Macy’s, Inc. Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 4, 2019, compared with the 13 weeks ended May 5, 2018. Although the request metadata references “2018 Q1,” the filing is for the first quarter of fiscal 2019. Macy’s is an omnichannel retailer operating Macy’s, Bloomingdale’s and bluemercury stores, websites and mobile applications.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $5,504 million | $5,541 million | Down 0.7% |
| Credit card revenues, net | $172 million | $157 million | Up $15 million |
| Gross margin | $2,101 million; 38.2% | $2,159 million; 39.0% | Down 80 bps |
| Operating income | $203 million; 3.7% of net sales | $238 million; 4.3% | Down $35 million |
| Net income attributable to Macy’s shareholders | $136 million | $139 million | Down $3 million |
| Diluted EPS | $0.44 | $0.45 | Down $0.01 |
| Net cash from operating activities | $(38) million | $322 million | Down $360 million |
| Capital expenditures and capitalized software | $264 million | $190 million | Up $74 million |
Comparable sales increased 0.6% on an owned basis and 0.7% on an owned-plus-licensed basis. Digital sales grew by double digits. Credit card penetration increased to 46.3% from 45.5%, supported by the enhanced Macy’s Star Rewards program and higher consumer credit balances.
Cost of sales increased to 61.8% of net sales from 61.0%, primarily because of higher delivery costs associated with free shipping. Selling, general and administrative expenses increased to 38.4% of net sales from 37.6%, reflecting investments in Backstage and other strategic initiatives. The effective tax rate declined to 16.6% from 28.4%, partly because of the settlement of certain tax matters.
Financial position, debt and liquidity
- Cash and cash equivalents were $737 million at May 4, 2019, compared with $1,162 million at February 2, 2019 and $1,531 million at May 5, 2018. Cash, cash equivalents and restricted cash totaled $815 million at quarter-end.
- Merchandise inventories were $5,498 million, up from $5,263 million at fiscal year-end and $5,291 million in the prior-year quarter.
- Long-term debt was $4,680 million, compared with $4,708 million at February 2, 2019 and $5,857 million at May 5, 2018. Short-term debt was $41 million.
- Lease liabilities of $3,186 million were recognized following adoption of ASC 842, including $2,823 million of long-term lease liabilities. The adoption also created a $2,631 million right-of-use asset and did not materially affect net income or cash flows.
- The company had no borrowings or letters of credit outstanding under its $1.5 billion revolving credit facility or its $1.5 billion commercial paper program at May 4, 2019. The facility could be increased to $1.75 billion, subject to lender commitments.
- On May 9, 2019, Macy’s entered into a replacement credit agreement expiring May 9, 2024, with up to two one-year extensions. The company was in compliance with its interest coverage and leverage covenants, reporting ratios of 12.30 and 1.78, respectively, versus required thresholds of at least 3.25 and no more than 3.75.
Material changes versus the prior comparable period
- Net sales declined modestly, but comparable sales increased, with strength in destination categories, digital channels, Bloomingdale’s and bluemercury. Handbags were weaker.
- Operating income and gross margin declined because higher delivery costs and strategic investments more than offset credit card revenue growth and higher real estate gains.
- Real estate sale gains increased to $43 million from $24 million, including a $21 million gain related to the Macy’s White Plains transaction.
- Impairment and other costs declined to $1 million from $19 million; the prior-year amount primarily related to the wind-down of Macy’s China Limited.
- Net interest expense declined by $19 million because of debt reductions from 2018 tender offers and open-market repurchases.
- Operating cash flow changed from an inflow of $322 million to an outflow of $38 million, primarily because of the timing of inventory purchases. Investing cash outflows increased by $81 million as the company funded strategic initiatives.
- Macy’s adopted the new lease accounting standard on February 3, 2019, adding $2.516 billion of net lease assets and $2.728 billion of lease liabilities, with a $158 million cumulative-effect reduction to retained earnings after the reported tax impact.
Guidance, outlook, commentary and risks
- Management reaffirmed its previously issued full-year fiscal 2019 guidance in a May 15, 2019 press release; the filing text does not provide the specific guidance amounts.
- Strategic initiatives include expanding Growth50 to Growth150 locations, adding 50 Backstage locations, expanding vendor direct merchandise, enhancing mobile features and investing in destination categories. Backstage totaled 181 locations at quarter-end, and STORY at Macy’s opened 36 locations.
- Management stated that cash on hand, operating cash flow, the revolving credit facility and other capital resources should be sufficient for foreseeable working capital, capital expenditure, debt service and other requirements. Actual liquidity could be affected by consumer demand, economic conditions and other factors.
- The company identified potential exposure to U.S. tariffs on Chinese imports, including a 25% tariff imposed on approximately $200 billion of imports and a proposed extension to approximately $300 billion of additional imports. Macy’s was evaluating sourcing, cost, sales and profitability impacts and mitigation strategies.
- Other principal risks include changing consumer behavior, intense retail competition, supply-chain disruption, foreign sourcing, tariffs and duties, cybersecurity and systems failures, labor and benefit costs, real estate transactions, economic conditions and the seasonal nature of retail operations.
- Legal proceedings are described as incidental to the ordinary course of business, and management does not expect them to have a material adverse effect on financial position or results of operations.
Important facts for investors to verify
- Confirm that full-year fiscal 2019 guidance remained unchanged after the May 15, 2019 announcement and review the omitted guidance amounts.
- Assess whether inventory growth and the sharp decline in operating cash flow were temporary timing effects or indicators of changing demand and working-capital requirements.
- Monitor gross-margin pressure from free shipping, tariffs, merchandise costs and other delivery expenses.
- Evaluate the effect of the newly recognized lease liabilities and long-term contractual lease commitments on leverage and fixed-cost obligations.
- Track the performance and returns from Growth150, Backstage, STORY, digital initiatives and destination categories.
- Review the potential financial impact of China-related tariffs and the feasibility and cost of shifting sourcing.
- Distinguish GAAP results from management’s adjusted EPS and comparable-sales measures when comparing periods or companies.