2001).
(b) Reports on Form 8-K
1. Current Report on Form 8-K filed on March 22, 2001
reporting matters under Item 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 June 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)