Macy’s Annual Report 2001

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FY2001 Annual Report · Macy’s

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2001 Annual Report

Standing Still
Gets You
Nowhere...

One of the nation's leadi

Federated Department Stores, Inc. currently operates more than 450 stores

in 34 states, Guam and Puerto Rico under the names of Bloomingdale’s,

The Bon Marché, Burdines, Goldsmith’s, Lazarus, Macy’s and Rich’s. It also

operates macys.com, Bloomingdale’s By Mail, and a network of online

bridal gift registries operated in conjunction with WeddingChannel.com.

C O M M U N I T Y

I N V O L V E M E N T

D I V E R S I T Y

Each Federated department store division is

As the leading retailer in some of America’s

well established in its operating areas.

largest and most diverse metropolitan 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 2001, cash contributions to charitable

organizations by Federated, its divisions and

subsidiaries – including those made by the

Federated Department Stores Foundation –

totaled approximately $15.2 million.

Federated prides itself on aggressively encouraging

inclusion of individuals of all types within its

workforce, vendor relationships 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 management/professional

ranks, 68 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.

Partners in Time, the company’s nationally

Additionally, Federated’s vendor development

recognized employee volunteer program,

program seeks to source goods and services –

involves all divisions and support operations.

either for resale or in support of business

In 2001, more than 68,800 volunteers gave

operations – from qualified minority- and

nearly 116,000 hours of time – touching

women-owned enterprises. In 2001, these

nearly every segment of American society.

purchases totaled approximately $300 million.

ng department store retailers...

F I N A N C I A L

H I G H L I G H T S

C O N T I N U I N G

O P E R A T I O N S

2001

2000

1999

1998

$ 15.651 billion
(5.3%)

$ 16.638 billion
2.0%

$ 16.029 billion
4.5%

$ 15.365 billion
2.2%

Net Sales

Same-store sales

Operating Income

Excluding unusual items (Note 1)
% of sales

$ 1.319 billion
8.4%

$ 1.771 billion
10.6%

$ 1.693 billion
10.6%

$ 1.455 billion
9.5%

EBITDA (Note 2)

% of sales

Net Income (Loss) (Note 1)

$ 2.008 billion
12.8%

$ 2.422 billion
14.6%

$ 2.358 billion
14.7%

$ 2.079 billion
13.5%

Excluding unusual items
Including unusual items

$
604 million
$ (276) million

$
870 million
$ (184) million

$
$

825 million
795 million

$
$

685 million
662 million

Diluted Earnings (Loss) Per Share (Note 1)

Excluding unusual items
Including unusual items

$ 3.03
$ (1.38)

$ 4.20
$ (.89)

$ 3.76
$ 3.62

$ 3.06
$ 2.96

Notes:

(1) Unusual items represent, where applicable, inventory valuation adjustments in 2001, asset impairment and restructuring charges in 2001 and 2000,

discontinued operations of Fingerhut in 2001, 2000 and 1999, and the loss associated with the prepayment of debt in 2001 and 1998.

(2) EBITDA represents earnings from continuing operations before interest, taxes, depreciation, amortization, and unusual items in 2001 and 2000.

5
1
$

4
1
$

%
7

4
1

%
6

4
1

%
5

3
1

%
8

2
1

6
7

3
6 $
0

3
$

0
2

4
$

3
0

3
$

98 99 00 01

SALES
From Continuing Operations
In Billions
(Excludes sales of stores closed and not replaced,
discontinued businesses and 53rd week of 2000)

EBITDA
From Continuing Operations
As a Percent of Sales
(Earnings Before Interest, Taxes, Depreciation,
Amortization and Unusual Items)

DILUTED EARNINGS
PER SHARE
From Continuing Operations

(Excludes Unusual Items)

Because we believe standing

still gets you nowhere,

Federated is moving

aggressively across a number

of fronts to restore sales

growth, increase profitability

and improve

return on investment.

L E T T E R

T O

S H A R E H O L D E R S

2001Dear Fellow Shareholder:

over. For our country, our industry and our company, 2001 was one of those years.

Sometimes, the best that can be said about a year is that it’s

From adversity, however, has come a renewed energy and determination to move
forward – to overcome challenges both internal and external. This is as true for
Federated as it is for America. So just as we are proud of our nation and its ability to
rise to the difficult challenges we are facing in the aftermath of 2001, so are we
proud of Federated’s 115,000 employees nationwide for the incomparable spirit and
resolve they have demonstrated over these difficult past 12 months.

A confluence of factors influenced our 2001 performance, some of which were well
outside of our ability to control. Among these were an economy dipping into recession,
terrorism and tourism issues that significantly impacted major East and West Coast
markets where Federated has sizeable concentrations of stores, power shortages and
blackouts in California, and unseasonable weather patterns across much of the
country that hurt sales of wear-now apparel throughout most of the year.

In addition to these external issues, there were internal factors influencing our
performance, many of which we believe can be impacted positively. So it is in these
areas that we are focusing our strategies and redoubling our efforts in 2002, with
the singular goal of developing a more compelling business proposition for our
customers to drive sales growth. We will not stand still until this is accomplished.

To achieve this goal, our objectives are clear:

• We will improve the shopping experience for our customers, making it easier

and faster to purchase merchandise.

• We will make our delivery of value more apparent to the customer.

• We will narrow our merchandise assortments to make selections easier and

presentations more convincing.

• We will focus on fashion and newness.

• We will make our stores more visually appealing and easier to navigate.

• We will tell our new story through effective marketing.

• We will continue to invest in developing our people.

Our singular goal

for 2002 is to develop

a more compelling

business proposition

for our customers to

drive sales growth.

%
6

0
% 1
5
.
9

%
6

0
1

%
4
.
8

98 99 00 01

OPERATING INCOME
From Continuing Operations
As a Percent of Sales
(Excludes Unusual Items)

• We will increase profitability and return on investment.

We are committed to achieving results in each of these areas in the year ahead, even
as we continue to build on some of the more notable successes of the last year.

2001 Progress

Although our successes tend to be overshadowed by the year’s larger issues, they are
significant because they bode well for the future of our department store operations:

• an ability to continue generating significant amounts of free cash flow from our

department store operations, despite pressure on sales – approximately $775 million
(after capital expenditures but before the acquisition of Liberty House), compared
to approximately $600 million in the prior year;

• an encouraging recovery in the fourth quarter, which enabled us to exceed revised

sales and EBIT forecasts;

• year-end inventories that were down about 7% on a same-store basis – a difficult
feat to achieve, but one that positions the company well for the year ahead;

• an exceptionally strong private brand program that consistently outperforms the
industry, and that has grown to represent 16% of Federated’s total 2001 sales;

• solid progress in growing our junior’s and young men’s businesses, which

significantly outperformed the rest of the store in the last year;

• opening of a new prototype department store – Lazarus at Easton Center
in Columbus, OH – where we are testing an array of new service and
merchandising concepts;

• the acquisition of Liberty House, with stores in Hawaii and Guam, and its virtually

flawless integration into our Macy’s West division;

• the elimination of Stern’s and the conversion of 17 stores into Macy’s in New York
and New Jersey, which further solidified Macy’s positioning in those markets, and
planned conversions of two New Jersey Stern’s stores to Bloomingdale’s, slated for
this year.

In January 2002, we announced our intent to dispose of Fingerhut, preferably
through the sale of its operations as a going concern, or in the case of the Fingerhut
catalog, by closure of the business. In total, we expect to realize approximately $1.1 to
$1.3 billion of after-tax proceeds, net of one-time costs, over the next four years as a
result of this disposition.

Federated acquired Fingerhut in 1999 primarily for its e-commerce potential. Knowing
what we do now, we certainly would have done things differently three years ago.

Yet having said that, we also know that being willing to take prudent risks is integral
to running a business. Indeed, in today’s competitive retail environment, we believe
there is greater risk in standing still and accepting the status quo than in stepping
out from the crowd, testing new concepts and trying to move forward.

Stepping Ahead

In 2002, we will resolutely pursue the goals for driving sales growth outlined
above, with the objective of generating a significant improvement in earnings and
return on investment.

We plan to open 14 new stores this year – 11 new department stores, two
Bloomingdale’s home stores in Las Vegas and Chicago, and a new Burdines Furniture
Gallery in Fort Lauderdale – and we will continue to test and roll out new prototype
concepts in these stores as well as incorporating some of these advances into our
ongoing store remodel program. A total of $700 million has been budgeted for
capital expenditures in 2002.

We also are investing in our people. Federated’s advanced Leadership Institute is
among the industry’s most outstanding training programs, and a catalyst for
Federated being recognized as one of Training magazine's Top 100 corporations
“unsurpassed in harnessing human capital.”

This is where we have been and where we are headed. We’re confident we have the
right people, the right strategies, the right priorities and a strong balance sheet
in place to ensure progress and profitability in 2002, and we are committed to
delivering that result.

Sincerely,

James M. Zimmerman
Chairman/Chief Executive Officer

Terry J. Lundgren
President/Chief Operating Officer
& Chief Merchandising Officer

April 17, 2002

James M. Zimmerman

Terry J. Lundgren

Making

The choice between standing still or stepping out from the

either approach, one thing is certain: standing still gets

purposeful strides on a number of fronts in pursuit of creati
(cid:2) Ultimately, it’s all about growing sales and increasing p

business practices in ways that leverage our strengths and c

To refine our merchandising app

New initiatives to grow sales are focused on improving the department store merchan-

dising by narrowing assortments, and offering more newness and exclusive items.

We also will be simplifying the shopping experience and strengthening marketing

support. We believe these efforts will build deeper relationships with customers and

increase the attractiveness of our stores as shopping destinations of choice.

We expect to significantly narrow our store assortments in 2002 and to reduce the

amount of excess inventory on the sales floor. This will help sharpen and clarify

our approach to customers, resulting in a focused, more compelling offering on

our selling floors. It also will enable us to partner more closely with selected

national-brand vendors to develop new and exclusive merchandise. Because of

our strong partnerships in the marketplace, many of these vendors are eager to

support Federated’s desire to offer unique, differentiated products in our stores,

and we greatly appreciate and value these relationships.

Going forward, private brand and private label merchandise will play a larger role

than ever in differentiating our merchandise offering and delivering superior value
to the customer. Our strong private brands – including Charter Club, I.N.C,
Alfani, The Cellar, Greendog, Style & Co., Jennifer Moore, First Impressions, Tools of

the Trade and Arnold Palmer – will continue to grow their presence throughout

the store with new lines, merchandising programs, sales promotions and marketing

innovation. Tasso Elba and Glen Royal are new private labels developed to address

Tracks

crowd really is no choice at all. While there may be risk in

you nowhere.

So Federated is committed to taking

ng the best possible shopping experience for our customers.

profitability.

To do that, we are taking steps to improve

capitalize on opportunities in every facet of the company…

roach…

specific niche opportunities within the men’s sportswear department. Meanwhile,
Federated’s best-selling I.N.C brand has enlisted Heather Mills, a celebrated model
and activist, to represent its new line of updated casual fashion for women in 2002.

The new JM Collection launches in 2002 with a fresh approach to the moderate,

traditional career customer, and with assortments focused on a relaxed, soft,

lifestyle approach to dressing. The introduction of Greendog footwear in selected

children’s shoe departments nationwide will allow head-to-toe wardrobing for kids

within the expanded Greendog brand.

Federated Merchandising Group’s design, development and marketing acumen –

as well as its production volume – will continue to evolve as our exclusive brands

extend beyond Federated’s own stores to non-competitive department store retailers

internationally. A full range of Federated’s private brands will be sold this year

in leading stores in Japan, Australia, Chile, Peru and other nations. We are unaware

of any department store whose private brands are so desired by other retailers

around the world.

Across Federated, we are revitalizing marketing programs to improve their efficiency

and increase their effectiveness in attracting customers and encouraging multiple

purchases. We will make our advertising more efficient through new systems

for tracking, reporting and measuring the results of marketing programs, and more

effective through more innovative tools and creative executions.

(cid:2)
(cid:2)
To run better stores…

While merchandising and marketing initiatives will bring more customers in the door,

our stores need to continually become easier and more exciting places to shop.

We recognize that today’s department stores must simultaneously provide convenience

and simplicity for time-starved customers, while also serving as entertainment for

shoppers seeking diversion, comfort and escape.

Federated’s stores are focused on improving their execution of fundamentals with

the intent of becoming easier to shop. There will be more room to walk, more places

to sit, and a wider variety of in-store refreshment options.

Technology will be used to collect and analyze data more scientifically so sales and

markdowns can be better managed. Likewise, more widespread use of systems will

ensure that the customer will find us in-stock more often on the correct size, color

and style of apparel and home goods.

In the bigger picture in 2002, we will roll out successful pilots tested over the past

several years within our "reinventing the department store" initiative. We will be

concentrating capital dollars on targeted store improvement projects, while molding

store formats to specific market opportunities.

Our dynamic new junior’s and young men’s department formats will be incorporated

into new and existing stores around the country as part of the effort to attract

younger shoppers with an environment that appeals to their heightened sense of style

and excitement. A similar process is beginning with children’s departments, where a

new holistic formula for success will be developed and tested in 2002.

In markets where full-line, mall-anchor stores are not feasible, Federated will be

building smaller department stores that package high-quality fashion brands and

basics – across multiple families of business – into half the space of a typical Federated

location. Sometimes, these stores will be located in suburban centers or will stand

alone in high-potential trading areas.

To satisfy the customer…

Department stores rely on knowledgeable sales staffs – the service they provide and

the relationships they build – to satisfy customers and build a loyal clientele. Even as

we improve merchandise, adopt new technology and refocus store operations, the

human touch is central to everything we do. Federated is resolutely committed to

having the best people in retailing, and to ensuring that caring for the customer is the

top priority in the way we do business.

In 2002, we will be increasing the intensity of training and development for our sales

associates on the selling floor, helping them maximize their performance and drive sales.

We also will extend the acclaimed Federated Leadership Institute, with its unique approach

to personal development and achievement-based management, to a broader audience of

employees. In our view, this investment in our people – and in customer satisfaction – is

more important than ever in a difficult economy.

Our people will have the support and tools necessary for success. Stores will be more

customer-friendly in the way merchandise is organized, displayed and signed. Technology

will continue to make transactions faster and easier, to communicate useful information

directly to customers through in-store computer terminals and displays, and even to

streamline bridal registry selection and gift-giving through the use of Palm Pilots in some

stores. On-location amenities, such as upscale coffee shops, shopping carts and childcare

in selected locations, will encourage customers to stay and shop in our stores longer.

To improve profitability…

Federated is managing its business to grow sales while increasing its profitability and

producing strong cash flow. This requires us to control costs, employ new technologies,

manage assets effectively and prioritize capital spending – all of which we have

identified as key areas of focus that will enable us to return to historical levels of

profitability in the near future.

In a rapidly changing retail sector – one in which flexibility is essential to take

advantage of high-potential opportunities as they emerge – a strong balance sheet is

paramount and cash is king. In 2001, Federated’s free cash flow from department

store operations was approximately $775 million, after capital expenditures but before

the acquisition of Liberty House. This was well above the approximately $600 million

generated in fiscal 2000.

We will not be a static organization that’s resigned simply to protect our turf. Federated

is committed to a path of steady and profitable growth built on decisive action and

innovative approaches. We are a company that stands for quality. We stand for value.

We stand for fashion and excitement. But we most certainly don’t stand still.

B o a r d o f D i r e c t o r s

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 Operating
Officer & 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
President
Nicholas Applegate
Capital Management

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

C o r p o r a t e M a n a g e m e n t

Senior Vice
Presidents

Dennis J. Broderick
General Counsel &
Secretary

Karen M. Hoguet
Chief Financial Officer

Rudolph V. Javosky
Design & Construction

Vice
Presidents

Joel A. Belsky
Controller

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

Neal J. Glueck
Tax

Gary J. Nay
Real Estate

Executive
Officers

James M. Zimmerman
Chairman & CEO

Terry J. Lundgren
President, COO & CMO

Ronald W. Tysoe
Vice Chairman
Finance & Real Estate

Thomas G. Cody
Executive VP
Legal & Human Resources

Susan Kronick
Group President
Regional Department Stores
& Federated Direct

Carol A. Sanger
Corporate Communications
& External Affairs

Michael Zorn
Employee Relations

D i v i s i o n P r i n c i p a l s

Bloomingdale’s
Michael Gould
Chairman

Edwin J. Holman
President

The Bon Marché
Daniel H. Edelman
Chairman

Peter R. Sachse
President

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

Macy’s West
Jeremiah J. Sullivan
Chairman

Robert Mettler
President

Rudolph J. Borneo
Vice Chairman &
Director of Stores

Rich’s/Lazarus/
Goldsmith’s
Ronald Klein
Chairman

David L. Nichols
President

Federated
Direct

Dawn Robertson
President-
Federated Stores Direct

Federated
Merchandising
Group
Janet E. Grove
Chairman

Leonard Marcus
President

Financial,
Administrative &
Credit Services
James J. Amann
Chairman

Federated Logistics,
Operations, Store
Planning & Systems
Tom Cole
Chairman

Federated
Systems Group

Larry A. Lewark
President

Shareholder Information

To Reach Us

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

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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

Federated Department Stores, Inc. • Investor Relations Department
7 West Seventh Street • Cincinnati, OH 45202

Call:

Write:

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

10K in pocket

The next annual meeting of shareholders will be held at 11 a.m. EDT, on Friday, May 17, 2002
at Corporate Headquarters in Cincinnati, OH.

Federated Selling Stars

Listed below are the talented, dedicated individuals inducted into Federated’s
Star Academy for 2001. They represent our company’s best and brightest
selling service professionals. Each year, one sales associate and one sales
manager is selected from each department store division for inclusion in the
Star Academy, based on their success in building customer relationships
through a commitment to service and satisfaction.

Founded in 1995, the Star Academy now includes 96 women and men who
serve as role models and mentors for newer and less experienced sales
professionals. Each of these winners has a story of excellence and
achievement that inspires his or her peers.

Jennifer Boccia
Huntington, NY
Bloomingdale's

Cindy Haynes
Coral Springs, FL
Burdines

Danielle Maple
West Covina, CA
Macy's West

Sally Zaki
Short Hills, NJ
Bloomingdale's

George (King) Knoch
Seminole, FL
Burdines

Anne Salem
Pleasanton, CA
Macy's West

Renee Layton
Pocatello, ID
The Bon Marché

Joseph Gahr
Yonkers, NY
Macy's East

Hyacinth Allen
Atlanta, GA
Rich's/Lazarus/Goldsmith's

Judith Wexler
Bellingham, WA
The Bon Marché

Lynne O'Connell
Braintree, MA
Macy's East

Annette Hagan
Evansville, IN
Rich's/Lazarus/Goldsmith's

7 West Seventh Street

Cincinnati, Ohio 45202