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
August 3, 1996.
FEDERATED DEPARTMENT STORES, INC.
151 West 34th Street
New York, New York 10001
(212) 695-4400
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.
207,811,452 shares of the Registrant's Common Stock, $.01 par
value, were outstanding as of August 31, 1996.
PART I -- FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Operations
(Unaudited)
(thousands, except per share figures)
13 Weeks Ended 26 Weeks Ended
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
Net Sales, including leased
department sales $3,284,228 $3,047,249 $6,584,893 $6,035,255
Cost of sales 1,995,573 1,862,915 4,010,221 3,686,836
Selling, general and
administrative expenses 1,113,984 1,067,887 2,267,049 2,137,846
Business integration and
consolidation expenses 98,917 89,023 176,605 172,345
Charitable contribution to
Federated Department Stores
Foundation - 25,581 - 25,581
Operating Income 75,754 1,843 131,018 12,647
Interest expense (126,996) (114,057) (250,341) (223,558)
Interest income 11,382 10,841 22,446 22,790
Loss Before Income Taxes (39,860) (101,373) (96,877) (188,121)
Federal, state and local income
tax benefit 12,667 34,447 31,738 64,196
Net Loss $ (27,193) $ (66,926) $ (65,139) $ (123,925)
Loss per Share $ (.13) $ (.37) $ (.31) $ (.68)
Average Number of Shares
Outstanding 207,663 182,830 207,187 182,754
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
Consolidated Balance Sheets
(Unaudited)
(thousands)
August 3, February 3, July 29,
1996 1996 1995
ASSETS:
Current Assets:
Cash $ 134,133 $ 172,518 $ 238,173
Accounts receivable 2,768,417 2,842,077 2,157,512
Merchandise inventories 3,234,271 3,094,848 2,694,564
Supplies and prepaid expenses 176,729 176,411 107,509
Deferred income tax assets 115,541 74,511 198,123
Total Current Assets 6,429,091 6,360,365 5,395,881
Property and Equipment - net 6,270,870 6,305,167 5,261,698
Intangible Assets - net 731,047 744,689 1,027,033
Notes Receivable 204,035 415,066 407,276
Other Assets 397,326 469,763 365,436
Total Assets $ 14,032,369 $ 14,295,050 $ 12,457,324
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Short-term debt $ 375,363 $ 733,115 $ 259,988
Accounts payable and accrued
liabilities 2,386,569 2,358,543 2,139,335
Income taxes 3,211 6,411 35,729
Total Current Liabilities 2,765,143 3,098,069 2,435,052
Long-Term Debt 5,644,524 5,632,232 5,121,445
Deferred Income Taxes 730,725 732,936 873,285
Other Liabilities 561,847 558,127 503,223
Shareholders' Equity 4,330,130 4,273,686 3,524,319
Total Liabilities and Shareholders'
Equity $ 14,032,369 $ 14,295,050 $ 12,457,324
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(thousands)
26 Weeks Ended 26 Weeks Ended
August 3, 1996 July 29, 1995
Cash flows from operating activities:
Net loss $ (65,139) $ (123,925)
Adjustments to reconcile net loss to
net cash provided (used) by operating
activities:
Depreciation and amortization of
property and equipment 251,657 206,556
Amortization of intangible assets 13,642 21,656
Amortization of financing costs 14,159 9,955
Amortization of original issue discount 225 981
Amortization of unearned restricted stock 1,334 2,569
Changes in assets and liabilities:
Decrease in accounts receivable 273,457 108,139
Increase in merchandise inventories (139,423) (313,943)
Increase in supplies and prepaid
expenses (318) (7,950)
Decrease in other assets not
separately identified 22,517 29,982
Increase (decrease) in accounts
payable and accrued liabilities
not separately identified 49,213 (9,700)
Decrease in current income taxes (3,200) (29,590)
Decrease in deferred income taxes (43,241) (69,064)
Increase (decrease) in other
liabilities not separately identified 3,420 (1,612)
Net cash provided (used) by operating
activities 378,303 (175,946)
Cash flows from investing activities:
Purchase of property and equipment (264,402) (169,932)
Disposition of property and equipment 105,053 23,841
Net cash used by investing activities (159,349) (146,091)
Cash flows from financing activities:
Debt issued 688,665 597,106
Financing costs (11,016) (3,859)
Debt repaid (1,034,350) (208,916)
Decrease in outstanding checks (21,187) (36,676)
Acquisition of treasury stock (598) (375)
Issuance of common stock 121,147 6,440
Net cash (used) provided by financing
activities (257,339) 353,720
(Continued)
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(thousands)
26 Weeks Ended 26 Weeks Ended
August 3, 1996 July 29, 1995
Net (decrease) increase in cash $ (38,385) $ 31,683
Cash at beginning of period 172,518 206,490
Cash at end of period $ 134,133 $ 238,173
Supplemental cash flow information:
Interest paid $ 219,793 $ 168,239
Interest received 13,611 23,046
Income taxes paid (net of refunds
received) 9,368 28,861
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, 1996 (the "1995 10-K"). The
accompanying Consolidated Financial Statements should be read
in conjunction with the Consolidated Financial Statements and
notes thereto in the 1995 10-K.
Because of the seasonal nature of the general merchandising
business, the results of operations for the 13 and 26 weeks
ended August 3, 1996 and July 29, 1995 (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 26 weeks
ended August 3, 1996 and July 29, 1995, 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.
2. Acquisition of Companies
The Company acquired Broadway Stores, Inc. ("Broadway")
pursuant to an Agreement and Plan of Merger dated August 14,
1995. The total purchase price of the Broadway acquisition
was approximately $1,620.0 million, consisting of (i) 12.6
million shares of common stock and options to purchase an
additional 1.5 million shares of common stock valued at $352.9
million and (ii) $1,267.1 million of Broadway debt. In
addition, a wholly owned subsidiary of the Company purchased
$422.3 million of mortgage indebtedness of Broadway for 6.8
million shares of common stock of the Company and a $242.3
million promissory note.
The Broadway acquisition was accounted for under the purchase
method and, accordingly, the results of operations of Broadway
have been included in the Company's results of operations
since July 29, 1995 and the purchase price has been allocated
to Broadway's assets and liabilities based on their estimated
fair values as of that date.
The following unaudited pro forma condensed statements of
operations gives effect to the Broadway acquisition and
related financing transactions as if such transactions had
occurred at the beginning of the period presented.
13 Weeks Ended 26 Weeks Ended
July 29, 1995 July 29, 1995
(millions, except per share figures)
Net sales $3,507.9 $6,919.8
Net loss (90.3) (174.2)
Loss per share (.45) (.86)
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
The foregoing unaudited pro forma condensed statements of
operations give effect to, among other pro forma adjustments,
the following:
(i) Interest expense on debt incurred in connection with the
acquisition and the reversal of certain of Broadway's historical
interest expense;
(ii) Amortization, over 20 years, of the excess of cost over net
assets acquired;
(iii) Depreciation and amortization adjustments related to
fair market value of assets acquired;
(iv) Adjustments to income tax expense related to the above; and
(v) Adjustments for shares issued.
The foregoing unaudited pro forma information is provided for
illustrative purposes only and does not purport to be
indicative of results that actually would have been achieved
had the Broadway acquisition been consummated on the first day of
the periods presented or of future results.
3. Business Integration and Consolidation Expenses
During the 26 weeks ended August 3, 1996, the Company recorded
$176.6 million of business integration and consolidation
expenses associated with the integration of Broadway into the
Company ($148.7 million) and the ongoing consolidation of
Macy's and other support operation restructurings ($27.9
million). Included in the Broadway integration expenses were
$65.7 million of inventory valuation adjustments to
merchandise in lines of business which the Company, subsequent
to acquisition, eliminated or replaced. The remainder of the
Broadway integration expenses relate primarily to the costs
associated with converting the Broadway stores to other name
plates (including advertising, credit card issuance and
promotion, and other name change expenses) and the costs of
operating Broadway central office functions for a transitional
period.
During the 26 weeks ended July 29, 1995, the Company recorded
$172.3 million of business integration and consolidation
expenses associated with the integration of Macy's into the
Company ($145.2 million) and the consolidation of the
Company's Rich's/Goldsmith's and Lazarus divisions ($27.1
million). The primary components of the Macy's integration
expenses were $67.8 million of inventory valuation adjustments
to merchandise in lines of business which the Company,
subsequent to the acquisition, eliminated or replaced, $21.6
million of costs to close and sell certain stores and to
convert a number of stores to other nameplates, $19.7 million
of severance costs and $36.1 million of other costs and
expenses associated with integrating Macy's into the Company.
Of the $27.1 million of expenses associated with the
divisional consolidation referred to above, $20.4 million
relates to inventory valuation adjustments to merchandise of
the affected divisions in lines of business which were
eliminated or replaced as a result of the consolidation.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Comparison of the 13 Weeks Ended August 3, 1996 and July 29, 1995
For purposes of the following discussion, all references to
"second quarter of 1996" and "second quarter of 1995" are to
the Company's 13-week fiscal periods ended August 3, 1996 and
July 29, 1995, respectively.
Net sales for the second quarter of 1996 totaled $3,284.2
million, compared to net sales of $3,047.3 million for the
second quarter of 1995, an increase of 7.8%. Net sales for
the second quarter of 1996 include the stores added in the
Broadway acquisition. On a comparable store basis, net sales
for the second quarter of 1996 increased 0.8% over the second
quarter of 1995. Net sales for the second quarter of 1996
were somewhat negatively impacted by the Company's efforts to
gradually reduce the degree to which it utilizes promotional
selling practices with respect to home-related merchandise.
Cost of sales was 60.8% as a percent of net sales for the
second quarter of 1996 compared to 61.1% for the second
quarter of 1995. The improvement reflects the lower level of
promotional activity for home-related merchandise and
increased sales of higher margin private label merchandise.
Cost of sales was not impacted by the valuation of merchandise
inventory on the last-in, first-out basis in the second
quarter of 1996 or the second quarter of 1995.
Selling, general and administrative expenses were 33.9% as a
percent of net sales for the second quarter of 1996 compared
to 35.1% for the second quarter of 1995. The improvement
primarily reflects the operating efficiencies resulting from
the integration of Macy's into the Company in fiscal 1995 and
other support operation restructurings.
Business integration and consolidation expenses for the second
quarter of 1996 consist of $82.7 million associated with the
integration of Broadway and $16.2 million related to the
ongoing consolidation of Macy's and other support operation
restructurings. During the remainder of fiscal 1996, the
Company expects to incur approximately $120.0 million of
additional business integration and consolidation expenses in
connection with the consolidation of Broadway, the ongoing
consolidation of Macy's and the support operation
restructurings.
Business integration and consolidation expenses for the second
quarter of 1995 consist of $71.7 million associated with the
integration of Macy's into the Company and $17.3 million
related to the consolidation of the Company's
Rich's/Goldsmith's and Lazarus divisions.
Net interest expense was $115.6 million for the second quarter
of 1996, compared to $103.2 million for the second quarter of
1995. The higher interest expense for the second quarter of
1996 is principally due to the higher levels of borrowings
incurred in connection with the acquisition of Broadway.
The Company's effective income tax rate of 31.8% for the
second quarter of 1996 differs from the federal income tax
statutory rate of 35% principally because of permanent
differences arising from the amortization of intangible assets
and state and local income taxes.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Comparison of the 26 Weeks Ended August 3, 1996 and July 29, 1995
For purposes of the following discussion, all references to
"1996" and "1995" are to the Company's 26 week fiscal periods
ended August 3, 1996 and July 29, 1995, respectively.
Net sales for 1996 were $6,584.9 million compared to $6,035.3
million for 1995, an increase of 9.1%. On a comparable store
basis, net sales for 1996 increased 2.7%, over 1995. Net
sales for 1996 were somewhat negatively impacted by the
Company's efforts to gradually reduce the degree to which it
utilizes promotional selling practices with respect to home-
related merchandise.
Cost of sales was 60.9% as a percent of net sales for 1996
compared to 61.1% for 1995. The improvement reflects the
lower level of promotional activity for home-related
merchandise and increased sales of higher margin private label
merchandise. Cost of sales includes no charge in 1996
compared to a charge of $1.8 million in 1995 resulting from
the valuation of merchandise inventory on the last-in, first-
out basis.
Selling, general and administrative expenses were 34.4% as a
percent of net sales for 1996 compared to 35.4% for 1995. The
improvement primarily reflects the operating efficiencies
resulting from the integration of Macy's into the Company in
fiscal 1995 and other support operation restructurings.
Business integration and consolidation expenses for 1996
consist of $148.7 million associated with the integration of
Broadway and $27.9 million related to the ongoing
consolidation of Macy's and other support operation
restructurings.
Business integration and consolidation expenses for 1995
consist of $145.2 million associated with the integration of
Macy's into the Company and $27.1 million related to the
consolidation of the Company's Rich's/Goldsmith's and Lazarus
divisions.
Net interest expense was $227.9 million for 1996 compared to
$200.8 million for 1995. The higher interest expense for
1996 is principally due to higher levels of borrowing incurred
in connection with the acquisition of Broadway.
The Company's effective income tax rate of 32.8% for 1996
differs from the federal income tax statutory rate of 35.0%
principally because of permanent differences arising from the
amortization of intangible assets and state and local income
taxes.
Liquidity and Capital Resources
For purposes of the following discussion, all references to
"1996" and "1995" are to the Company's 26 week fiscal periods
ended August 3, 1996 and July 29, 1995, respectively.
The Company's principal sources of liquidity are cash from
operations, cash on hand and available credit facilities.
FEDERATED DEPARTMENT STORES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Net cash provided by operating activities in 1996 was $378.3
million an increase of $554.2 million compared to net cash
used by operating activities of $175.9 million in 1995. In
addition to improved operating results, the most significant
factors contributing to this improvement were greater
reductions in customer accounts receivable due to Broadway
store closings and lower increases in merchandise inventories.
Net cash used in investing activities was $159.3 million in
1996 with purchases of property and equipment totaling $264.4
million and dispositions of property and equipment,
principally Broadway stores, totaling $105.1 million. During
1996, the Company opened two new furniture galleries,
converted an existing Stern's store to a Macy's store and
closed the existing Macy's store in that trading area and
closed three other stores.
Net cash used by the Company for all financing activities was
$257.3 million in 1996. During 1996, the Company repaid
$1,034.4 million of debt, including $386.5 million of
commercial paper borrowings under a receivables based credit
facility of a subsidiary of Broadway which was terminated on
May 14, 1996, $64.0 million of asset-backed notes issued by a
subsidiary of Broadway and $214.2 million of term borrowings
and $230.0 million of revolving credit loans under its bank
credit facility.
During 1996, the Company issued $450.0 million of 8-1/2%
Senior Notes due 2003 and a wholly owned subsidiary of the
Company issued $238.8 million of asset-backed certificates in
two separate classes. The two classes are: (i) $218.0
million in aggregate principal amount of 6.70% Class A Asset-
Backed Certificates, Series 1996-1 due May 15, 2001 and (ii)
$20.8 million in aggregate principal amount of 6.85% Class B
Asset-Backed Certificates, Series 1996-1 due June 15, 2001.
The Company also issued 4.1 million shares of common stock and
received $99.0 million in proceeds upon the exercise of its
Series A Warrants.
On May 3, 1997, a $200.0 million installment of a note
receivable matures and $176.0 million of borrowings under a
note monetization facility become due and payable.
Accordingly, as of August 3, 1996, such amounts have been
included in accounts receivable and short-term debt,
respectively.
Management believes the department store industry will
continue to consolidate. Accordingly, the Company intends
from time to time to consider additional acquisitions of
department store assets and companies.
Management of the Company 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
other possible capital markets transactions, including the
refinancing of indebtedness.
PART II -- OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
Item 1. Legal Proceedings
The information regarding legal proceedings in the
Company's Quarterly Report on Form 10-Q for the period
ended May 4, 1996 covers events known to the Company
and occurring prior to June 4, 1996. Subsequent to
that date, the Company and its subsidiaries have been
involved in various legal proceedings incidental to the
normal course of their business. Management does not
expect that any of such proceedings will have a
material adverse effect on the Company's consolidated
financial position or results of operations.
Item 5. Other Information
On June 4, 1996, the Company and GE Capital Consumer
Card Co. ("GE Bank") and certain of their respective
affiliates entered into various agreements pursuant to
which the contractual arrangements previously entered
into between Macy's and GE Bank were modified to
provide for, among other things, a methodology that
will govern the allocation of the ownership of Macy's
credit card accounts between GE Bank and the Company.
In addition, the parties entered into certain cross-
servicing arrangements with a view to facilitating
uniform treatment of Company-owned Macy's accounts and
GE Bank-owned Macy's accounts.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amended and Restated Credit Card Program
Agreement, dated as of June 4,
1996, by and among GE Capital Consumer Card Co.
("GE Bank"), the Company, FDS National Bank ("FDS
Bank"), Macy's East, Inc., Macy's West, Inc.,
Bullock's, Inc., Broadway Stores, Inc., FACS
Group, Inc. ("FACS") and MSS-Delaware, Inc. *
10.2 Amended and Restated Trade Name and Service Mark
License Agreement,
dated as of June 4, 1996, by and among the
Company, GE Bank and General Electric Capital
Corporation ("GE Capital")
10.3 FACS Credit Services and License Agreement, dated
as of June 4, 1996, by and
among GE Bank, GE Capital and FACS *
10.4 FDS Guaranty, dated as of June 4, 1996
10.5 GE Capital Credit Services and License Agreement,
dated as of June 4, 1996, by and among GE Capital,
FDS Bank, the Company and FACS *
PART II -- OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
10.6 GE Capital/GE Bank Credit Services Agreement,
dated as of June 4, 1996, by
and among GE Capital and GE Bank *
10.7 Amended and Restated Commercial Accounts
Agreement, dated as of June 4,
1996, by and among GE Capital, the Company, FDS
Bank, Macy's East, Inc., Macy's West, Inc.,
Bullock's, Inc., Broadway Stores, Inc., FACS and
MSS-Delaware, Inc. *
11 Statement re computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter
ended August 3, 1996.
* Confidential portions of this Exhibit were omitted and filed
separately with the SEC pursuant to Rule 24b-2 under the Exchange
Act.
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 17, 1996 /s/ Dennis J. Broderick
Dennis J. Broderick
Senior Vice President, General Counsel
and Secretary
/s/ John E. Brown
John E. Brown
Senior Vice President and Controller
(Principal Accounting Officer)