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 2, 1997.
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 Incorporation) (Commission File No.) (I.R.S. Employer
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.
209,546,590 shares of the Registrant's Common Stock, $.01 par value,
were outstanding as of August 30, 1997.
PART I -- FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(THOUSAND, EXCEPT PER SHARE FIGURES)
13 Weeks Ended 26 Weeks Ended
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
Net Sales $3,452,829 $3,284,228 $6,861,920 $6,584,893
Cost of sales:
Recurring 2,098,671 1,995,573 4,185,536 4,010,221
Inventory valuation
adjustments related
to consolidation - 29,093 - 65,681
Total cost of sales 2,098,671 2,024,666 4,185,536 4,075,902
Selling, general and
administrative expenses:
Recurring 1,142,298 1,113,984 2,316,464 2,267,049
Business integration
and consolidation
expenses - 69,824 - 110,924
Total selling, general and
administrative expenses 1,142,298 1,183,808 2,316,464 2,377,973
Operating Income 211,860 75,754 359,920 131,018
Interest expense (106,358) (126,996) (221,083) (250,341)
Interest income 7,095 11,382 17,443 22,446
Income (Loss) Before
Income Taxes and
Extraordinary Item 112,597 (39,860) 156,280 (96,877)
Federal, state and local
income tax (expense)
benefit (46,227) 12,667 (65,851) 31,738
Income (Loss) Before
Extraordinary Item 66,370 (27,193) 90,429 (65,139)
Extraordinary Item - loss
on early extinguishment
of debt, net of tax
effect of $24,960 (38,673) - (38,673) -
Net Income (Loss) $ 27,697 $ (27,193) $ 51,756 $ (65,139)
(Continued)
PART I -- FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE FIGURES)
13 Weeks Ended 26 Weeks Ended
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
Earnings (Loss) per Share:
Income (loss) before
extraordinary item $ .31 $ (.13) $ .42 $ (.31)
Extraordinary item (.18) - (.18) -
Net Income (Loss) $ .13 $ (.13) $ .24 $ (.31)
Fully Diluted Earnings
(Loss) per Share:
Income (loss) before
extraordinary item $ .30 $ (.13) $ .42 $ (.31)
Extraordinary item (.17) - (.18) -
Net Income (Loss) $ .13 $ (.13) $ .24 $ (.31)
The accompanying notes are an integral part of these unaudited Consolidated
Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(THOUSANDS)
August 2, February 1, August 3,
1997 1997 1996
ASSETS:
Current Assets:
Cash $ 317,352 $ 148,794 $ 134,133
Accounts receivable 2,498,148 2,834,321 2,768,417
Merchandise inventories 3,371,584 3,245,996 3,234,271
Supplies and prepaid expenses 128,981 109,678 176,729
Deferred income tax assets 105,989 88,513 115,541
Total Current Assets 6,422,054 6,427,302 6,429,091
Property and Equipment - net 6,371,055 6,524,757 6,270,870
Intangible Assets - net 703,761 717,404 731,047
Notes Receivable 3,976 204,400 204,035
Other Assets 373,286 390,280 397,326
Total Assets $13,874,132 $14,264,143 $14,032,369
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Short-term debt $ 1,504,528 $ 1,094,557 $ 375,363
Accounts payable and accrued
liabilities 2,482,362 2,492,195 2,386,569
Income taxes 4,370 8,947 3,211
Total Current Liabilities 3,991,260 3,595,699 2,765,143
Long-Term Debt 3,732,269 4,605,916 5,644,524
Deferred Income Taxes 835,725 830,943 730,725
Other Liabilities 559,001 562,431 561,847
Shareholders' Equity 4,755,877 4,669,154 4,330,130
Total Liabilities and
Shareholders' Equity $13,874,132 $14,264,143 $14,032,369
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 2, 1997 August 3, 1996
Cash flows from operating activities:
Net income (loss) $ 51,756 $ (65,139)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization of property and
equipment 276,875 251,657
Amortization of intangible assets 13,643 13,642
Amortization of financing costs 12,580 14,384
Amortization of unearned restricted stock 560 1,334
Loss on early extinguishment of debt 38,673 -
Changes in assets and liabilities:
Decrease in accounts receivable 336,599 273,457
Increase in merchandise inventories (125,588) (139,423)
Increase in supplies and prepaid expenses (19,303) (318)
(Increase) decrease in other assets not
separately identified (5,150) 22,517
(Decrease) increase in accounts payable and
accrued liabilities not separately
identified (20,997) 49,213
Increase (decrease) in current income taxes 3,459 (3,200)
Increase (decrease) in deferred income taxes 4,230 (43,241)
(Decrease) increase in other liabilities not
separately identified (3,431) 3,420
Net cash provided by operating activities 563,906 378,303
Cash flows from investing activities:
Purchase of property and equipment (218,659) (264,402)
Disposition of property and equipment 89,343 105,053
Decrease in notes receivable 199,997 -
Net cash provided (used) by investing
activities 70,681 (159,349)
Cash flows from financing activities:
Debt issued 849,998 688,665
Financing costs (5,512) (11,016)
Debt repaid (1,356,087) (1,034,350)
Increase (decrease) in outstanding checks 11,165 (21,187)
Acquisition of treasury stock (1,734) (598)
Issuance of common stock 36,141 121,147
Net cash used by financing activities (466,029) (257,339)
(Continued)
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(THOUSANDS)
26 Weeks Ended 26 Weeks Ended
August 2, 1997 August 3, 1996
Net increase (decrease) in cash $ 168,558 $ (38,385)
Cash at beginning of period 148,794 172,518
Cash at end of period $ 317,352 $ 134,133
Supplemental cash flow information:
Interest paid $ 211,911 $ 219,793
Interest received 19,619 13,611
Income taxes paid (net of refunds received) 48,244 9,368
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 1, 1997 (the "1996 10-K"). The accompanying
Consolidated Financial Statements should be read in conjunction with
the Consolidated Financial Statements and notes thereto in the 1996
10-K.
Because of the seasonal nature of the general merchandising
business, the results of operations for the 13 and 26 weeks ended
August 2, 1997 and August 3, 1996 (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 2, 1997 and August 3, 1996, 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.
Earnings (loss) per share are computed on the basis of daily average
number of shares and share equivalents (shares issuable under
outstanding warrants and stock options) outstanding during the
period for the 13 and 26 weeks ended August 2, 1997. For the 13 and
26 weeks ended August 3, 1996, the potential issuance of share
equivalents was anti-dilutive and earnings (loss) per share were
computed on the basis of daily average number of shares outstanding.
The computation of fully diluted earnings (loss) per share takes
into account, if dilutive, the above-described share equivalents and
shares issuable upon the conversion of convertible debt. Statement
of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"), was issued in February 1997. The statement
establishes standards for computing and presenting earnings per
share and is effective for financial statements for periods ending
after December 15, 1997. Adoption of this statement will not have a
material impact on the Company's earnings per share computations.
Certain reclassifications have been made to amounts for the 13 and
26 weeks ended August 3, 1996 to conform with the classifications of
such amounts for the 52 weeks ended February 1, 1997.
2. INVENTORY VALUATION ADJUSTMENTS RELATED TO CONSOLICATION AND
BUSINESS INTEGRATION AND CONSOLIDATION EXPENSES
In connection with the consolidation of merchandise inventories for
acquired and pre-existing businesses, the Company recorded one-time
inventory valuation adjustments related to merchandise in lines of
business that were eliminated or replaced as a separate component of
cost of sales. For the 26 weeks ended August 3, 1996, the amount
recorded related to the consolidation of Broadway into the Company's
Macy's West division.
(Continued)
FEDERATED DEPARTMENT STORES, INC.
NOTES DO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Additionally, the Company incurred certain one-time costs related to
the integration and consolidation of acquired and pre-existing
businesses and classified such costs as business integration and
consolidation expenses as a separate component of selling, general
and administrative expenses. During the 26 weeks ended August 3,
1996, the Company recorded $110.9 million of business integration
and consolidation expenses consisting of $83.0 million of costs
associated with the integration of Broadway into the Company
(related primarily to the incremental costs associated with
converting the Broadway stores to other nameplates, 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), $17.1 million of costs related
to the consolidation of Macy's and $10.8 million of costs related to
other support operation restructurings.
3. EXTRAORDINARY ITEM
On July 14, 1997, the Company issued $300.0 million of 7.45% Senior
Debentures due 2017 and $250.0 million of 6.79% Senior Debentures
due 2027 and on July 28, 1997, the Company entered into new credit
agreements which provide for unsecured revolving credit loans of up
to $2,000.0 million. Using proceeds from these transactions and
other funds, the Company voluntarily prepaid $1,044.3 million of
debt during the 13 weeks ended August 2, 1997. The associated costs
for the debt prepayments were recorded as an extraordinary charge of
$38.7 million, net of an income tax benefit of $25.0 million. The
debt prepaid included all amounts outstanding under the Company's
mortgage loan facility, secured promissory note, certain other
mortgages and previous bank credit facility, all of which were
retired and terminated.
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 2, 1997 AND AUGUST 3, 1996
For purposes of the following discussion, all references to "second
quarter of 1997" and "second quarter of 1996" are to the Company's
13-week fiscal periods ended August 2, 1997 and August 3, 1996,
respectively.
Net sales for the second quarter of 1997 totaled $3,452.8 million,
compared to net sales of $3,284.2 million for the second quarter of
1996, an increase of 5.1%. On a comparable store basis, net sales
for the second quarter of 1997 increased 4.4% over the second
quarter of 1996.
Cost of sales was 60.8% as a percent of net sales for the second
quarter of 1997 compared to 61.7% for the second quarter of 1996.
Cost of sales for the second quarter of 1996 included $29.1 million
of one-time inventory valuation adjustments related to merchandise
in lines of business that were eliminated or replaced in connection
with the consolidation of Broadway's merchandise inventories with
the Company's merchandise inventories. Excluding these inventory
valuation adjustments from the second quarter of 1996, cost of sales
would have been 60.8% of net sales. Cost of sales was not impacted
by the valuation of merchandise inventory on the last-in, first-out
basis in the second quarter of 1997 or the second quarter of 1996.
Selling, general and administrative ("SG&A") expenses were 33.1% as
a percent of net sales for the second quarter of 1997 compared to
36.0% for the second quarter of 1996. SG&A expenses for the second
quarter of 1996 included $69.8 million of one-time costs related to
the integration and consolidation of acquired and pre-existing
businesses as business integration and consolidation expenses
("BICE"). Excluding BICE, SG&A expenses would have been 33.9% of
net sales for the second quarter of 1996. The major factor
contributing to the 0.8% improvement in the SG&A expense rate
(excluding BICE for the second quarter of 1996) was lower
distribution-related expense resulting from restructuring and
technological improvements in the merchandise distribution process.
Net interest expense was $99.3 million for the second quarter of
1997, compared to $115.6 million for the second quarter of 1996.
The lower interest expense for the second quarter of 1997 is
principally due to lower levels of borrowings.
The Company's effective income tax rate of 41.1% for the second
quarter of 1997 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.
The extraordinary item of $38.7 million in the second quarter of
1997 represents the after-tax expenses associated with debt
prepayments.
FEDERATED DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDISION AND RESULTS OF OPERATION (CONTINUED)
COMPARISON OF THE 26 WEEKS ENDED AUGUST 2, 1997 AND AUGUST 3, 1996
For purposes of the following discussion, all references to "1997"
and "1996" are to the Company's 26 week fiscal periods ended August
2, 1997 and August 3, 1996, respectively.
Net sales for 1997 were $6,861.9 million compared to $6,584.9
million for 1996, an increase of 4.2%. On a comparable store basis,
net sales for 1997 increased 3.5% over 1996.
Cost of sales was 61.0% as a percent of net sales for 1997 compared
to 61.9% for 1996. Cost of sales for 1996 included $65.7 million of
one-time inventory valuation adjustments related to merchandise in
lines of business that were eliminated or replaced in connection
with the consolidation of Broadway's merchandise inventories with
the Company's merchandise inventories. Excluding these inventory
valuation adjustments from 1996, cost of sales would have been 60.9%
and the 0.1% increase in 1997 is due to higher merchandise markdowns
associated with the elimination of certain consumer electronics
lines of business. Cost of sales was not impacted by the valuation
of merchandise inventory on the last-in, first-out basis in 1997 or
1996.
SG&A expenses were 33.8% as a percent of net sales for 1997 compared
to 36.1% for 1996. SG&A expenses for 1996 included $110.9 million
of one-time costs related to the integration and consolidation of
acquired and pre-existing businesses under the caption BICE.
Excluding BICE, SG&A expenses would have been 34.4% of net sales for
1996. The major factor contributing to the 0.6% improvement in the
SG&A expense rate (excluding BICE for 1996) was lower distribution-
related expenses resulting from restructuring and technological
improvements in the merchandise distribution process.
Net interest expense was $203.6 million for 1997 compared to $227.9
million for 1996. The lower interest expense for 1997 is
principally due to lower levels of borrowings.
The Company's effective income tax rate of 42.1% for 1997 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
For purposes of the following discussion, all references to "1997"
and "1996" are to the Company's 26 week fiscal periods ended August
2, 1997 and August 3, 1996, respectively.
The Company's principal sources of liquidity are cash from
operations, cash on hand and certain 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 1997 was $563.9
million, an increase of $185.6 million compared to the $378.3
million provided in 1996. The major factors contributing to this
improvement were improved operating results and greater reductions
in customer accounts receivable.
Net cash provided by investing activities was $70.7 million in 1997,
with purchases of property and equipment totaling $218.7 million and
dispositions of property and equipment totaling $89.3 million.
During 1997, the Company opened five new stores, including a
furniture gallery, and closed nine stores. On May 5, 1997, a $200.0
million installment of a note receivable held by the Company was
received.
Net cash used by the Company for all financing activities was $466.0
million in 1997. During 1997, the Company incurred debt totaling
$850.0 million and repaid debt in the amount of $1,356.1 million.
On July 14, 1997, the Company issued $300.0 million of 7.45% Senior
Debentures due 2017 and $250.0 million of 6.79% Senior Debentures
due 2027, and on July 28, 1997, the Company entered into new bank
credit agreements which replaced its existing bank credit agreement.
The new credit agreements provide for a $1,500.0 million unsecured
revolving credit facility with a termination date of July 28, 2002
and a $500.0 million unsecured revolving credit facility with a
termination date of July 27, 1998. The net incremental borrowings
under the Company's revolving credit and commercial paper facilities
were $300.0 million in 1997.
The major components of debt repaid, with proceeds of the financings
described above, proceeds of the $200.0 million note receivable and
other funds, included the entire $345.1 million of outstanding
borrowings under the Company's mortgage loan facility, the entire
$220.8 million of borrowings outstanding under its secured
promissory note, $176.0 million of borrowings outstanding under its
note monetization facility, and all $515.7 million of outstanding
term borrowings under its bank credit facility. In addition to
extending the maturities of its debt, the Company expects to save
$15.0-$20.0 million in annual interest expense from the refinancing
transactions.
On May 3, 1998, the final $200.0 million installment of a note
receivable held by the Company matures and the remaining $176.0
million of borrowings under the related note monetization facility
become due and payable. Accordingly, as of August 2, 1997, 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 3,
1997 covers events known to the Company and occurring prior
to June 17, 1997. Subsequent to that date and prior to
September 16, 1997, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 364-Day Credit Agreement, dated as of July 28, 1997,
by and among the Company, the Initial Lenders named
therein, Citibank, N.A., as Administrative Agent and
Paying Agent, The Chase Manhattan Bank, as
Administrative Agent, BankBoston, N.A., as Syndication
Agent, and The Bank of America, National Trust &
Savings Association, as Documentation Agent.
10.2 Five-Year Credit Agreement, dated as of July 28, 1997,
by and among the Company, the Initial Lenders named
therein, Citibank, N.A., as Administrative Agent and
Paying Agent, The Chase Manhattan Bank, as
Administrative Agent, BankBoston, N.A., as Syndication
Agent, and The Bank of America, National Trust &
Savings Association, as Documentation Agent.
10.3 Eighth Supplemental Trust Indenture, dated as of July
14, 1997, by and among the Company and State Street
Bank and Trust Company (successor to The First
National Bank of Boston), Trustee (incorporated by
reference to Exhibit 2 to the Company's Current Report
on Form 8-K dated as of July 15, 1997 (the "July 1997
Form 8-K")).
10.4 Ninth Supplemental Trust Indenture, dated as of July
14, 1997, by and among the Company and State Street
Bank and Trust Company (successor to The First
National Bank of Boston), Trustee (incorporated by
reference to Exhibit 3 to the July 1997 Form 8-K).
11 Statement re computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K, dated July 15, 1997, reporting
matters under Item 5 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 16, 1997 /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)