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Business Context and Reporting Period

Company: Federated Department Stores, Inc. (operating as Macy's, Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: 13 and 39 weeks ended October 29, 2005.
Key Event: The Company completed the acquisition of The May Department Stores Company ("May") on August 30, 2005, for approximately $11.7 billion. Results of May are included in the consolidated financial statements from the acquisition date. The Company operates approximately 900 department stores nationwide following the merger.

Key Financial Metrics

Note: Debt figures reflect the balance sheet as of October 29, 2005, which includes debt assumed in the May acquisition.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 64.1% in the quarter and 22.5% year-to-date, primarily driven by the inclusion of May's operations. Comparable store sales increased 0.6% for the quarter and 1.4% year-to-date.
• Profitability: Net income surged due to a one-time $480 million pre-tax gain from the sale of proprietary and non-proprietary credit card accounts and receivables to Citibank. Operating income also benefited from the acquisition.
• Debt and Liquidity: Total debt increased significantly to $11.6 billion (from $3.9 billion) to finance the May acquisition. Cash and cash equivalents decreased to $240 million from $868 million at the start of the fiscal year, reflecting the cash portion of the acquisition and inventory build-up.
• Integration Costs: The Company recorded $63 million in May integration costs, primarily related to impairment charges for Macy's locations planned for divestiture.
• Discontinued Operations: The acquired May bridal group business (David's Bridal, etc.) is classified as discontinued operations, generating $3 million in net income for the period.

Guidance, Outlook, and Risks

• Outlook: Management expects comparable store sales to increase 1% to 2% in the fourth quarter of fiscal 2005. Diluted earnings per share from continuing operations are projected at $2.00 to $2.20 for the fourth quarter.
• Integration Costs: The fourth-quarter guidance includes estimated May integration costs of $100 million to $150 million. The Company anticipates total one-time acquisition and integration costs of approximately $1 billion over three years.
• Store Portfolio: The Company plans to divest approximately 83 stores (including 48 acquired May locations) and is reviewing the future of the Lord & Taylor division. Most acquired May stores will be converted to the Macy's nameplate in September 2006.
• Risks: Key risks include the successful integration of May, realization of cost synergies, disruption to employee/customer relationships, and general economic conditions affecting consumer spending. The Company also faces potential legal proceedings regarding Proposition 65 compliance in California, though management does not expect a material impact.

Investor Verification Checklist

• One-Time Gains: Verify the sustainability of earnings by excluding the $480 million gain from the sale of credit card receivables when assessing core operating performance.
• Debt Servicing: Review the impact of the increased debt load ($11.6 billion) on future interest expenses and liquidity, noting the $2.5 billion commercial paper outstanding.
• Integration Execution: Monitor the progress of the $1 billion in planned integration costs and the realization of the projected $450 million in annual cost savings starting in 2007.
• Store Divestitures: Track the timeline and financial impact of the planned divestiture of 83 stores and the decision regarding the Lord & Taylor division.
• Comparable Sales: Assess the 0.6% comparable store sales growth in the quarter, noting the negative impact of Hurricanes Katrina and Wilma on Florida operations.