Macy’s, Inc. Form 10-K Summary
Reporting period: Fiscal year ended February 1, 2020, comprising 52 weeks. The request identifies “2018 Q4,” but the supplied filing is Macy’s fiscal 2019 Form 10-K and includes fourth-quarter fiscal 2019 results. Fiscal 2018 ended February 2, 2019.
Business Context
Macy’s is an omnichannel retailer operating Macy’s, Bloomingdale’s, Bloomingdale’s The Outlet, Macy’s Backstage and bluemercury. It operated 775 locations across 43 states, the District of Columbia, Puerto Rico and Guam, with approximately 123,000 non-seasonal employees. The company reports one operating segment.
Fiscal 2019 merchandise sales were concentrated in women’s accessories, intimate apparel, shoes, cosmetics and fragrances ($9.454 billion), men’s and kids’ ($5.628 billion), women’s apparel ($5.411 billion) and home/other ($4.067 billion).
Financial Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $24.560 billion | $24.971 billion | Down 1.6% |
| Credit card revenues, net | $771 million | $768 million | Up $3 million |
| Gross margin | $9.389 billion; 38.2% | $9.756 billion; 39.1% | Down 90 basis points |
| Operating income | $970 million; 3.9% of sales | $1.738 billion; 7.0% | Down $768 million |
| Net income attributable to Macy’s shareholders | $564 million | $1.108 billion | Down $544 million |
| Diluted EPS | $1.81 | $3.56 | Down $1.75 |
| Adjusted EBITDA | $2.336 billion | $2.877 billion | Down $541 million |
| Operating cash flow | $1.608 billion | $1.735 billion | Down $127 million |
| Capital expenditures and capitalized software | $1.157 billion | $932 million | Up $225 million |
| Cash and cash equivalents | $685 million | $1.162 billion | Down $477 million |
Comparable sales declined 0.8% on an owned basis and 0.7% on an owned-plus-licensed basis. Digital sales increased to 26.0% of comparable sales from 23.0%. Credit card penetration was 46.9%, unchanged from fiscal 2018.
Cost of sales declined in dollars but increased to 61.8% of sales from 60.9%, primarily because of higher promotional markdowns and delivery costs associated with omnichannel activities, free shipping and loyalty programs. SG&A declined to $8.998 billion but increased to 36.6% of sales from 36.2%.
Balance Sheet, Debt and Liquidity
- Total assets were $21.172 billion and shareholders’ equity was $6.377 billion at February 1, 2020.
- Short-term debt was $539 million and long-term debt was $3.621 billion, compared with $43 million and $4.708 billion, respectively, in the prior year.
- The company repurchased $525 million face value of debt for a cash cost of $553 million and recognized $30 million of early-retirement expense.
- The new unsecured revolving credit facility provides up to $1.5 billion, expandable to $1.75 billion, and expires May 9, 2024, subject to extension options. No borrowings were outstanding at year-end.
- Fiscal 2019 interest coverage was 12.68 versus a 3.25 minimum, and leverage was 1.78 versus a 3.75 maximum under the credit agreement.
- Contractual obligations totaled $17.122 billion, including $6.911 billion of operating lease obligations, $3.607 billion of long-term debt, $1.723 billion of debt interest and $4.274 billion of other obligations.
- Cash dividends paid were $466 million, or $1.51 per share. The company had $1.716 billion remaining under its share-repurchase authorization at year-end, but that authorization was rescinded in March 2020.
Material Changes and Unusual Items
- Restructuring, impairment, store-closing and other costs increased to $354 million from $136 million. Fiscal 2019 included $197 million of asset impairments and approximately $318 million of Polaris-related costs.
- Real estate sale gains declined to $162 million from $389 million.
- The company adopted the new lease accounting standard, recording $2.668 billion of right-of-use assets and $2.918 billion of long-term lease liabilities at year-end. The adoption did not materially affect net income or cash flows.
- The company closed or announced the closure of 30 Macy’s stores during fiscal 2019. Store count declined to 775 locations from 800 at the beginning of the year.
- Fiscal 2019 operating cash flow remained positive but declined, while investing cash use increased substantially because of Growth store and Backstage investments.
Strategy, Outlook and Risks
In February 2020, Macy’s announced its three-year Polaris strategy, focused on customer relationships, curated fashion, digital growth, store-portfolio optimization and cost-base restructuring. Management expects approximately $1.5 billion of savings by 2022, including approximately $600 million from gross-margin improvement and $900 million from SG&A savings. Estimated implementation costs were approximately $400 million to $420 million, with approximately $82 million to $102 million of additional costs expected in 2020.
The company planned to close approximately 125 least-productive stores over three years, expand Growth treatment to another 100 locations, add Backstage locations and consolidate its headquarters in New York. These benefits and costs remain subject to execution and may differ materially from estimates.
COVID-19 was identified as a subsequent event with potentially material adverse effects. Macy’s closed all stores beginning March 18, 2020, fully drew its $1.5 billion credit facility, suspended quarterly dividends beginning in the second quarter of 2020, furloughed most employees, reduced discretionary spending and withdrew its 2020 guidance. The filing states that the ultimate financial impact could not be reasonably estimated.
Other principal risks include declining store traffic and consumer discretionary spending, online competition, inventory markdowns, supply-chain and tariff exposure, cybersecurity and systems disruptions, real-estate execution, pension and benefit obligations, debt covenant compliance, litigation, tax contingencies and potential goodwill or long-lived-asset impairment. Management indicated that a first-quarter 2020 goodwill impairment charge was expected if market valuation remained at then-current levels.
Investor Verification Checklist
- Verify the period being analyzed: the supplied filing covers fiscal 2019, not fiscal 2018 fourth quarter.
- Reconcile GAAP EPS of $1.81 with adjusted EPS of $2.91 and $2.53 excluding real-estate sale gains; these are non-GAAP measures.
- Assess liquidity after the COVID-19 store closures, including the $1.5 billion facility draw, dividend suspension and limits on commercial-paper access.
- Review Polaris execution, expected store closures, restructuring costs and whether projected 2022 savings are achievable.
- Monitor debt maturities, covenant headroom, credit-rating changes and lease obligations.
- Evaluate exposure to inventory markdowns, declining store traffic, digital fulfillment costs, tariffs and foreign sourcing disruptions.
- Review subsequent filings for COVID-19 effects, goodwill impairment, updated guidance, liquidity actions and any changes to store closures or capital expenditures.