Macy’s Annual Report 2000

FY2000 Annual Report · Macy’s

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Annual Report
2000

the big picture

On the Cover:
Greendog is Federated's
newest private brand,
helping to distinguish our
stores for fashion, quality
and value. And like the
good dog he is, Greendog is
helping local animal shelters
and humane associations
raise much-needed funds
through various community
and in-store events.

Federated Department Stores, Inc.,
is one of the nation's leading department store retailers. Federated currently operates

more than 425 department stores in 33 states and Puerto Rico under the names of

Bloomingdale's, The Bon Marché, Burdines, Goldsmith's, Lazarus, Macy's and Rich's,

as well as macys.com, bloomingdales.com and Bloomingdale's By Mail. Federated also

operates the Fingerhut catalog and e-commerce subsidiary.

Community Involvement
Each Federated department store division and direct-to-customer
subsidiary is well established in its operating areas.

The company believes in giving back to the communities from
which it draws strength and sustenance. Federated understands that
stronger, healthier and more vibrant communities provide better
environments for our stores to do business and for our employees
and customers to live and work.

In 2000, cash contributions to charitable organizations by Federated,
its divisions and subsidiaries – including those made by the Federated
Department Stores Foundation – totaled approximately $16.3 million.
A significant and growing percent of direct giving was devoted to two
areas of strategic focus – women’s issues and HIV/AIDS.

Partners in Time, the company’s nationally recognized employee
volunteer program, involves all divisions and support operations.
In 2000, more than 53,500 volunteers gave nearly 102,300 hours
of time – touching nearly every segment of American society.

Diversity

As a leading retailer in some of America’s largest and most diverse
metropolitan areas, Federated prides itself on aggressively encouraging
inclusion of individuals of all types within its workforce, vendor relation-
ships and customer base. Management’s philosophy is intended to help
ensure that appreciation for the unique characteristics and strengths of
every person is pervasive at every level of the company.

Of Federated’s total workforce, approximately 76 percent are women
and 44 percent belong to a racial minority group. In management ranks,
66 percent of our executives are women and 23 percent are racial
minorities. This makes Federated among the leaders in diversity in our
industry, as well as among major U.S. corporations.

Additionally, Federated’s vendor development program seeks to source
goods and services – either for resale or in support of business
operations – from qualified minority- and women-owned enterprises.
In 2000, these purchases totaled approximately $317 million.

Net Sales

$ 18.407 billion

$ 17.716 billion

$ 15.365 billion

$ 15.220 billion

2000

1999

1998

1997

Department Store Operating Income
Excluding unusual items (Note 1)
% of department store sales

Total Operating Income

$ 2.004 billion
12.2%

$ 1.871 billion
11.8%

$ 1.589 billion
10.3%

$ 1.473 billion
9.7%

Excluding unusual items (Note 1)
% of sales

$ 1.512 billion
8.2%

$ 1.701 billion
9.6%

$ 1.455 billion
9.5%

$ 1.341 billion
8.8%

EBITDA (Note 2)

% of sales

Net Income (Loss) (Note 1)

$ 2.245 billion
12.2%

$ 2.439 billion
13.8%

$ 2.079 billion
13.5%

$ 1.931 billion
12.7%

Excluding unusual items
Including unusual items

$
637 million
$ (184) million

$
$

795 million
795 million

$
$

685 million
662 million

$
$

575 million
536 million

Diluted Earnings (Loss) Per Share (Note 1)

Excluding unusual items
Including unusual items

$ 3.08
$ (.90)

$ 3.62
$ 3.62

$ 3.06
$ 2.96

$ 2.58
$ 2.41

Notes:

(1) Unusual items represent, where applicable, inventory valuation adjustments related to the Fingerhut restructuring in 2000, asset impairment and restructuring

charges in 2000, and the loss associated with the prepayment of debt in 1998 and 1997.

(2) EBITDA represents earnings before interest, taxes, depreciation, amortization, and unusual items in 2000.

Financial Highlights

Sales
IN BILLIONS

4
8
1
$

7
7
1
$

2
5
1
$

4
5
1
$

EBITDA
AS A PERCENT OF SALES

(EARNINGS BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION)

%
8
3
1

%
5
3
1

%
7
2
1

%
2
2
1

Diluted Earnings
Per Share

(EXCLUDES UNUSUAL ITEMS)

2
6
3
6 $
0
3
8 $
5
2
$

8
0
3
$

97 98 99 00

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To Shareholders

Dear Fellow Shareholder:

The year 2000 for Federated was challenging

and disappointing. While the department store

segment performed acceptably versus our

expectations – and very well compared to the

retail sector as a whole – it was not enough to

justify being satisfied with our overall results.

The Fingerhut credit delinquency problem that

surfaced mid-year caused Federated’s total

earnings performance to be well below standard.

While we know that there inevitably will be ups

and downs for any company, our goal clearly is to

avoid such problems and to capitalize on the

distinctive assets that should enable Federated to

produce superior results over the longer term.

mix of merchandise offerings, including the

important presence of prominent national brands

from the marketplace, can help Federated’s

department stores to consistently produce

operating profits equal to or better than the

world’s best retailers.

Federated also continues to be a strong cash-

flow generator. We believe that cash flow is an

important measure of performance and success

for any company, but in a consolidating retail

sector it is even more of a strategic advantage.

In 2000, the company produced cash flow of

$481 million, compared to $370 million in the

prior year, before financing and the cost of the

Fingerhut acquisition in 1999. Since much of the

Fingerhut issue resulted in a non-cash drain, and

With this in mind, we believe the big picture for

the subsequent downsizing of Fingerhut reduced

Federated is very good.

working capital, we actually wound up exceeding

Our department stores, which constitute 90%

of our business and comprise some of the best

our original cash-flow plans for the year,

performing very well on this important subject.

brands and the best people in the industry,

Last year, Federated used approximately $600

managed to outperform our peers in comp-store

million of excess cash to repurchase 17.6 million

sales growth in 2000, despite an economic

shares of the company’s common stock. In the

climate that grew increasingly difficult as the

future, we expect to continue to use excess cash

year progressed. Department store operating

for stock buybacks, as well as for strategic

income, before one-time charges, also grew last

acquisitions and other appropriate growth

year – to 12.2%, up from 11.8% in 1999. This

opportunities that may arise.

was particularly gratifying since we were coming

off the best year in the company’s history.

Underlying the strength of our department store

segment is a commitment to investing in new

We believe our exclusive private brands and

stores and store remodels, as well as in developing

labels – backed by a merchandising organization

and deploying state-of-the-art retail technology.

unparalleled in the industry – are a crucial

Federated opened nine new department stores in

component of the success of our department

2000, including an exciting new Macy’s in Puerto

stores. Positive customer response to our superior

Rico – our first outside of the continental U.S.

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Department Store
Operating Income

AS A PERCENT OF SALES

(EXCLUDES UNUSUAL ITEMS)

%
2
2
1

%
8
1
1

%
3
0
1

%
7
9

97 98 99 00

We also opened three new furniture stores in

know that being an industry leader means taking

2000 and undertook a number of significant store

chances and being willing to learn from whatever

remodels in key markets. Nine new department

mistakes are made along the way. So given the

stores and two free-standing furniture stores are

choice, Federated would rather take some prudent

on the horizon for 2001. In the area of technology,

risks than choose to do nothing – because as

our in-store systems and back-of-the-house

we see it, doing nothing tends to guarantee that

operational support infrastructure also lead the

nothing is what you’ll get in return.

industry, which we believe gives us a strategic

competitive advantage when it comes to

capitalizing on future growth opportunities.

A Picture of 2001

Our goals for the current year are to be great at

One of the most attractive of these growth

the fundamentals of retailing, and as such they

opportunities we think lies in capturing

are not much changed from prior years.

the potential inherent in effective multi-channel

integration – a seamless weaving together of

stores, catalogs and e-commerce sites into a retail

fabric that covers a broad range of customer

needs and preferences. Although some of the

luster justifiably has worn off the world’s view

of e-commerce in the last year, Federated remains

committed to effectively integrating the bricks

of our stores with the clicks of our e-commerce

We will continue to plan and execute the

business with the objective of maximizing

earnings per share growth while increasing return

on investment. We intend to do this by focusing

on increasing operating income, department store

earnings and cash flow, as well as by taking

advantage of strategic growth opportunities that

may emerge.

websites. It is a matter of customer relationship

While we anticipate a 2% comp-store sales

management, and this is where we see

increase in our department stores this year,

the future headed for successful retailers.

reflecting an economy that most observers

While the numbers being produced by our

Internet businesses still are immaterial, we feel

good about the progress that is being made.

Our principal e-commerce sites last year

generated $156 million in sales – up 150% from

the prior year. In 2001, we expect to see continued

dramatic growth in Internet sales as we further

nurture these brand-extending businesses.

expect to be sluggish into the second half of

the year, our longer term goal is to achieve

comp-store sales increases averaging about 3%.

While our department store EBITDA rate

(earnings before interest, taxes, depreciation

and amortization) now is approaching the

highest in our industry – and, as such, will be

more difficult to grow in the coming years –

we still see some modest opportunity for

As with anything new, however, it inevitably will

improvement. And we are committed to

take awhile before we get the stitching in this

improving our return on investment and

new multi-channel fabric exactly right. Still, we

generating significant cash flow.

In summary, we are resolved to stay

focused and stay on track. We will not be

diverted from our principal department

store business as it is updated for the

opportunities of the future, and we will do

what needs to be done to maximize cash

flow from these unparalleled assets. We

will continue to hire and develop the most

talented individuals in the industry, and we

will encourage these exceptional people to

be creative, innovative and challenging in

their pursuit of our goal of being nothing

less than the best department store

company in the world.

So this is Federated in 2001. We hope this

gives you a better picture of where we are

and where we are headed, and we hope

you like what you see.

Sincerely,

James M. Zimmerman

Chairman/Chief Executive Officer

Terry J. Lundgren

President/Chief Merchandising Officer

April 18, 2001

Customers expect something special when they walk into a
Federated store. And that’s what they get. Our success is rooted in an exceptionally strong

program of private brands, which differentiates our merchandise assortments while providing

fashion and value to the customer. A great example is INC International Concepts, a collection

of updated casual styles for women, carried in about 305 Federated stores nationwide.

Exc

lusive Brands

“Who Let The Dogs Out?”
Well, that’s easy. Federated did – unleashing a

Beyond the merchandise inside our stores, we’re also

best-selling hit of its own last year with the

intent on solidifying our store nameplates as distinctive

launch of the popular Greendog (see our Greendog

national and regional brands. Each division is aggressively

mascot on the cover) private brand apparel for

pursuing a strategic marketing initiative to position

children ages 2 to 12. Backed by playful and

itself in a manner that resonates best with customers

distinctive visual presentations, Greendog is happily

in its markets, building loyalty as a preferred shopping

lapping up sales in this important tots-to-‘tweens

destination. At The Bon Marché, for example, this

merchandise category.

translates into a marketing theme built on bringing the

“good life” — or Bon-life, as we say — to customers

and associates in the Pacific Northwest.

And Greendog is just the most recent example of

innovation in private branding for Federated.

We’ve built a reputation for designing, sourcing

and marketing merchandise that hits the target for

customers and lifestyles across every family of business

– women’s, men’s, children’s and home. Together,

private brands account for about 15 percent of total

sales in our traditional department stores.

The combination of these very special private brands

coupled with important status brands designed by our

key vendor partners create a powerful combination that

customers expect to find in our stores.

In 2000, we also refocused and repositioned our Style

& Co. brand of updated moderate sportswear, and

continued to build our three largest private brands –

Charter Club, INC and Alfani – with new items, lines

and styles. Seeing opportunity for these popular

brands beyond the boundaries of the U.S., we

also signed a licensing agreement that makes

INC fashions available through more than

30 high-volume department stores in Japan.

Look around our sales
floors and what do
you see?
Just what you’d expect to find in America’s

premier department store company –

Ralph Lauren/Polo … Nautica … Kenneth

Cole … Waterford … Tommy Hilfiger …

Estée Lauder … Liz Claiborne … Lancome …

Calvin Klein … DKNY … Nine West …

Jones New York … Guess … and hundreds

of the most powerful and well-known

brands. Indeed, Federated’s stores are

committed to offering the best new

fashions from the best companies in

the business.

Best B

Ralph Lauren/Polo is one of the world’s

leading lifestyle brands, and a cornerstone of

assortments in every Federated department

store, as well as on macys.com. Customers

come to us for Ralph Lauren/Polo

merchandise not only because of the wide

selection of goods we offer across the store,

but also for knowledgeable selling service

that supports the merchandise.

With approximately 85 percent of

the merchandise in our stores coming

from national-brand designers and

manufacturers, Federated places a

suitably high priority on building strong

relationships with our resources. We offer

vendors the best locations for premiering

unique merchandise, as well as for

presenting and selling their goods in a

manner that maximizes results.

Backed by 170 years of retail know-

how, Federated has the skills and agility

necessary to capitalize on emerging

fashion trends through a myriad of

branded resources. In fall 2000, for

example, when customers came to our

stores for trend-setting leather jackets,

outfits and accessories, our buyers selected

and integrated merchandise from dozens

Having the best people –
both on our selling floors and behind the scenes – is essential. Federated recognizes

exceptional personal performance annually through our Star Academy, which

celebrates a top sales associate and sales manager from each department store

division. These talented, dedicated individuals are the backbone of our business,

building customer relationships through a commitment to service and satisfaction.

Inductees into Federated’s Star Academy for 2000 are pictured here.

rands

of vendors to make a strong fashion

statement and deliver a broad choice of

styles and price points.

We also are “gift headquarters” for many

of our customers. Our assortments are

tailored to attract customers buying for

weddings, anniversaries, holidays and

other gift-giving occasions. And we are

leveraging this strength on the Internet

through our own e-commerce sites and

our relationship with WeddingChannel.com.

1. Barbara Swiacki, Boca Raton, FL; Delores Porter, Plantation, FL – Burdines
2. Margaret Nohowel, McLean, VA; Natalie Nelson, Boca Raton, FL – Bloomingdale’s
3. Michelle Bowen, Atlanta, GA; Thomas Weis, Atlanta, GA – Rich’s/Lazarus/Goldsmith’s
4. Sophie Zega, Paramus, NJ; Robert Cato, Garden City, NY – Stern’s
5. Sandra Major, New York, NY; Azza Pitt, Miami, FL – Macy’s East
6. Karen Siporen, Santa Clara, CA; Jeanne Reid, Las Vegas, NV – Macy’s West
7. Robin Wright, Puyallup, WA; Howard Rohner, Boise, ID – The Bon Marché

Branding O

You simply can’t ignore a parade.
Especially not a parade that features towering character balloons, dazzling

floats, marching bands and energized celebrities performing on the streets of

America’s largest city before a crowd of 2 million spectators and a worldwide

television audience.

That’s Macy’s Thanksgiving Day Parade, all right. And it’s the largest annual

spectator event in America. Yet exciting as it is, this legendary parade –

now in its 75th year – is only one of the ways Federated’s stores, catalogs

and online sites uniquely market themselves. In a highly competitive

environment where retailers join a cacophony of others constantly clamoring

for consumer attention, to be recognized you’ve got to stand out from the

crowd. A 40-foot-tall inflated Greendog pretty much does the trick.

direct to consumer
The company’s catalog and e-commerce

businesses enable us to be a multi-channel

retailer offering customers a consistent

and seamless experience across all selling

vehicles and points of contact.

catalogs
Through mail-order catalogs, we offer specially selected
merchandise items and niche categories to targeted customers.

e-commerce
Both macys.comand bloomingdales.comprovide online
customers with the best of merchandise assortments from these
national store brands. The fingerhut.comwebsite is positioned
to offer transaction efficiency for merchandise available in the
Fingerhut catalog.

bricks & clicks
By integrating our direct-to-consumer channels with our
department stores, customers enjoy easy returns and exchanges
of merchandise purchased online. They also get convenient
24/7 access to shopping, charge account information, store
locators, promotions and events listings, as well as enhanced
communications related to fashion and lifestyle.

Big-impact special events are part and parcel
of the theater of department store retailing. And they are typical

across Federated – from the lighting of the Rich’s Great Tree and the

Holiday Star at The Bon Marché to the legendary Passport fashion

shows put on by Macy’s West to support AIDS prevention and

treatment. Equally important are hundreds of smaller events held at

all of our stores each year, designed to stimulate sales and build

customer and community loyalty as we leverage our investments in

store and merchandise brands.

It’s significant that every Federated regional department store division

will have a promotional Internet site in place by the end of 2001.

These sites will support sales and events, educate customers, drive

store traffic and generate sales opportunities in a manner that

urselves

supports our store brands. And we will continue to develop

multi-channel marketing programs, such as an online companion to

the Macy’s parade, a fun-filled Greendog web site for kids, and a

system of permission-based e-mail communications to technology-

savvy customers.

Federated’s partnership with WeddingChannel.com has resulted in a

fully integrated nationwide “clicks and bricks” bridal registry that

combines the convenience and geographic reach of the Internet with

the personal touch of in-store shopping. In the future, we expect to

use emerging technology to develop niche opportunities for selling

merchandise, such as special sizes and unusual items, not typically

found in our stores.

So what’s new about a department store?
Well, at Federated the answer is quite a lot. We’ve embarked on an evolving

process of “reinventing” our department stores, making them more convenient,

exciting and attuned to the needs and lifestyles of a 21st Century customer.

We’re testing scores of new merchandising techniques, philosophies and

concepts within our existing stores to gauge consumer response, improve service

and challenge conventional wisdom. It’s a big undertaking that started with

Brand New

innovations in junior’s departments, and has since expanded to encompass

shoes, food services, cosmetics … even strategically placed computerized “e-osks”

that offer unique and specialized items for

home delivery.

We’re also tinkering with

store formats. A new

Macy’s opened in fall

2000 in West Palm Beach,

FL with only 100,000

square feet – about 40

percent the size of a typical

mall store. Located on a

“city street corner” in

City Place, an eclectic new

mixed-use development,

this new Macy’s features

departments that have been

distilled to trendy and

tightly edited assortments.

It is an example of a compact

new store capable of being

slotted into smaller malls and

even strip centers in markets

where larger-format stores are

not practical.

Stores

The Bon Marché will open another new

first-of-its-kind store in Helena, MT later

this year. Encompassing only 65,000 square

feet, this will be a full-line, upscale store

on a single level, with a single entrance,

centralized sales areas and specially designed

shopping carts – all aimed at creating maximum

customer service and convenience.

Continuing a strategy of locating new stores

in promising markets, Macy’s in October 2000

opened Federated’s first store outside of the

continental United States – in Plaza Las Americas

in San Juan, Puerto Rico. This unique Macy’s

captures the island’s atmosphere in both design

and merchandise.

Building on our strength in upscale, fashion-

oriented home goods, Federated continues to open

free-standing home stores and furniture galleries

in key markets across the United States. Often

located near our full-line department stores, these

free-standing units allow us to present dominant

assortments in key home categories – creating a

destination for the targeted customer.

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Meyer Feldberg
Dean
Columbia Business School,
Columbia University

Earl G. Graves, Sr.
Chairman &
Chief Executive Officer
Earl G. Graves, Ltd.

Sara Levinson
Chairman &
Chief Executive Officer
ClubMom, Inc.

Terry J. Lundgren
President & Chief
Merchandising Officer
Federated Department
Stores, Inc.

Joseph Neubauer
Chairman &
Chief Executive Officer
ARAMARK Corporation

Joseph A. Pichler
Chairman &
Chief Executive Officer
The Kroger Co.

Ronald W. Tysoe
Vice Chairman
Federated Department
Stores, Inc.

Karl M. von der Heyden
Formerly Vice Chairman
PepsiCo, Inc.

Craig E. Weatherup
Chairman &
Chief Executive Officer
The Pepsi Bottling
Group, Inc.

Marna C. Whittington
Formerly Chief
Operating Officer
Morgan Stanley Dean Witter
Investment Management

James M. Zimmerman
Chairman &
Chief Executive Officer
Federated Department
Stores, Inc.

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Department Stores

Bloomingdale’s
Michael Gould
Chairman

Edwin J. Holman
President

The Bon Marché
Daniel H. Edelman
Chairman

Peter R. Sachse
President

Executive Officers

Senior Vice Presidents

Vice Presidents

Dennis J. Broderick
General Counsel &
Secretary

Karen M. Hoguet
Chief Financial Officer

Rudolph V. Javosky
Design & Construction

James M. Zimmerman
Chairman & CEO

Terry J. Lundgren
President & CMO

Ronald W. Tysoe
Vice Chairman

Thomas G. Cody
Executive VP
Legal & Human Resources

Susan Kronick
Group President
Regional Department Stores

Joel A. Belsky
Controller

David W. Clark
Executive &
Organizational
Development, Diversity/
Training/Compensation

Neal J. Glueck
Tax

Gary J. Nay
Real Estate

Carol A. Sanger
Corporate Communications
& External Affairs

John R. Sims
Deputy General Counsel

Joseph F. Vella
Employee Relations

Federated Direct

Support Operations

Jeffrey Sherman
Chairman

Dawn Robertson
President-
Federated Stores Direct

Burdines
Timothy M. Adams
Chairman

Michael J. Osborn
President

J. David Scheiner
Vice Chairman &
Director of Stores

Macy’s East
Harold D. Kahn
Chairman

James E. Gray
President

Ronald Klein
Executive Vice Chairman

Macy’s West
Jeremiah J. Sullivan
Chairman

Robert Mettler
President

Rudolph J. Borneo
Vice Chairman &
Director of Stores

Rich’s/Lazarus/
Goldsmith’s
Arnold Orlick
Chairman

David L. Nichols
President

Stern’s
James N. Andress
President

Federated
Merchandising Group
Janet E. Grove
Chairman

Leonard Marcus
President

Financial, Administrative
and Credit Services
James J. Amann
Chairman

Federated Logistics
& Operations
Tom Cole
Chairman

Federated Systems
Group
James J. Amann
Chairman

Larry A. Lewark
President

To Reach Us:

Visit: Our website at www.federated-fds.com/financialto

• Sign up to have Federated’s news releases sent to you via e-mail

by subscribing to News Direct

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price look-up feature

Call: Federated Investor Relations Department,

Monday-Friday, 8:30 a.m.- 5 p.m. Eastern: 1-513-579-7028

Federated News & Information Request Hotline: 1-800-261-5385

For copies of past news releases & corporate background data: 1-800-853-9150

Write: Federated Department Stores, Inc. • Investor Relations Department

7 West Seventh Street • Cincinnati, OH 45202

Common Stock:

Shares of Federated common stock are traded on the New York Stock Exchange.

The company’s trading symbol is FD.

The approximate number of Federated shareholders of record, as of February 3, 2001,
was 11,700. Also, as of this date there were approximately 198 million shares of
Federated common stock outstanding, excluding shares held by Federated.

Transfer agent for Federated shares:

The Bank of New York • Shareholder Relations Department
Church Street Station • P.O. Box 11258 • New York, NY 10286-1258 • 1-800-524-4458

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Quarterly Trading Volume & Share Price Data:
Shares
Traded

Average
Daily Volume

2000

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

1999

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

75,395,000
104,915,000
105,575,000
108,120,000

85,833,000
68,486,000
63,412,000
75,121,000

1,197,000
1,665,000
1,650,000
1,638,000

1,362,000
1,087,000
991,000
1,212,000

Prices

Low

High

31.63
21.00
23.81
28.31

36.44
45.94
38.44
40.94

44.75
40.88
30.19
46.06

47.13
57.06
52.88
53.88

The next annual meeting of shareholders will be held at 11 a.m. EDT,
on Friday, May 18, 2001 at Corporate Headquarters in Cincinnati, OH.

In recognition of the importance of preserving a healthy environment for future generations,
Federated uses recycled paper and soy ink in the production of its annual report.

7 West Seventh Street
Cincinnati, Ohio 45202
www.federated-fds.com