Federated Financials Presume Fingerhut Closing

Federated Department Stores may have signed a non-binding letter of intent last week with Business Development Group Acquisitions Inc. for the possible sale of Fingerhut, but the parent company's loss is being reported in its financials with the assumption that the catalog operation will be closed.

The news was included yesterday in Federated's fourth-quarter and fiscal 2001 results. Fingerhut's after-tax operating loss for fiscal 2001 was $14 million.

The release stated that “the determination to report Fingerhut financials under the heading of discontinued operations was made in conjunction with Federated's Jan. 16 announcement that the catalog subsidiary would be sold or liquidated in fiscal 2002.”

Federated chief financial officer Karen Hoguet said at yesterday's earnings conference call that though BDGA is interested in buying most of Fingerhut, “until there is sufficient certainty of its outcome, we will continue to report the expected loss as if the core catalog is closed. We do not expect material changes in the [financial] estimates regardless of whether we sell or liquidate.”

In the fourth quarter, Fingerhut had sales of $434 million and earnings before corporate expenses, interest and taxes, or EBIT, of $49 million. During the fiscal year, Fingerhut's sales totaled $1.244 billion and EBIT totaled $103 million, which was within the expected range of $75 million to $125 million.

In the fourth quarter, Federated recorded an after-tax loss on the disposal of discontinued operations of $770 million, including $292 million of estimated after-tax operating losses expected during the wind-down period. This is below the previously forecast range of $800 million to $950 million. The loss includes asset write-offs and cash costs associated with winding down Fingerhut. The company continues to expect to generate about $1.1 billion to $1.3 billion of after-tax proceeds (net of one-time costs) in the next four years as a result of this disposition.

“Fingerhut lost $33 million on a pretax basis in 2001 and was expected to lose more in 2002,” Hoguet said.

Regarding the $770 million disposal loss, she said the estimate assumes the wind-down scenario for the core catalog and the sale of Fingerhut catalogs Arizona Mail Order, Figi's and Popular Club.

“Within that $770 million, a very small portion of that is cash,” she said. “That cash estimate remains unchanged of between $150 million and $200 million after tax.”

Fingerhut is expected to contribute positively to the company's cash flow in 2002.

“But just how much will depend on how we dispose of it in terms of the timing,” Hoguet said.

In addition, asset impairment and restructuring charges for the fourth quarter and fiscal 2001 included $44 million related to the reorganization of macys.com, bloomingdales.com and Bloomingdale's By Mail, all of which took place in the fourth quarter. Inventory valuation adjustments involving restructuring included $3 million related to the reorganization of macys.com, bloomingdales.com and Bloomingdale's By Mail, all in the fourth quarter.

In the 13-week fiscal fourth quarter ended Feb. 2, Federated's income from continuing operations totaled $310 million, compared with $400 million in the 14-week period a year ago. The company recorded income from continuing operations of $518 million, before the extraordinary item, for the 52 weeks of fiscal 2001, compared with earnings of $821 million for the 53 weeks of fiscal 2000.

In other Federated news, the Alaska Ironworkers Pension Trust filed a lawsuit yesterday seeking to stop Federated Department Stores Inc. from taking steps to liquidate its Fingerhut subsidiary, according to reports.

The lawsuit is the second in Hennepin County District Court on behalf of Federated shareholders by the Milberg Weiss Bershad Hynes & Lerach law firm. The first was filed Feb. 14 on behalf of Nick Wesenberg, a Federated shareholder and Fingerhut employee.

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