SECURITIES AND EXCHANGE COMMISSION

 

 

 

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 2054

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, 2003.

 

 

FEDERATED DEPARTMENT STORES, INC.
7 West Seventh St.
Cincinnati, Ohio 45202
(513) 579-7000
and
151 West 34th Street
New York, New York 10001
(212) 494-1602

Delaware
(State of Incorporation)

1-13536
(Commission File No.)

13-3324058
(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.

Indicate by checkmark whether Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). 
Yes X No _____

182,805,907 shares of the Registrant's Common Stock, $.01 par value, were outstanding as of August 30, 2003.

 

FEDERATED DEPARTMENT STORES, INC.

Consolidated Statements of Income
(Unaudited)

(millions, except per share figures)

 

13 Weeks Ended

26 Weeks Ended

 

August 2,
2003

August 3,
2002

August 2,
2003

August 3,
2002

         

Net Sales

$3,434 

$3,486 

$6,725 

$6,939 

         

Cost of sales

2,025 

2,051 

4,027 

4,129 

         

Gross margin

1,409 

1,435 

2,698 

2,810 

         

Selling, general and administrative expenses

1,145 

1,135 

2,288 

2,289 

         

Operating income

264 

300 

410 

521 

         

Interest expense

(67)

(83)

(140)

(161)

         

Interest income

2 

         5 

5 

         9 

         

Income from continuing operations before
  income taxes


199 


222 


275 


369 

         

Federal, state and local income tax expense

(79)

       (89)

(109)

    (147)

         

Income from continuing operations

120 

133 

166 

222 

         

Income on disposal of discontinued operations,
  net of tax effect


-
 


149 


-
 


149 

         

Net Income

$ 120 

$ 282 

$ 166 

$ 371 

 

(Continued)

FEDERATED DEPARTMENT STORES, INC.

Consolidated Statements of Income (continued)
(Unaudited)

(millions, except per share figures)

 

13 Weeks Ended

26 Weeks Ended

 

August 2,

August 3,

August 2,

August 3,

 

2003

2002

2003

2002

         

Basic earnings per share:

       

      Income from continuing operations

$ .65 

$   .66 

$ .89 

$ 1.10 

      Income from discontinued operations

- 

   .74 

- 

   .74 

      Net income

$ .65 

$ 1.40 

$ .89 

$ 1.84 

         

Diluted earnings per share:

       

      Income from continuing operations

$ .64 

$   .66 

$ .88 

$ 1.09 

      Income from discontinued operations

- 

   .73 

- 

   .73 

      Net income

$ .64 

$ 1.39 

$ .88 

$ 1.82 

         
         

The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

 

 

FEDERATED DEPARTMENT STORES, INC.

Consolidated Balance Sheets
(Unaudited)

(millions)

 

August 2,

February 1,

August 3,

 

2003

2003

2002

ASSETS:

     

   Current Assets:

     

       Cash

$ 564 

$   716 

$ 1,398 

      Accounts receivable

2,836 

2,945 

2,676 

      Merchandise inventories

3,439 

3,359 

3,657 

      Supplies and prepaid expenses

115 

124 

135 

      Deferred income tax assets

13 

10 

16 

      Assets of discontinued operations

- 

- 

  593 

         Total Current Assets

6,967 

7,154 

8,475 

       

   Property and Equipment - net

6,200 

6,379 

6,389 

   Goodwill

262 

262 

305 

   Other Intangible Assets - net

378 

378 

378 

   Other Assets

269 

268 

544 

       

         Total Assets

$14,076 

$14,441 

$16,091 

       

LIABILITIES AND SHAREHOLDERS' EQUITY:

     

   Current Liabilities:

     

      Short-term debt

$ 749 

$ 946 

$ 1,919 

      Accounts payable and accrued liabilities

2,678 

2,584 

2,731 

      Income taxes

121 

71 

42 

      Liabilities of discontinued operations

- 

- 

322 

         Total Current Liabilities

3,548 

3,601 

5,014 

       

   Long-Term Debt

3,154 

3,408 

3,402 

   Deferred Income Taxes

1,026 

998 

1,299 

   Other Liabilities

641 

672 

551 

   Shareholders' Equity

5,707 

5,762 

5,825 

       

         Total Liabilities and Shareholders' Equity

$14,076 

$14,441 

$16,091 

       

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
August 2, 2003

26 Weeks Ended
August 3, 2002

Cash flows from continuing operating activities:

   

   Net income

$ 166 

$ 371 

   Adjustments to reconcile net income to net cash
      provided by continuing operating activities:

   

Income from discontinued operations

(149)

         Depreciation and amortization

351 

331 

         Amortization of financing costs

         Amortization of unearned restricted stock

         Changes in assets and liabilities:

   

            Decrease in accounts receivable

113 

308 

            Increase in merchandise inventories

(80)

(281)

            (Increase) decrease in supplies and prepaid expenses

(11)

            Increase in other assets not separately identified

(1)

(27)

            Increase in accounts payable and accrued liabilities
              not separately identified


110 


75 

            Increase (decrease) in current income taxes

50 

(15)

            Increase (decrease) in deferred income taxes

25 

(41)

            Decrease in other liabilities not separately identified

(27)

(11)

               Net cash provided by continuing operating activities

719 

556 

     

Cash flows from continuing investing activities:

   

   Purchase of property and equipment

(156)

(219)

   Capitalized software

(27)

(23)

   Increase in note receivable

(39)

   Disposition of property and equipment

2 

- 

               Net cash used by continuing investing activities

(181)

(281)

     

Cash flows from continuing financing activities:

   

   Debt issued

   Debt repaid

(454)

(35)

   Dividends paid
   Increase (decrease) in outstanding checks

(23)
(18)


13 

   Acquisition of treasury stock

(227)

(139)

   Issuance of common stock

26 

26 

               Net cash used by continuing financing activities

(690)

(135)

     

 

(Continued)

FEDERATED DEPARTMENT STORES, INC.

Consolidated Statements of Cash Flows (continued)
(Unaudited)

(millions)

 

26 Weeks Ended
August 2, 2003

 

26 Weeks Ended
August 3, 2002

       

Net cash provided (used) by continuing operations

(152)

 

140 

Net cash provided by discontinued operations

- 

 

   622 

Net increase (decrease) in cash

(152)

 

762 

Cash at beginning of period

716 

 

636 

       

Cash at end of period

$ 564 

 

$1,398 

       

Supplemental cash flow information:

     

   Interest paid

$ 144 

 

$   175 

   Interest received

 

   Income taxes paid (net of refunds received)

28 

 

55 

       

Schedule of non cash investing and financing activities:

     

   Consolidation of assets and debt of previously
      unconsolidated subsidiary


 


479 

       

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, 2003 (the "2002 10-K"). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 2002 10-K.

Because of the seasonal nature of the retail business, the results of operations for the 13 and 26 weeks ended August 2, 2003 and August 3, 2002 (which do not include the Christmas season) are not necessarily indicative of such results for the fiscal year.

The Consolidated Financial Statements for the 13 and 26 weeks ended August 2, 2003 and August 3, 2002, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly, in all material respects, the consolidated financial position and results of operations of the Company and its subsidiaries.

Effective February 2, 2003, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" and SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 145 rescinds or amends existing authoritative pronouncements to limit the circumstances under which gains and losses from the extinguishment of debt will be treated as extraordinary items, to make various technical corrections and clarifications and to describe the applicability of certain of these pronouncements under changed conditions. SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation" and Accounting Principles Board ("APB") Opinion No. 28, "Interim Financial Reporting" to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based compensation and amends the disclosure provisions therein. SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for the costs of asset retirement obligations. The adoption of these statements did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The adoption of this statement on August 3, 2003 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

The Company accounts for its stock-based employee compensation plan in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan have an exercise price at least equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," for stock options granted. The Company estimates the fair value of each employee stock option grant on the date of grant using the Black-Scholes option-pricing model.

 

13 Weeks Ended  

26 Weeks Ended   

 

August 2,
2003

August 3,
2002

August 2,
2003

August 3,
2002

 

(millions, except per share data)

Net income, as reported

$120 

$282 

$166 

$371 

Deduct total stock-based employee
   compensation cost determined in
   accordance with SFAS No.123, net     of related tax benefit




(9)




(10)




(20)




(21)

Pro forma net income

$111 

$272 

$146 

$350 

         

Earnings per share:

       

   Basic - as reported

$.65 

$1.40 

$.89 

$1.84 

   Basic - pro forma

$.60 

$1.35 

$.78 

$1.74 

   Diluted - as reported

$.64 

$1.39 

$.88 

$1.82 

   Diluted - pro forma

$.59 

$1.34 

$.78 

$1.72 

  1. Discontinued Operations

    On January 16, 2002, the Company's board of directors approved a plan to dispose of the operations of Fingerhut Companies, Inc. ("Fingerhut"), including the Arizona Mail Order, Figi's and Popular Club Plan businesses conducted by Fingerhut's subsidiaries, which were acquired by the Company on March 18, 1999.
  2. During July 2002, the Company completed the sale of Fingerhut's core catalog accounts receivable portfolio, with the buyer assuming $450 million of receivables-backed debt, and in a separate transaction completed the sale of various other Fingerhut assets, including two distribution centers, the corporate headquarters, a data center, existing inventory, the Fingerhut name, customer lists and other miscellaneous property and equipment. Proceeds from these sales and collections on customer accounts receivable prior to the sale, net of operating expenses, exceeded the amount estimated to be received through wind-down of the portfolio and liquidation of the assets, resulting in an adjustment to the loss on disposal of discontinued operations totaling $236 million of income before income taxes, or $149 million after income taxes.

    Through additional transactions during the third and fourth quarters of 2002, the Company also completed the sale of the Arizona Mail Order, Figi's and Popular Club Plan businesses conducted by Fingerhut's subsidiaries and completed the sale of various other Fingerhut assets. As of February 1, 2003, substantially all Fingerhut assets had been disposed of and substantially all Fingerhut liabilities had been settled.

    The net assets of Fingerhut included within discontinued operations as of August 3, 2002 were as follows:

     

    (millions)

       

    Current assets

    $556 

    Other assets

    37 

    Current liabilities

    (322)

     

    $271 

  3. Restructuring Accruals

    During the fourth quarter of 2002, the Company recorded certain costs and expenses associated with the Rich's-Macy's consolidation, including $6 million of severance costs, in selling, general and administrative expenses.

The Company recorded restructuring charges in 2001 and 2000, including long-term lease obligations related to the disposition of Stern's properties and severance costs associated with the closing of its Stern's department store division.

The following tables show the activity associated with the restructuring accruals:

 

February 1,
2003    


Expense 


Payments 

August 2,
2003  

   

(millions)

 

Long-term lease obligations

$ 14

$ -

$ (1)

$ 13

Rich's-Macy's severance costs

$   6

$ -

$ (5)

$   1

The $13 million reserve that the Company still expects to pay out relates to liabilities associated with the disposition of Stern's properties. The remaining Rich's-Macy's severance is still expected to be paid.


February 2,
2002    


Expense 


Payments 

August 3,
2002  

   

(millions)

 

Long-term lease obligations

$ 18

$ -

$ (3)

$ 15

Stern's severance costs

$   2

$ -

$ (2)

$   -

The $15 million reserve that the Company expected to pay out related to liabilities associated with the disposition of Stern's properties.

  1. Financing

    During July 2002, in connection with the extension of the financing arrangement related to the Company's non-proprietary credit card receivables, the Company's special purpose subsidiary took certain actions which resulted in the consolidation of the Prime Credit Card Master Trust II (the "Trust") for financial reporting purposes. In particular, the documentation governing the arrangement was amended to provide the Company's special purpose subsidiary the ability to unilaterally remove transferred assets from the Trust. Under SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," this amendment disqualified the arrangement for sale treatment and requires secured borrowing treatment for all sales of the Company's non-proprietary credit card receivables pursuant to this arrangement. The principal assets and liabilities of the Trust consist of non-proprietary credit card receivables transferred by the Company to the Trust in transactions previously accounted for as sales under SFAS No. 140 and the related debt issued by the Trust. As a result of these actions, the transfer of receivables and debt are being treated as secured borrowings as of and subsequent to July 5, 2002. All assets and liabilities of the Trust were consolidated at fair value. These actions increased the Company's consolidated assets and debt by $479 million at July 5, 2002.
  2. Earnings Per Share

    The following tables set forth the computation of basic and diluted earnings per share from continuing operations:
 

13 Weeks Ended

 

August 2, 2003

 

August 3, 2002

 

Income

 

Shares

 

Income

 

Shares

     (millions, except per share figures)

             

         Income from continuing
           operations and average number
           of shares outstanding opera-            tions and average number of             shares outstanding





$ 120 

 





184.9 

 





$ 133

 





200.9 

         Shares to be issued under    
            deferred compensation plans


-
 

 


.7
 

 


     -

 


     .6 

 

$ 120 

 

185.6 

 

$ 133

 

201.5 

               

          Basic earnings per share

 

$ .65 

     

$ .66

 
               

      Effect of dilutive securities -

             

          stock options

- 

 

1.6 

 

     -

 

   2.0 

 

$ 120 

 

187.2 

 

$ 133

 

203.5 

               

          Diluted earnings per share

 

$ .64 

     

$ .66

 
               
 

26 Weeks Ended

 

August 2, 2003

 

August 3, 2002

 

Income

 

Shares

 

Income

 

Shares

      (millions, except per share figures)

             

         Income from continuing
           operations and average number
           of shares outstanding opera-             tions and average number of             shares outstanding





$ 166 

 





186.7 

 





$ 222 

 





201.0 

         Shares to be issued under
            deferred compensation plans


- 

 


.7 

 


      - 

 


     .6 

 

$ 166 

 

187.4 

 

$ 222 

 

201.6 

               

          Basic earnings per share

 

$ .89 

     

$ 1.10

 
               

      Effect of dilutive securities -

             

          stock options

- 

 

.9 

 

      - 

 

   2.1 

 

$ 166 

 

188.3 

 

$ 222 

 

203.7 

               

          Diluted earnings per share

 

$ .88 

     

$ 1.09

 

In addition to the stock options reflected in the foregoing tables, stock options to purchase 14.9 million shares of common stock at prices ranging from $35.65 to $79.44 per share were outstanding at August 2, 2003 and stock options to purchase 13.8 million shares of common stock at prices ranging from $40.44 to $79.44 per share were outstanding at August 3, 2002 but were not included in the computation of diluted earnings per share because the exercise price thereof exceeded the average market price and their inclusion would have been antidilutive.

 

FEDERATED DEPARTMENT STORES, INC.

Management's Discussion and Analysis
of Financial Condition and Results of Operations

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

For purposes of the following discussion, all references to "second quarter of 2003" and "second quarter of 2002" are to the Company's 13-week fiscal periods ended August 2, 2003 and August 3, 2002, respectively, and all references to "2003" and "2002" are to the Company's 26-week fiscal periods ended August 2, 2003 and August 3, 2002, respectively.

On May 22, 2003, the Company announced a strategy to more fully leverage its Macy's brand. Beginning in the fall season of 2003, The Bon Marche stores operate as Bon - Macy's, Lazarus stores operate as Lazarus - Macy's and Goldsmith's stores operate as Goldsmith's - Macy's. Beginning in fiscal 2004, Burdines stores will operate as Burdines - Macy's and the seven Macy's stores currently operating in Florida will be integrated into the Burdines - Macy's organization. The Company believes that these changes will allow the Company to benefit from the expansion of the Macy's brand and should lead to more efficient operations.

In January 2003, the Company announced and commenced the implementation of its plans to integrate the stores of Rich's and Macy's in the metro Atlanta area and operate these and all other Rich's stores under a combined "Rich's-Macy's" nameplate, effective February 2, 2003. As part of the consolidation, certain stores were closed; however, one location was renovated and partially reopened as a Rich's-Macy's furniture gallery in July 2003 and two locations continue to be renovated and plan to reopen as Bloomingdale's later this year. In the near term, the store closings and store closing costs are expected to have a negative impact on net sales and operating income, but in the longer term all of these actions are expected to positively affect operating income, cash flows from operations and return on investment.

On January 16, 2002, the Company's board of directors approved a plan to dispose of the operations of Fingerhut Companies, Inc. ("Fingerhut"), including the Arizona Mail Order, Figi's and Popular Club Plan businesses conducted by Fingerhut's subsidiaries, which were acquired by the Company on March 18, 1999. The decision to dispose of Fingerhut was based on management's determination that there was no longer strategic value to Federated in retaining the Fingerhut operations and there was no expectation, based on Fingerhut's historical earnings and future prospects, that this business would contribute meaningfully to the Company's future financial performance. The plan of disposition approved by the Company's board of directors contemplated a disposal by liquidation of the Fingerhut core catalog operations and a disposal by sale of Fingerhut's three catalog subsidiaries, Arizona Mail Order, Figi's and Popular Club Plan. As of February 1, 2003, substantially all Fingerhut assets had been disposed of and substantially all Fingerhut liabilities had been settled.

The Company's Consolidated Financial Statements for all periods account for Fingerhut as a discontinued operation as a result of the Company's decision to dispose of the Fingerhut operations. Unless otherwise indicated, the following discussion relates to the Company's continuing operations.

Results of Operations

Comparison of the 13 Weeks Ended August 2, 2003 and August 3, 2002

Income from continuing operations and net income for the second quarter of 2003 totaled $120 million, compared to income from continuing operations of $133 million and net income of $282 million for the second quarter of 2002. The second quarter of 2002 included $149 million of income from the disposal of discontinued operations, net of tax effect. The decrease in income from continuing operations for the second quarter of 2003 compared to the second quarter of 2002 reflects a lower level of sales.

Net sales for the second quarter of 2003 totaled $3,434 million, down 1.5% compared to net sales of $3,486 million for the second quarter of 2002. On a comparable store basis (sales from stores in operation throughout 2002 and 2003), net sales for the second quarter of 2003 decreased 1.2% compared to the second quarter of 2002. Bloomingdale's and Rich's/Lazarus/Goldsmith's-Macy's had the strongest sales performance during the second quarter of 2003 with the weakest performance experienced at Burdines. Sales of the Company's private label brands continue to outperform the national brands. By family of business, sales were strongest in career apparel, big ticket home areas and cosmetics. The weakest businesses were housewares and children's.

Cost of sales was 59.0% of net sales for the second quarter of 2003, compared to 58.8% for the second quarter of 2002. In the second quarter of 2003, the cost of sales rate and corresponding gross margin rate reflects higher net markdowns as a percent to net sales in order to maintain inventories at appropriate levels. Merchandise inventories were down 6.0% at the end of the second quarter of 2003 as compared to the second quarter of 2002. The valuation of merchandise inventories on the last-in, first-out basis did not impact cost of sales in either period.

Selling, general and administrative ("SG&A") expenses were 33.3% of net sales for the second quarter of 2003, compared to 32.6% for the second quarter of 2002, due primarily to the lower sales level. SG&A expenses in actual dollars for the second quarter of 2003 were up 0.8% compared to the second quarter of 2002 due to $10 million of costs incurred in connection with the Rich's-Macy's consolidation and other announced store closings.

Net interest expense was $65 million for the second quarter of 2003, compared to $78 million for the second quarter of 2002, primarily due to the lower level of borrowings.

The Company's effective income tax rate of 39.6% for the second quarter of 2003 and the second quarter of 2002 differ from the federal income tax statutory rate of 35.0% principally because of the effect of state and local income taxes.

During July 2002, the Company completed the sale of Fingerhut's core catalog accounts receivable portfolio, with the buyer assuming $450 million of receivables-backed debt, and in a separate transaction completed the sale of various other Fingerhut assets, including two distribution centers, the corporate headquarters, a data center, existing inventory, the Fingerhut name, customer lists and other miscellaneous property and equipment. Proceeds from these sales and collections on customer accounts receivable prior to the sale, net of operating expenses, exceeded the amount estimated to be received through wind-down of the portfolio and liquidation of the assets, resulting in an adjustment to the loss on disposal of discontinued operations totaling $236 million of income before income taxes, or $149 million after income taxes.

Comparison of the 26 Weeks Ended August 2, 2003 and August 3, 2002

Income from continuing operations and net income for 2003 totaled $166 million, compared to income from continuing operations of $222 million and net income of $371 million for 2002. Net income for 2002 included $149 million of income from the disposal of discontinued operations, net of tax effect. The lower income from continuing operations results from a combination of lower sales and higher cost of sales, partially offset by lower net interest expense.

Net sales for 2003 totaled $6,725 million, compared to net sales of $6,939 million for 2002, a decrease of 3.1%. On a comparable store basis (sales from stores in operation throughout 2002 and 2003), net sales also decreased 3.1% compared to 2002. By family of business, sales were strongest in furniture and cosmetics. The weakest businesses were the small ticket home areas, especially housewares.

Cost of sales was 59.9% of net sales for 2003, compared to 59.5% for 2001. The cost of sales rate in 2003 reflects higher net markdowns as a percent to net sales due to the weak sales trend and to maintain inventories at appropriate levels. 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 34.0% of net sales for 2003 compared to 33.0% for 2002. SG&A expenses in actual dollars for 2003 were essentially flat compared to 2002; however, due to the lower sales level, SG&A expenses increased 1.0 percentage point as a percent to net sales. Included in SG&A expenses for 2003 were approximately $18 million of costs incurred in connection with the Rich's-Macy's consolidation and other announced store closings. Higher depreciation and amortization expense and the Rich's-Macy's consolidation costs in 2003 were offset by lower selling costs, lower advertising expense and improvements related to the Company's credit card operations. Although selling costs and advertising expenses were lower in actual dollars in 2003, as a percent to net sales they were consistent with 2002.

Net interest expense was $135 million for 2003, compared to $152 million for 2002, primarily due to the lower level of borrowings.

The Company's effective income tax rate of 39.7% for 2003 and 2002 differ from the federal income tax statutory rate of 35.0% principally because of the effect of state and local income taxes.

During July 2002, the Company completed the sale of Fingerhut's core catalog accounts receivable portfolio, with the buyer assuming $450 million of receivables-backed debt, and in a separate transaction completed the sale of various other Fingerhut assets, including two distribution centers, the corporate headquarters, a data center, existing inventory, the Fingerhut name, customer lists and other miscellaneous property and equipment. Proceeds from these sales and collections on customer accounts receivable prior to the sale, net of operating expenses, exceeded the amount estimated to be received through wind-down of the portfolio and liquidation of the assets, resulting in an adjustment to the loss on disposal of discontinued operations totaling $236 million of income before income taxes, or $149 million after income taxes.

Liquidity and Capital Resources

The Company's principal sources of liquidity are cash from operations, cash on hand and available credit facilities.

Net cash provided by continuing operating activities in 2003 was $719 million, compared to the $556 million provided in 2002. Cash provided by continuing operating activities in 2003 reflects a smaller increase in merchandise inventories and increases in current and deferred income taxes payable in 2003 versus decreases in 2002, partially offset by a smaller decrease in accounts receivable.

Net cash used by continuing investing activities was $181 million for 2003. Investing activities for 2003 included purchases of property and equipment totaling $156 million and capitalized software of $27 million. Investing activities for 2002 included purchases of property and equipment totaling $219 million, capitalized software of $23 million and the acceptance of a $39 million note receivable related to the sale of certain Fingerhut assets. The Company opened one department store, one home store and four furniture galleries during 2003 and plans to open five additional department stores and a home store during the remainder of 2003. The Company now expects capital expenditures to be approximately $600-$625 million for 2003, down from a budget of $650 million due to a delay in certain projects.

Net cash used by the Company for all continuing financing activities was $690 million for 2003, including the repayment of $450 million of 8.5% senior notes and approximately $227 million for the acquisition of treasury stock.

On April 16, 2003, the Company's board of directors approved a $500 million increase to the Company's existing stock repurchase program. During 2003, the Company purchased 7.3 million shares of its Common Stock under the stock repurchase program at an approximate cost of $227 million. As of August 2, 2003, the Company had approximately $485 million of authorization remaining under the Company's 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.

Net cash provided to the Company by discontinued operations was $622 million for 2002, primarily due to the sale of Fingerhut's core catalog accounts receivable portfolio and the sale of various other Fingerhut assets.

In 2003, the Company renewed its 364-day revolving credit facility to June 25, 2004 and voluntarily reduced the borrowing capacity under this facility to $200 million. As a result, the Company's ability to borrow under the Company's bank credit agreements and commercial paper program has been reduced to a maximum of $1,400 million.

On August 22, 2003, the Company's board of directors declared a quarterly dividend of 12.5 cents per share on Federated Common Stock. The dividend is payable October 1, 2003 to shareholders of record at the close of business on September 15, 2003.

Management believes that, with respect to the Company's current operations, cash on hand and funds from operations, together with its credit facilities and other capital resources, will be sufficient to cover the Company's reasonably foreseeable working capital, capital expenditure and debt service requirements and capital transactions in both the near term and over the longer term. The Company's ability to generate funds from operations may be affected by numerous factors, including general economic conditions and levels of consumer confidence and demand; however, the Company expects to be able to manage its working capital levels and capital expenditure amounts so as to maintain its liquidity levels. 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 current indebtedness or for other corporate purposes.

Management believes the department store business and other retail businesses will continue to consolidate. The Company intends from time to time to consider additional acquisitions of, and investments in, department stores and other complementary assets and companies. 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.

Outlook

The Company is assuming that general economic and other conditions and consumer confidence and demand will be such that comparable store sales will be between down 1 percent and up 1 percent for both the third and fourth quarters of 2003. The Company presently expects to achieve earnings per share from continuing operations in the remainder of fiscal 2003 of $2.40 to $2.50, consisting of $.25 to $.30 a share in the third quarter and $2.15 to $2.20 a share in the fourth quarter of 2003. These estimates include additional store-closing costs of approximately $10 million in the third quarter and $2 million in the fourth quarter. In connection with these estimates, the Company is assuming that the gross margin rate will be up slightly for the remainder of the year, compared to last year, and SG&A dollars, excluding the aforementioned store-closing costs, will also increase slightly compared to last year.

The accuracy of the assumptions and the resulting forecasts described above is subject to uncertainties and circumstances beyond the Company's control. Consequently, actual results could differ materially from the forecasted results. See "Forward-Looking Statements" for a discussion of matters that could cause actual results to vary from the Company's expectations.

Item 4. Controls and Procedures

The Company's Chief Executive Officer and Chief Financial Officer have carried out, as of August 2, 2003, an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and forms. There were no changes in the Company's internal control over financial reporting that occurred during the Company's most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

PART II -- OTHER INFORMATION

FEDERATED DEPARTMENT STORES, INC.

Item 1. Legal Proceedings

The Company and certain members of its senior management have been named defendants in five substantially identical purported class action complaints filed on behalf of persons who purchased shares of the Company between February 23, 2000 and July 20, 2000. Originally filed in August, September and October 2000, in the United States District Court for the Southern District of New York, the actions have been consolidated into a single case (In Re Federated Department Stores, Inc. Securities Litigation, Case No. 00-CV-6362 (RCC)) and a consolidated amended complaint (the "Complaint") has been filed. The Complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, on the basis that the Company, among other things, made false and misleading statements regarding its financial condition and results of operations and failed to disclose material information relating to the credit delinquency problem at the Company's former Fingerhut subsidiary. The plaintiffs are seeking unspecified amounts of compensatory damages and costs, including legal fees. Management intends to defend vigorously against those allegations. A motion to dismiss the Complaint is pending. Discovery has not commenced.

Item 5. Other Information

This report and other reports, statements and information previously or subsequently filed by the Company with the Securities and Exchange Commission (the "SEC") contain or may contain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the management of the Company at the time such statements are made. The following are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (i) statements preceded by, followed by or that include the words "may," "will," "could," "should," "believe," "expect," "future," "potential," "anticipate," "intend," "plan," "think," "estimate" or "continue" or the negative or other variations thereof, and (ii) statements regarding matters that are not historical facts. Such forward-looking statements are subject to various risks and uncertainties, including (a) risks and uncertainties relating to the possible invalidity of the underlying beliefs and assumptions, (b) possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions, (c) actions taken or omitted to be taken by third parties, including customers, suppliers, business partners, competitors and legislative, regulatory, judicial and other governmental authorities and officials, and (d) attacks or threats of attacks by terrorists or war. Furthermore, future results of the operations of the Company could differ materially from historical results or current expectations because of a variety of factors that affect the Company, including transaction costs associated with the renovation, conversion and transitioning of retail stores in regional markets; the outcome and timing of sales and leasing in conjunction with the disposition of retail store properties; the retention, reintegration and transitioning of displaced employees; and competitive pressures from department and specialty stores, general merchandise stores, manufacturers' outlets, off-price and discount stores, and all other retail channels; and general consumer-spending levels, including the impact of the availability and level of consumer debt, levels of consumer confidence and the effects of the weather. In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the statements in the immediately preceding sentence and the statements under captions such as "Risk Factors" and "Special Considerations" in reports, statements and information filed by the Company with the SEC from time to time constitute cautionary statements identifying important factors that could cause actual amounts, results, events and circumstances to differ materially from those reflected in such forward-looking statements.

Item 6. Exhibits and Reports on Form 8-K

A.

Exhibits

 
     
 

10.1

Amended and Restated 364-Day Credit Agreement, dated as of June 27, 2003, by and among the Company and the financial institutions party thereto.

     
 

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a).

     
 

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a).

     
 

32.1

Certifications by Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act.

     

 

B.

Reports on Form 8-K

 
 

1.

Current report on Form 8-K, dated May 8, 2003, reporting matters under item 12 thereof.

     
 

2.

Current report on Form 8-K, dated May 14, 2003, reporting matters under item 12 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 hereunto duly authorized.

FEDERATED DEPARTMENT STORES, INC.

Dated:  September 16, 2003

By:_____________________________

Name:  Dennis J. Broderick

Title:  Senior Vice President, General Counsel
            and Secretary

By:_____________________________

Name:  Joel A. Belsky

Title:  Vice President and Controller

           (Principal Accounting Officer)