Business Context and Reporting Period
Company: Federated Department Stores, Inc. (Parent of Macy's, Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Fiscal quarter ended July 31, 2004 (13 weeks) and fiscal year-to-date ended July 31, 2004 (26 weeks).
Business Overview: A retail organization operating department stores (including Macy's, Bloomingdale's, and regional banners) across 34 states, Puerto Rico, and Guam. The company is executing a strategy to differentiate merchandise, simplify pricing, and leverage the Macy's brand through co-branding and store consolidations.
Key Financial Metrics
| Metric (in millions) | 13 Weeks Ended July 31, 2004 |
13 Weeks Ended Aug 2, 2003 |
26 Weeks Ended July 31, 2004 |
26 Weeks Ended Aug 2, 2003 |
|---|---|---|---|---|
| Net Sales | $3,548 | $3,434 | $7,065 | $6,725 |
| Gross Margin | $1,457 | $1,409 | $2,869 | $2,698 |
| Operating Income | $245 | $264 | $462 | $410 |
| Net Income | $78 | $120 | $175 | $166 |
| Diluted EPS | $0.43 | $0.64 | $0.96 | $0.88 |
| Cash from Operations | N/A | N/A | $490 | $719 |
| Short-term Debt | $691 | N/A | N/A | N/A |
| Long-term Debt | $3,040 | N/A | N/A | N/A |
| Cash & Equivalents | $605 | N/A | N/A | N/A |
Note: Balance sheet figures are as of July 31, 2004. Cash flow figures are for the 26-week period.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3.3% in the quarter and 5.1% year-to-date. Comparable store sales rose 3.3% in the quarter and 5.0% year-to-date, driven by strength in women's and men's sportswear, handbags, and jewelry.
- Profitability Decline (Quarterly): Net income dropped 35% to $78 million in the quarter compared to $120 million in the prior year. This was primarily due to a $59 million charge associated with the repurchase of $273 million in senior notes and increased restructuring costs.
- Profitability Increase (Year-to-Date): Net income rose 5% to $175 million year-to-date, reflecting strong sales and gross margin performance that offset higher interest and restructuring expenses.
- Interest Expense: Net interest expense surged to $119 million in the quarter (from $65 million) and $179 million year-to-date (from $135 million), largely due to the debt repurchase costs.
- Operating Expenses: SG&A expenses as a percentage of sales increased to 34.2% in the quarter (from 33.3%) due to higher pension costs and store closing/consolidation expenses.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Full Year 2004 Guidance: Management expects comparable store sales to increase 3.0% to 4.0% for the full year. Diluted EPS is projected at $3.70 to $3.80.
- Remaining 2004 Outlook: Comparable store sales are expected to rise 1.5% to 3.0% in both the third and fourth quarters. Diluted EPS is estimated at $0.35 to $0.40 for Q3 and $2.45 to $2.55 for Q4.
- Restructuring Costs: The company anticipates $58 million in store closing and consolidation costs for the remainder of the year, including $18 million in inventory valuation adjustments (cost of sales) and $40 million in SG&A.
- Shareholder Returns: The company intends to repurchase $700 million to $900 million of common stock in 2004. The quarterly dividend was increased to $0.135 per share.
Risks and Contingencies
- Hurricane Frances: Preliminary estimates indicate lost sales of approximately $20 million in Florida stores, reducing September same-store sales by 1.5% and earnings by 3-4 cents per share in Q3.
- Legal Proceedings: The company is defending a securities class action lawsuit regarding its former subsidiary, Fingerhut Companies, Inc. (dismissed without prejudice in March 2004, refiled May 2004). Additionally, a California Attorney General action alleges violations of Proposition 65 regarding lead in fashion jewelry; management does not expect a material financial impact.
- Market Conditions: Results are subject to general economic conditions, consumer confidence, competitive pressures, and weather events.
Investor Verification Checklist
- Debt Repurchase Impact: Verify the $59 million charge related to the buyback of 8.5% senior notes and its effect on quarterly earnings.
- Restructuring Accruals: Confirm the $58 million projected restructuring costs for the remainder of 2004 and the timing of cash outflows.
- Hurricane Impact: Monitor updates on the financial impact of Hurricane Frances beyond the initial $20 million sales loss estimate.
- Comparable Store Sales: Track the achievement of the 3.0% to 4.0% full-year comparable store sales growth target.
- Capital Allocation: Review progress on the $700-$900 million stock repurchase program and the execution of the home store centralization strategy.