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 July
29, 2000.
FEDERATED DEPARTMENT STORES, INC.
151 West 34th Street
New York, New York 10001
(212) 494-1602
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.
201,918,002 shares of the Registrant's Common Stock, $.01 par
value, were outstanding as of August 26, 2000.
PART I -- FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Income
(Unaudited)
(millions, except per share figures)
13 Weeks Ended 26 Weeks Ended
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
Net Sales $ 4,065 $ 4,006 $ 8,097 $ 7,606
Cost of sales 2,379 2,319 4,774 4,493
Selling, general and
administrative expenses 1,466 1,369 2,850 2,570
Operating Income 220 318 473 543
Interest expense (110) (87) (210) (165)
Interest income 2 2 3 5
Income Before Income Taxes 112 233 266 383
Federal, state and local income
tax expense (49) (96) (114) (159)
Net Income $ 63 $ 137 $ 152 $ 224
Basic earnings per share $ .31 $ .65 $ .73 $ 1.07
Diluted earnings per share $ .30 $ .61 $ .72 $ 1.02
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
Consolidated Balance Sheets
(Unaudited)
(millions)
July 29, January 29, July 31,
2000 2000 1999
ASSETS:
Current Assets:
Cash $ 296 $ 218 $ 357
Accounts receivable 3,818 4,313 3,512
Merchandise inventories 3,932 3,589 3,635
Supplies and prepaid expenses 231 230 221
Deferred income tax assets 183 172 142
Total Current Assets 8,460 8,522 7,867
Property and Equipment - net 6,757 6,828 6,689
Intangible Assets - net 1,703 1,735 1,807
Other Assets 655 607 516
Total Assets $ 17,575 $ 17,692 $ 16,879
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Short-term debt $ 1,714 $ 1,284 $ 1,402
Accounts payable and accrued
liabilities 2,992 3,043 2,905
Income taxes 97 225 46
Total Current Liabilities 4,803 4,552 4,353
Long-Term Debt 4,452 4,589 4,704
Deferred Income Taxes 1,458 1,444 1,240
Other Liabilities 548 555 586
Shareholders' Equity 6,314 6,552 5,996
Total Liabilities and Shareholders'
Equity $ 17,575 $ 17,692 $ 16,879
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(millions)
26 Weeks Ended 26 Weeks Ended
July 29, 2000 July 31, 1999
Cash flows from operating activities:
Net income $ 152 $ 224
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 322 324
Amortization of intangible assets 42 36
Amortization of financing costs 4 3
Amortization of unearned restricted stock 3 -
Changes in assets and liabilities:
Decrease in accounts receiv 499 178
Increase in merchandise inventories (340) (211)
Increase in supplies and prepaid expenses (1) (19)
Decrease in other assets not separately
identified (32) (20)
Increase (decrease) in accounts payable
and accrued liabilities not separately
identified (74) 30
Decrease in current income taxes (126) (52)
Increase in deferred income taxes 1 1
Decrease in other liabilities not
separately identified (6) (7)
Net cash provided by operating activities 444 487
Cash flows from investing activities:
Purchase of property and equipment (251) (241)
Capitalized software (37) (21)
Investments in companies (31) (49)
Acquisition of Fingerhut Companies, Inc.,
net of cash acquired - (1,539)
Disposition of property and equipment 53 23
Net cash used by investing activities (266) (1,827)
Cash flows from financing activities:
Debt issued 350 1,299
Financing costs (3) (10)
Debt repaid (57) (31)
Increase in outstanding checks 2 81
Acquisition of treasury stock (431) -
Issuance of common stock 39 51
Net cash provided (used) by financing
activities (100) 1,390
Net increase in cash $ 78 $ 50
Cash at beginning of period 218 307
Cash at end of period $ 296 $ 357
Supplemental cash flow information:
Interest paid $ 196 $ 144
Interest received 3 4
Income taxes paid (net of refunds received) 242 194
Schedule of non cash investing and financing
activities:
Debt assumed in acquisition - 125
Equity issued in acquisition - 12
Consolidation of net assets and debt of
previously unconsolidated subsidiary - 1,132
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 January 29, 2000 (the "1999 10-K"). The
accompanying Consolidated Financial Statements should be read
in conjunction with the Consolidated Financial Statements and
notes thereto in the 1999 10-K.
Because of the seasonal nature of the retail business, the
results of operations for the 13 and 26 weeks ended July 29,
2000 and July 31, 1999 (which do not include the Christmas
season) are not indicative of such results for the fiscal
year.
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.
Direct-to-customer merchandise inventories are stated at the
lower of FIFO (first-in, first-out) cost or market.
The Consolidated Financial Statements as of and for the 13 and
26 weeks ended July 29, 2000 and July 31, 1999, 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.
Certain reclassifications were made to prior period amounts to
conform with the classifications of such amounts for the most
recent periods.
2. Acquisition
On March 18, 1999, the Company purchased Fingerhut Companies,
Inc. ("Fingerhut") for a purchase price of approximately
$1,720 million, including the assumption of $125 million of
debt. The Fingerhut acquisition is being accounted for under
the purchase method of accounting. Accordingly, the Company's
results of operations do not include Fingerhut's results of
operations for any period prior to March 18, 1999 and the
purchase price has been allocated to Fingerhut's assets and
liabilities based on the estimated fair value of these assets
and liabilities as of March 18, 1999.
3. Segment Data
The Company conducts its business through two segments,
department stores and direct-to-customer. The department
store segment sells a wide range of merchandise, including
men's, women's and children's apparel and accessories,
cosmetics, home furnishings and other consumer goods. The
direct-to-customer segment (Fingerhut, Bloomingdale's By Mail,
bloomingdales.com, Macy's By Mail, macys.com and certain other
direct marketing activities) 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.
13 Weeks Ended 26 Weeks Ended
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
(millions)
Net Sales:
Department Stores $ 3,644 $ 3,569 $ 7,185 $ 7,006
Direct-to-Customer 421 437 912 600
Total $ 4,065 $ 4,006 $ 8,097 $ 7,606
Operating income:
Department Stores $ 428 $ 398 $ 736 $ 671
Direct-to-Customer (183) (27) (206) (29)
Corporate and other (25) (53) (57) (99)
Total $ 220 $ 318 $ 473 $ 543
Depreciation and amortization expense:
Department Stores $ 149 $ 151 $ 298 $ 304
Direct-to-Customer 10 14 22 17
Corporate and other 23 22 47 39
Total $ 182 $ 187 $ 367 $ 360
4. Earnings Per Share
The following tables set forth the computation of basic and
diluted earnings per share:
13 Weeks Ended
July 29, 2000 July 31, 1999
(millions, except per share data) Income Shares Income Shares
Net income and average number
of shares outstanding $ 63 206.1 $ 137 209.5
Shares to be issued under deferred
compensation plans - .5 - .4
63 206.6 137 209.9
Basic earnings per share $ .31 $ .65
Effect of dilutive securities:
Warrants - 1.0 - 8.8
Stock options - .9 - 3.2
$ 63 208.5 $ 137 221.9
Diluted earnings per share $ .30 $ .61
26 Weeks Ended
July 29, 2000 July 31, 1999
(millions, except per share data) Income Shares Income Shares
Net income and average number
of shares outstanding $ 152 209.2 $ 224 209.0
Shares to be issued under deferred
compensation plans - .5 - .4
152 209.7 224 209.4
Basic earnings per share $ .73 $ 1.07
Effect of dilutive securities:
Warrants - 1.5 - 7.3
Stock options - 1.2 - 2.5
$ 152 212.4 $ 224 219.2
Diluted earnings per share $ .72 $ 1.02
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
In addition to the warrants and stock options reflected in
the foregoing tables, warrants and stock options to purchase
12.7 million and .8 million shares of common stock at prices
ranging from $34.38 to $79.44 per share were outstanding at
July 29, 2000 and July 31, 1999, respectively, but were not
included in the computation of diluted earnings per share
because the exercise price thereof exceeded the average
market price and 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
"second quarter of 2000" and "second quarter of 1999" are to
the Company's 13-week fiscal periods ended July 29, 2000 and
July 31, 1999, respectively, and all references to "2000" and
"1999" are to the Company's 26-week fiscal periods ended July
29, 2000 and July 31, 1999, respectively.
Results of Operations
Comparison of the 13 Weeks Ended July 29, 2000 and July 31, 1999
Net sales for the second quarter of 2000 totaled $4,065
million, compared to net sales of $4,006 million for the
second quarter of 1999, an increase of 1.5%. Net sales for
department stores for the second quarter of 2000 were $3,644
million, compared to net sales of $3,569 million for the
second quarter of 1999, an increase of 2.1%. On a comparable
store basis (sales from stores in operation throughout 1999
and 2000), net sales for department stores for the second
quarter of 2000 increased 1.9% compared to the second quarter
of 1999. Net sales for the direct-to-customer segment totaled
$421 million for the second quarter of 2000 compared to $437
million for the second quarter of 1999.
Cost of sales was 58.5% of net sales for the second quarter of
2000, compared to 57.9% for the second quarter of 1999. The
increase in the cost of sales rate reflects additional
markdowns taken through the second quarter of 2000, which
enabled the Company to keep in-store inventories fresh and
fashion-current. 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
36.1% of net sales for the second quarter of 2000 compared to
34.2% for the second quarter of 1999. Department store SG&A
expenses improved 1.1% as a percent of department store net
sales, reflecting the impact of lower non-payroll expenses and
higher finance charge income. SG&A expenses for the direct-to-
customer segment in the second quarter of 2000 were negatively
impacted by higher than anticipated bad debt expenses
resulting from increased credit delinquencies at Fingerhut.
The higher credit related expenses in the direct-to-customer
segment and increased costs related to recently launched
businesses combined to offset the improvement in the
department store SG&A expense rate and produce a 1.9% increase
in the overall SG&A expense rate for the second quarter of
2000. The Company believes that the credit delinquency
problem at Fingerhut will negatively impact direct-to-customer
operating profits by $200 - $250 million through the remainder
of the year. With a view to resolving the credit delinquency
problem at Fingerhut, management has begun the process of
comprehensively evaluating the Fingerhut operations and
businesses. This process could result in the implementation
of a plan that may result in the incurrence of one-time
restructuring costs.
Net interest expense was $108 million for the second quarter
of 2000, compared to $85 million for the second quarter of
1999. The higher interest expense for the second quarter of
2000 is due primarily to the increased outstanding debt
resulting from the consolidation of the Fingerhut Master Trust
for financial reporting purposes.
The Company's effective income tax rate of 43.5% for the
second quarter of 2000 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 and from other non-
deductible items.
Comparison of the 26 Weeks Ended July 29, 2000 and July 31, 1999
Net sales for 2000 totaled $8,097 million, compared to net
sales of $7,606 million for 1999, an increase of 6.5%. Net
sales for department stores for 2000 were $7,185 million,
compared to net sales of $7,006 million for 1999, an increase
of 2.6%. On a comparable store basis, net sales for
department stores for 2000 increased 2.4% compared to 1999.
Net sales for the direct-to-customer segment totaled $912
million for 2000 (which includes Fingerhut for the entire
period) compared to $600 million for 1999 (which includes
Fingerhut from and after the March 18, 1999 acquisition date).
Cost of sales was 59.0% of net sales for 2000, compared to
59.1% for 1999. Cost of sales as a percent of net sales for
both department stores and the direct-to-customer segment for
2000 were relatively flat compared to the same period a year
ago. The valuation of department store merchandise
inventories on the last-in, first-out basis did not impact
cost of sales in either period.
SG&A expenses were 35.2% of net sales for 2000 compared to
33.8% for 1999. Department store SG&A expenses improved 0.7%
as a percent of department store net sales, reflecting the
impact of lower non-payroll expenses, including depreciation
expense, and higher finance charge income. SG&A expenses for
the direct-to-customer segment in 2000 were negatively
impacted by higher than anticipated bad debt expenses
resulting primarily from increased credit delinquencies at
Fingerhut during the second quarter of 2000. The higher
credit related expenses in the direct-to-customer segment
during the second quarter of 2000, increased costs related to
recently launched businesses and increased amortization
expense resulting from the Fingerhut acquisition combined to
offset the improvement in the department store SG&A expense
rate and produce a 1.4% increase in the overall SG&A expense
rate for 2000.
Net interest expense was $207 million for 2000, compared to
$160 million for 1999. The higher interest expense for 2000
is due primarily to the increased outstanding debt resulting
from the Fingerhut acquisition and the consolidation of the
Fingerhut Master Trust for financial reporting purposes.
The Company's effective income tax rate of 42.8% for 2000
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 and from other non-deductible items.
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 2000 was $444
million, a decrease of $43 million compared to the $487
million provided in 1999. This reflects greater
decreases in 2000 in non-merchandise accounts payable and accrued
liabilities due to the timing of the Fingerhut acquisition and
greater decreases in income tax liabilities. The lower net
income resulting from higher reserves for bad debt at
Fingerhut was offset by greater decreases in 2000 in accounts
receivable. The greater increases in 2000 in merchandise inventories
were offset by greater increases in merchandise accounts
payable.
Net cash used by investing activities was $266 million for
2000. Investing activities for 2000 included purchases of
property and equipment totaling $251 million, capitalized
software of $37 million and investments in companies engaged
in complementary businesses totaling $31 million. The Company
opened two new department stores and one new furniture gallery
during 2000, and plans to open eight additional department
stores and two additional furniture galleries during the
remainder of 2000.
Net cash used by the Company for all financing activities was
$100 million in 2000. On June 6, 2000, the Company issued $350
million of 8.5% Senior Notes due 2010. The Company purchased
11.6 million shares of its Common Stock under its stock
repurchase program during 2000 at a cost of $429 million. On
August 25, 2000, the Board of Directors approved a $500
million increase to the current stock repurchase program. 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. Also during 2000, the Company
issued 1.0 million shares of its Common Stock and received $35
million in proceeds from the exercise of the Company's Series
B Warrants, which expired on February 15, 2000.
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 two
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 and August 30, 2000, in the
United States District Court for the Southern District
of New York. The Complaints allege violation 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 vigorously defend against the
allegations contained in the Complaints.
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," "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
(i) risks and uncertainties relating to the possible
invalidity of the underlying beliefs and assumptions,
(ii) possible changes or developments in social,
economic, business, industry, market, legal and
regulatory circumstances and conditions, and (iii)
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. 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Fourth Supplemental Trust Indenture, dated as of
June 6, 2000, by and among the Company and
Citibank, N.A. (incorporated by reference to
Exhibit 4 to the Company's Current Report on Form
8-K dated as of June 5, 2000).
10.1 Eleventh Amendment to Amended and Restated Pooling
and Servicing Agreement, dated as of March 23,
2000, by and among Prime Receivables Corporation,
FDS National Bank and The Chase Manhattan Bank.
10.2 Tenth Amendment to Receivables Purchase Agreement,
dated as of March 23, 2000, by and among The
Originators listed on the signature page thereto
and Prime Receivables Corporation.
10.3 First Amendment to Series 1999-1 Variable Funding
Supplement, dated as of August 1, 2000, by and among Prime II
Receivables Corporation, FDS National Bank, The Chase Manhattan
Bank, Market Street Funding Corporation and PNC Bank, National
Association.
10.4 First Amendment to Series 1997-1 Variable Funding
Supplement, dated as of June 19, 2000, by and among Prime II
Receivables Corporation, FDS National Bank and The Chase
Manhattan Bank.
10.5 Third Amended and Restated Credit Agreement, dated as of
July 24, 2000, 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, Fleet
National Bank, as Syndication Agent, and Bank of America, N.A.,
as Documentation Agent.
10.6 Second Amendment Agreement to Fingerhut Receivables, Inc.
Security Purchase Agreement, dated as of July 20, 2000, by and
among Fingerhut Receivables, Inc., Kitty Hawk Funding
Corporation, Falcon Asset Securitization Corporation, Four Winds
Funding Corporation, Bank of America, N.A., Bank One, NA (Main
Office Chicago), Norddeutsche Landesbank Girozentrale, New York
Branch and/or Cayman Island Branch, and Commerzbank
Aktiengesellschaft, Chicago Branch.
27 Financial Data Schedule
(b) Reports on Form 8-K
1. Current Report on Form 8-K dated May 31, 2000
reporting matters under Item 5 and related
exhibits under Item 7 thereof.
2. Current Report on Form 8-K dated June 2, 2000
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 September 11, 2000 /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)
