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Business Context and Reporting Period

This Form 10-Q covers Federated Department Stores, Inc. (Macy's, Inc.) for the fiscal quarter ended October 28, 1995 (13 weeks) and the 39 weeks ended October 28, 1995. The reporting period is heavily influenced by two major acquisitions: R.H. Macy & Co., Inc. (acquired December 1994) and Broadway Stores, Inc. (acquired July 1995). Consequently, results are not directly comparable to prior periods due to the inclusion of these entities under the purchase method of accounting.

Key Financial Metrics

Note: Operating margins were compressed by significant integration costs. Net interest expense for the 39-week period was $331.1 million.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 94.5% in the quarter and 89.0% for the 39-week period compared to the prior year, driven primarily by the addition of 215 department stores and 150+ specialty stores from the Macy's and Broadway acquisitions.
• Profitability: The company reported a net loss of $46.4 million for the quarter and $170.3 million for the 39 weeks, contrasting with net income of $44.3 million and $80.3 million, respectively, in the prior year periods. This reversal is attributed to high interest expenses and integration costs.
• Expense Ratios: Cost of sales increased to 62.1% of net sales (quarter) and 61.5% (39 weeks) due to markdowns at acquired Broadway stores. Selling, general, and administrative (SG&A) expenses rose to 34.0% (quarter) and 34.9% (39 weeks), largely because credit card revenue (which offsets SG&A) decreased as a percentage of sales following the Macy's acquisition.
• Debt Load: Total debt increased significantly to finance acquisitions. Short-term debt rose to $941.4 million and long-term debt to $5.94 billion.

Guidance, Outlook, and Risks

• Integration Costs: Management expects to incur approximately $45.0 million in additional business integration and consolidation expenses for the remainder of fiscal 1995 related to Macy's and divisional consolidation. Costs related to the Broadway integration for the remainder of 1995 and fiscal 1996 are currently indeterminable.
• Store Strategy: A majority of Broadway stores are expected to be converted to other nameplates in fiscal 1996. The company has entered agreements to sell nine stores and identified 10 more for potential sale.
• Liquidity: Management believes cash on hand, funds from operations, and credit facilities are sufficient to cover working capital, capital expenditures, and debt service. Future acquisitions may be financed through cash, operations, or new debt/equity issuances.
• Legal Risks:
  • Cash Payment Claims: Approximately $362.5 million in face value of claims against Macy's Debtors are disputed; the estimated allowed amount is $242.5 million.
  • Antitrust Review: The California Attorney General is reviewing the competitive effects of the Broadway acquisition.

Investor Verification Checklist

• Verify the final allocation of the $1,620 million Broadway purchase price, specifically the valuation of property and equipment and the final amount of one-time integration costs.
• Monitor the resolution of the $362.5 million disputed cash payment claims against Macy's Debtors to assess potential cash outflows.
• Track the progress of store conversions and dispositions for Broadway to evaluate the impact on future comparable store sales and SG&A ratios.
• Review the company's ability to service its increased debt load ($6.88 billion total) given the current net operating cash outflow of $520.6 million for the 39-week period.
• Confirm the outcome of the California Attorney General's antitrust review of the Broadway acquisition.