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Federated 3Q 2004 Earnings Exceed Expectations

From: ASAP

Comments

Federated Department Stores, Inc. (NYSE:FD) (PCX:FD) today reported diluted earnings per share of 42 cents for the third quarter of 2004. This compared to diluted earnings per share of 36 cents in the same 13-week period last year.

For the first three quarters of 2004, Federated reported diluted earnings per share of $1.38, compared to $1.25 a share in the same period of 2003.

Terry J. Lundgren, Federated's chairman, president and chief executive officer, said the company was very pleased to have achieved an earnings performance in the quarter that exceeded expectations.

"The stronger trend we saw in October in markets across the country was encouraging. We also experienced a post-hurricane sales recovery in Florida, although not enough to offset the negative impact in September," Lundgren said.

Sales

Sales in the third quarter totaled $3.491 billion, an increase of 0.2 percent compared to sales of $3.486 billion in the same period last year. On a same-store basis, Federated's third quarter sales were up 0.4 percent.

For the year to date, Federated's sales totaled $10.556 billion, an increase of 3.4 percent from sales of $10.211 billion in the same period last year. On a same-store basis, Federated's sales for the first 39 weeks of 2004 also were up 3.4 percent.

New stores opened in the third quarter included a Rich's-Macy's at Arbor Place Mall in Douglasville, GA, and a Macy's in Rancho Cucamonga, CA.

Operating Income

Federated's operating income totaled $175 million or 5.0 percent of sales for the quarter ended October 30, 2004, compared to operating income of $173 million or 5.0 percent of sales for the same period last year.

The company's operating income for the first 39 weeks of 2004 was $637 million or 6.0 percent of sales, compared to $583 million or 5.7 percent of sales in the same period of 2003.

Federated's operating income includes store closing, centralization and consolidation costs of $36 million in the third quarter this year, compared to $29 million for the same period last year. On a year-to-date basis, store closing, centralization and consolidation costs amounted to $86 million this year, compared to $47 million for the same period last year.

Cash Flow

Cash flow from operating activities was $381 million in the first three quarters of 2004, compared to $630 million in the same period last year. Last year's cash flow from operating activities benefited from lower income tax payments, reflecting the use of Fingerhut net operating losses. After investing activities of $324 million for the first three quarters this year and $356 million for the first three quarters last year, cash flow before financing activities was $57 million compared to $274 million in the same period last year.

The company used $336 million to repurchase 7.4 million shares of Federated common stock in the third quarter.

Fourth Quarter Expectations

Federated reaffirmed its earnings expectations for the fourth quarter of fiscal 2004 of $2.45-$2.55 a share. The company anticipates same-store sales for the fourth quarter to increase 1.5 to 3 percent. Federated is anticipating that November same-store sales will be flat to up 2 percent, while December will benefit from having two extra pre-Christmas shopping days this year, resulting in an anticipated same-store sales increase of 1 to 3 percent.

Federated, with corporate offices in Cincinnati and New York, is one of the nation's leading department store retailers, with annual sales of more than $15.2 billion. Federated operates more than 450 stores in 34 states, Guam and Puerto Rico under the names of Macy's, Bloomingdale's, Bon-Macy's, Burdines-Macy's, Goldsmith's-Macy's, Lazarus-Macy's and Rich's-Macy's. The company also operates macys.com and Bloomingdale's By Mail. www.fds.com

This release contains certain forward-looking statements that reflect current views of the financial performance and future events of Federated. The words "expect," "plan," "think," "believe" and other similar expressions identify forward-looking statements. Any such forward-looking statements are subject to risks and uncertainties. Future results of the operations of Federated 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 company retail stores in regional markets; the outcome and timing of sales and leasing in conjunction with the disposition of company retail store properties; the retention, reintegration and transitioning of displaced company employees; 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, and the effects of weather.

(NOTE: Additional information on Federated is available on the Internet at www.fds.com/pressroom. A webcast of Federated's third quarter earnings call with analysts will be held beginning at 10:30 a.m. on Wednesday, November 10th. Pre-registration is requested. Those unable to access the webcast may call 1-800-347-3350 to listen to the audio in real time. The webcast will be archived for replay beginning approximately two hours after the conclusion of the live call.)

FEDERATED DEPARTMENT STORES, INC.

Consolidated Statements of Income (Unaudited) (Note 1) ------------------------------------------------------

(All amounts in millions except percentages and per share figures)

13 Weeks Ended 39 Weeks Ended ----------------------- ------------------------ October 30, November 1, October 30, November 1, 2004 2003 2004 2003 ----------- ----------- ----------- ------------

Net sales $ 3,491 $ 3,486 $ 10,556 $ 10,211

Cost of sales (Note 2) 2,100 2,091 6,296 6,118

Percent to sales 60.2% 60.0% 59.6% 59.9% ----------- ----------- ----------- ------------

Gross margin 1,391 1,395 4,260 4,093 Percent to sales 39.8% 40.0% 40.4% 40.1%

Selling, general and administrative expenses (Note 3) 1,216 1,222 3,623 3,510

Percent to sales 34.8% 35.0% 34.4% 34.4% ----------- ----------- ----------- ------------

Operating income 175 173 637 583

Percent to sales 5.0% 5.0% 6.0% 5.7%

Interest expense - net (Note 4) (55) (61) (234) (196) ----------- ----------- ----------- ------------

Income before income taxes 120 112 403 387

Federal, state and local income tax expense (46) (45) (154) (154) ----------- ----------- ----------- ------------

Net Income $ 74 $ 67 $ 249 $ 233 =========== =========== =========== ============

Basic Earnings per Share $ .43 $ .37 $ 1.41 $ 1.26 =========== =========== =========== ============

Diluted Earnings per Share (Note 5) $ .42 $ .36 $ 1.38 $ 1.25 =========== =========== =========== ============

Average common shares: Basic 172.0 182.6 177.2 185.8 Diluted 174.4 185.7 180.2 187.5

Depreciation and amortization expense $ 178 $ 176 $ 533 $ 529

FEDERATED DEPARTMENT STORES, INC.

Consolidated Statements of Income (Unaudited) (Note 1) ------------------------------------------------------

Notes:

(1) Because of the seasonal nature of the retail business, the results of operations for the 13 and 39 weeks ended October 30, 2004 and November 1, 2003 (which do not include the Christmas season) are not necessarily indicative of such results for the fiscal year.

(2) Merchandise inventories are primarily valued at the lower of cost or market using the last-in, first-out (LIFO) retail inventory method. Application of this method did not impact cost of sales for the 13 and 39 weeks ended October 30, 2004 or November 1, 2003. For the 13 weeks ended October 30, 2004, cost of sales includes inventory valuation adjustments of $14 million related to the Macy's home store centralization. For the 39 weeks ended October 30, 2004, cost of sales includes inventory valuation adjustments of $31 million (including $26 million related to the Macy's home store centralization and $5 million related to the Burdines-Macy's consolidation).

(3) Selling, general and administrative ("SG&A") expenses include costs and expenses related to the Rich's-Macy's and Burdines-Macy's consolidations, centralizing the Macy's home store business and other store closings. For the 13 weeks ended October 30, 2004, SG&A expenses include store closing and consolidation costs of $22 million, including Macy's home store centralization costs of $7 million and Burdines-Macy's consolidation costs of $5 million. For the 39 weeks ended October 30, 2004, SG&A expenses include store closing and consolidation costs of $55 million, including Macy's home store centralization costs of $26 million and Burdines-Macy's consolidation costs of $10 million. For the 13 weeks ended November 1, 2003, SG&A expenses include store closing and consolidation costs of $29 million, including $7 million related to the Rich's-Macy's consolidation. For the 39 weeks ended November 1, 2003, SG&A expenses include store closing and consolidation costs of $47 million, including $20 million related to the Rich's-Macy's consolidation.

(4) Interest expense for the 39 weeks ended October 30, 2004 includes $59 million of one-time costs, or 20 cents a diluted share, associated with the repurchase of $274 million of Federated's 8.5% senior notes due 2010.

(5) For the 13 and 39 weeks ended October 30, 2004, store closing and consolidation costs and Macy's home store centralization costs (See notes 2 and 3) amounted to $.13 and $.30 per diluted share, respectively. For the 13 and 39 weeks ended November 1, 2003, store closing and consolidation costs (See note 3) amounted to $.09 and $.15 per diluted share, respectively.

FEDERATED DEPARTMENT STORES, INC.

Consolidated Balance Sheets (Unaudited) ---------------------------------------

(millions)

October 30, January 31, November 1, 2004 2004 2003 ----------- ----------- ------------ ASSETS: Current Assets: Cash $ 212 $ 925 $ 227 Accounts receivable 3,147 3,213 2,906 Merchandise inventories 4,259 3,215 4,403 Supplies and prepaid expenses 117 99 113 Deferred income tax assets - - 14 ----------- ----------- ------------ Total Current Assets 7,735 7,452 7,663

Property and Equipment - net 5,974 6,174 6,170 Goodwill 262 262 262 Other Intangible Assets - net 378 378 378 Other Assets 275 284 277 ----------- ----------- ------------

Total Assets $ 14,624 $ 14,550 $ 14,750 =========== =========== ============

LIABILITIES AND SHAREHOLDERS' EQUITY: Current Liabilities: Short-term debt $ 845 $ 908 $ 839 Accounts payable and accrued liabilities 3,369 2,613 3,414 Income taxes 162 362 115 ----------- ----------- ------------ Total current liabilities 4,376 3,883 4,368

Long-Term Debt 3,038 3,151 3,152 Deferred Income Taxes 1,057 998 1,038 Other Liabilities 605 578 642 Shareholders' Equity 5,548 5,940 5,550 ----------- ----------- ------------

Total Liabilities and Shareholders' Equity $ 14,624 $ 14,550 $ 14,750 =========== =========== ============

FEDERATED DEPARTMENT STORES, INC.

Consolidated Statements of Cash Flows (Unaudited) -------------------------------------------------

(millions)

39 Weeks Ended 39 Weeks Ended October 30, 2004 November 1, 2003 ---------------- ---------------- Cash flows from operating activities: Net income $ 249 $ 233 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 531 526 Amortization of financing costs 5 2 Amortization of unearned restricted stock 2 3 Changes in assets and liabilities: Decrease in accounts receivable 54 44 Increase in merchandise inventories (1,044) (1,044) (Increase) decrease in supplies and prepaid expenses (18) 11 Increase in other assets not separately identified - (1) Increase in accounts payable and accrued liabilities not separately identified 712 803 Increase (decrease) in current income taxes (198) 44 Increase in deferred income taxes 61 35 Increase (decrease) in other liabilities not separately identified 27 (26) ---------------- ---------------- Net cash provided by operating activities 381 630 ---------------- ----------------

Cash flows from investing activities: Purchase of property and equipment (316) (313) Capitalized software (59) (46) Collection of notes receivable 30 - Disposition of property and equipment 21 3 ---------------- ---------------- Net cash used by investing activities (324) (356) ---------------- ----------------

Cash flows from financing activities: Debt issued 189 96 Debt repaid (364) (456) Dividends paid (70) (46) Increase in outstanding checks 26 24 Acquisition of treasury stock (689) (485) Issuance of common stock 138 104 ---------------- ---------------- Net cash used by financing activities (770) (763) ---------------- ----------------

Net decrease in cash (713) (489) Cash at beginning of period 925 716 ---------------- ----------------

Cash at end of period $ 212 $ 227

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