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
November 1, 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 (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.
209,811,821 shares of the Registrant's Common Stock, $.01 par
value, were outstanding as of November 29, 1997.
PART I -- FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE FIGURES)
13 Weeks Ended 39 Weeks Ended
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
Net Sales $ 3,746,276 $ 3,609,148 $10,608,196 $10,194,041
Cost of sales:
Recurring 2,286,919 2,189,903 6,472,455 6,200,124
Inventory valuation adjustments
related to consolidation - - - 65,681
Total cost of sales 2,286,919 2,189,903 6,472,455 6,265,805
Selling, general and
administrative expenses:
Recurring 1,191,396 1,187,629 3,507,860 3,454,678
Business integration and
consolidation expenses - 44,304 - 155,228
Total selling, general and
administrative expenses 1,191,396 1,231,933 3,507,860 3,609,906
Operating Income 267,961 187,312 627,881 318,330
Interest expense (100,957) (124,510) (322,040) (374,851)
Interest income 9,079 11,149 26,522 33,595
Income (Loss) Before Income
Taxes and Extraordinary Item 176,083 73,951 332,363 (22,926)
Federal, state and local income
tax expense (70,969) (32,150) (136,820) (412)
Income (Loss) Before
Extraordinary Item 105,114 41,801 195,543 (23,338)
Extraordinary Item - loss on
early extinguishment of debt,
net of tax effect of $24,960 - - (38,673) -
Net Income (Loss) $ 105,114 $ 41,801 $ 156,870 $ (23,338)
(Continued)
PART I -- FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE FIGURES)
13 Weeks Ended 39 Weeks Ended
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
Earnings (Loss) per Share:
Income (loss) before
extraordinary item $ .48 $ .20 $ .91 $ (.11)
Extraordinary item - - (.18) -
Net Income (Loss) $ .48 $ .20 $ .73 $ (.11)
Fully Diluted Earnings (Loss)
per Share:
Income (loss) before
extraordinary item $ .47 $ .20 $ .89 $ (.11)
Extraordinary item - - (.17) -
Net Income (Loss) $ .47 $ .20 $ .72 $ (.11)
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(THOUSANDS)
November 1, February 1, November 2,
1997 1997 1996
ASSETS:
Current Assets:
Cash $ 431,156 $ 148,794 $ 152,596
Accounts receivable 2,513,143 2,834,321 2,821,833
Merchandise inventories 4,287,328 3,245,996 4,170,860
Supplies and prepaid expenses 119,685 109,678 169,532
Deferred income tax assets 116,107 88,513 90,883
Total Current Assets 7,467,419 6,427,302 7,405,704
Property and Equipment - net 6,423,168 6,524,757 6,384,812
Intangible Assets - net 696,940 717,404 724,225
Notes Receivable 6,923 204,400 204,997
Other Assets 337,091 390,280 376,956
Total Assets $ 14,931,541 $ 14,264,143 $ 15,096,694
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Short-term debt $ 1,899,473 $ 1,094,557 $ 741,117
Accounts payable and accrued
liabilities 3,047,907 2,492,195 3,059,327
Income taxes 28,042 8,947 3,550
Total Current Liabilities 4,975,422 3,595,699 3,803,994
Long-Term Debt 3,682,499 4,605,916 5,624,065
Deferred Income Taxes 842,048 830,943 727,772
Other Liabilities 560,247 562,431 564,606
Shareholders' Equity 4,871,325 4,669,154 4,376,257
Total Liabilities and
Shareholders' Equity $ 14,931,541 $ 14,264,143 $ 15,096,694
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(THOUSANDS)
39 Weeks Ended 39 Weeks Ended
November 1, 1997 November 2, 1996
Cash flows from operating activities:
Net income (loss) $ 156,870 $ (23,338)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation and amortization of
property and equipment 417,474 379,816
Amortization of intangible assets 20,464 20,464
Amortization of financing costs 16,905 20,790
Amortization of unearned restricted stock 896 1,629
Loss on early extinguishment of debt 38,673 -
Changes in assets and liabilities:
Decrease in accounts receivable 321,733 220,041
Increase in merchandise inventories (1,041,333) (1,076,012)
(Increase) decrease in supplies and
prepaid expenses (10,007) 6,879
(Increase) decrease in other assets not
separately identified (6,995) 20,342
Increase in accounts payable and accrued
liabilities not separately identified 467,991 652,942
Increase (decrease) in current
income taxes 4,055 (2,861)
Decrease in deferred income taxes (16,489) (21,536)
(Decrease) increase in other liabilities
not separately identified (2,184) 6,179
Net cash provided by operating
activities 408,053 205,335
Cash flows from investing activities:
Purchase of property and equipment (410,547) (523,540)
Disposition of property and equipment 120,113 137,464
Decrease in notes receivable 199,997 -
Net cash used by investing activities (90,437) (386,076)
Cash flows from financing activities:
Debt issued 1,284,049 688,665
Financing costs (6,351) (11,096)
Debt repaid (1,445,080) (689,172)
Decrease in outstanding checks 87,724 47,842
Acquisition of treasury stock (1,803) (646)
Issuance of common stock 46,207 125,226
Net cash (used) provided by financing
activities (35,254) 160,819
(Continued)
FEDERATED DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(THOUSANDS)
39 Weeks Ended 39 Weeks Ended
November 1, 1997 November 2, 1996
Net increase (decrease) in cash $ 282,362 $ (19,922)
Cash at beginning of period 148,794 172,518
Cash at end of period $ 431,156 $ 152,596
Supplemental cash flow information:
Interest paid $ 310,052 $ 337,553
Interest received 28,889 33,875
Income taxes paid (net of refunds received) 96,587 18,604
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 39 weeks
ended November 1, 1997 and November 2, 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 39 weeks
ended November 1, 1997 and November 2, 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 39 weeks ended
November 1, 1997. For the 13 and 39 weeks ended November 2,
1996 the potential issuance of share equivalents was
immaterial or 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 39 weeks ended November 1, 1996 to conform to the
classifications of such amounts for the 52 weeks ended
February 1, 1997.
2.INVENTORY VALUATION ADJUSTMENTS RELATED TO CONSOLIDATION 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 39 weeks ended November 2, 1996, the amount
recorded related to the consolidation of Broadway into the
Company's Macy's West division.
FEDERATED DEPARTMENT STORES, INC.
NOTES TO 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
39 weeks ended November 2, 1996, the Company recorded $155.2
million of business integration and consolidation expenses
consisting of $116.9 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), $21.9 million of costs related to the
consolidation of Macy's and $16.4 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 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. 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.
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 NOVEMBER 1, 1997 AND NOVEMBER 2, 1996
For purposes of the following discussion, all references to
"third quarter of 1997" and "third quarter of 1996" are to the
Company's 13-week fiscal periods ended November 1, 1997 and
November 2, 1996, respectively.
Net sales for the third quarter of 1997 totaled $3,746.3
million, compared to net sales of $3,609.1 million for the
third quarter of 1996, an increase of 3.8%. On a comparable
store basis, net sales for the third quarter of 1997 increased
3.1% over the third quarter of 1996.
Cost of sales was 61.0% as a percent of net sales for the
third quarter of 1997 compared to 60.7% for the third quarter
of 1996. Cost of sales for the third quarter of 1997
reflected higher levels of clearance markdowns than the third
quarter of 1996. Cost of sales was not impacted by the
valuation of merchandise inventory on the last-in, first-out
basis in the third quarter of 1997 or the third quarter of
1996.
Selling, general and administrative ("SG&A") expenses were
31.8% as a percent of net sales for the third quarter of 1997
compared to 34.1% for the third quarter of 1996. SG&A expenses
for the third quarter of 1996 included $44.3 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 32.9% of net sales for the third
quarter of 1996. The major factor contributing to the 1.1%
improvement in the SG&A expense rate (excluding BICE for the
third quarter of 1996) was lower distribution-related expenses
resulting from restructuring and technological improvements in
the merchandise distribution process.
Net interest expense was $91.9 million for the third quarter
of 1997, compared to $113.4 million for the third quarter of
1996. The lower interest expense for the third quarter of
1997 is due to lower levels of borrowings and lower interest
rates resulting from the refinancings completed in July 1997.
The Company's effective income tax rate of 40.3% for the third
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.
COMPARISON OF THE 39 WEEKS ENDED NOVEMBER 1, 1997 AND NOVEMBER 2, 1996
For purposes of the following discussion, all references to
"1997" and "1996" are to the Company's 39 week fiscal periods
ended November 1, 1997 and November 2, 1996, respectively.
Net sales for 1997 were $10,608.2 million compared to
$10,194.0 million for 1996, an increase of 4.1%. On a
comparable store basis, net sales increased 3.4%.
FEDERATED DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Cost of sales was 61.0% as a percent of net sales for 1997
compared to 61.5% 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
adjustment from 1996, cost of sales would have been 60.8% of
net sales, with the 0.2% increase in 1997 being 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 33.1% as a percent of net sales for 1997
compared to 35.4% for 1996. SG&A expenses for 1996 included
$155.2 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 33.9% of net sales for 1996. The major factor
contributing to the 0.8% 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 $295.5 million for 1997 compared to
$341.3 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 41.2% 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.
The extraordinary item of $38.7 million for 1997 represents
the after-tax expenses associated with debt prepayments.
LIQUIDITY AND CAPITAL RESOURCES
For purposes of the following discussion, all references to
"1997" and "1996" are to the Company's 39 week fiscal periods
ended November 1, 1997 and November 2, 1996, respectively.
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 1997 was $408.1
million compared to the $205.3 million provided in 1996. The
major factors contributing to this improvement were improved
operating results and greater reductions in accounts
receivable.
FEDERATED DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net cash used by investing activities was $90.4 million in
1997, with purchases of property and equipment totaling $410.5
million and dispositions of property and equipment totaling
$120.1 million. During 1997, the Company opened five new
stores, including a furniture gallery, and closed ten 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
$35.3 million in 1997. During 1997, the Company incurred debt
totaling $1,284.0 million and repaid debt in the amount of
$1,445.1 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 $734.0 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 November 1, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Ninth Amendment to Amended and Restated Pooling
and Servicing Agreement, dated as of August 28,
1997, by and among Prime Receivables Corporation, as
Transferor, FDS National Bank, as Servicer, and The
Chase Manhattan Bank, as Trustee.
10.2 First Amendment to Series 1992-1 Supplement, dated
as of August 28, 1997, to the Pooling and Servicing
Agreement, dated as of December 15, 1992, by and among
Prime Receivables Corporation, as Transferor, FDS
National Bank, as Servicer, and The Chase Manhattan
Bank, as Trustee.
10.3 First Amendment to Series 1992-2 Supplement, dated
as of August 28, 1997, to the Pooling and Servicing
Agreement, dated as of December 15, 1992, by and among
Prime Receivables Corporation, as Transferor, FDS
National Bank, as Servicer, and The Chase Manhattan
Bank, as Trustee.
10.4 First Amendment to Series 1995-1 Supplement, dated
as of August 28, 1997, to the Pooling and Servicing
Agreement, dated as of December 15, 1992, by and among
Prime Receivables Corporation, as Transferor, FDS
National Bank, as Servicer, and The Chase Manhattan
Bank, as Trustee.
10.5 First Amendment to Series 1996-1 Supplement, dated
as of August 28, 1997, to the Pooling and
Servicing Agreement, dated as of December 15, 1992,
by and among Prime Receivables Corporation, as Transferor,
FDS National Bank, as Servicer, and The Chase Manhattan
Bank, as Trustee.
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
November 1, 1997.
FEDERATED DEPARTMENT STORES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunder duly authorized.
FEDERATED DEPARTMENT STORES, INC.
Date December 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)