Business Context and Reporting Period
This Form 10-K covers the fiscal year ended January 28, 1995, for Federated Department Stores, Inc. (the "Company"). The Company is a leading operator of full-line department stores in the United States, operating 355 department stores and over 135 specialty/clearance stores across 35 states. The reporting period is significantly impacted by the December 19, 1994, reverse acquisition of R.H. Macy & Co., Inc. ("Macy's"), structured as a merger where Macy's was the surviving corporation but Federated was treated as the accounting acquirer. The Company is currently integrating the Macy's business, including consolidating divisions such as Abraham & Straus/Jordan Marsh with Macy's East, and Lazarus with Rich's.
Key Financial Metrics
| Metric | 1994 (Current) | 1993 (Prior) |
|---|---|---|
| Net Sales | $8,315.9 million | $7,229.4 million |
| Operating Income | $549.5 million | $531.9 million |
| Net Income | $187.6 million | $193.2 million |
| Earnings Per Share (Diluted) | $1.41 | $1.53 |
| Operating Margin | 6.6% | 7.4% |
| Net Cash from Operations | $161.5 million | $410.5 million |
| Total Assets | $12,379.7 million | $7,419.4 million |
| Total Debt (Short + Long Term) | $4,992.3 million | $2,796.8 million |
| Shareholders' Equity | $3,639.6 million | $2,278.2 million |
Liquidity: As of January 28, 1995, the Company held $206.5 million in cash. It maintains a $2.8 billion bank credit facility ($800 million term, $2 billion revolving) and a $375 million receivables-backed commercial paper facility. Working capital was $2.48 billion.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 15.0% to $8.32 billion, driven primarily by the acquisition of Macy's (adding 121 department stores) and Horne's (10 stores). Comparable store sales increased 3.1%.
- Cost Structure: Cost of sales as a percentage of net sales rose to 61.7% from 60.5%, attributed to higher markdowns to maintain inventory freshness. Selling, general, and administrative (SG&A) expenses decreased as a percentage of sales to 30.7% from 32.1%, aided by expense controls and a $23.8 million reduction in SG&A due to favorable settlements of disputed bankruptcy claims.
- Integration Costs: The Company incurred $85.9 million in business integration and consolidation expenses in 1994, including $45.8 million for Macy's integration and $13.1 million for severance related to the consolidation of Rich's and Lazarus divisions.
- Debt Levels: Total debt increased significantly to fund the Macy's acquisition. The Company incurred $2.53 billion in new debt during 1994, including a $340 million promissory note and $450 million in Senior Notes, while repaying $1.59 billion of prior debt.
- Cash Flow: Net cash provided by operating activities decreased by $249 million to $161.5 million, primarily due to higher accounts receivable balances from increased proprietary credit sales and seasonal decreases in Macy's payables.
Guidance, Outlook, and Risks
- Future Integration Costs: Management expects to incur approximately $225 million in additional business integration and consolidation expenses in the 53 weeks ended February 3, 1996, related to the Macy's acquisition and division consolidations.
- Capital Expenditures: Budgeted capital expenditures for the 1995-1998 period are approximately $2.8 billion, with 68% allocated to existing stores, 21% to new stores, and 11% to technology. Funding is anticipated from operations, though debt issuance remains an option.
- Legal and Tax Contingencies:
- Bankruptcy Claims: Disputed "Cash Payment Claims" from the Macy's reorganization have a face amount of $846.9 million, with an estimated allowed amount of $355.7 million. Management believes the actual allowed amount will not materially exceed the estimate.
- IRS Disputes: The IRS is appealing a decision regarding the deductibility of approximately $176.3 million in "break-up fees." Management does not expect a material adverse effect from this or other tax disputes.
- Dividends: The Company does not anticipate paying dividends on Common Stock in the foreseeable future, and debt covenants restrict dividend payments.
Investor Verification Checklist
- Integration Execution: Verify the Company's ability to realize synergies from the Macy's merger and manage the projected $225 million in future integration costs without eroding margins.
- Debt Service Capacity: Assess the impact of the increased debt load (nearly $5 billion total) on interest coverage ratios, particularly given the seasonal nature of cash flows.
- Bankruptcy Claim Resolution: Monitor the resolution of the disputed $846.9 million in Macy's prepetition claims to ensure the estimated $355.7 million liability does not increase materially.
- Comparable Store Sales: Track the 3.1% comparable store sales growth to ensure it is sustainable post-acquisition integration.
- Inventory Management: Review inventory levels and markdown rates, as cost of sales increased to 61.7% of net sales due to markdowns.