Macy’s, Inc. Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended November 3, 2018, compared with the periods ended October 28, 2017. The request metadata identifies “2017 Q3,” but the filing is for fiscal third quarter 2018. Results are unaudited and exclude the important holiday season.
Business context
Macy’s is an omnichannel retailer operating approximately 870 stores across Macy’s, Bloomingdale’s and bluemercury, together with Macy’s Backstage, STORY and digital channels. Macy’s accounted for 88% of consolidated net sales. The company continued executing its North Star strategy, including loyalty initiatives, Backstage expansion, digital and fulfillment enhancements, Growth50 stores, in-store technology and bluemercury expansion.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $5.404 billion | $5.281 billion | $16.516 billion | $16.267 billion |
| Credit card revenues, net | $185 million | $145 million | $528 million | $473 million |
| Operating income | $147 million | $118 million | $688 million | $619 million |
| Net income attributable to Macy’s shareholders | $62 million | $30 million | $368 million | $219 million |
| Diluted EPS | $0.20 | $0.10 | $1.18 | $0.71 |
| Gross margin | 40.3% | 40.3% | 39.9% | 39.4% |
| Operating margin | 2.7% | 2.2% | 4.2% | 3.8% |
Third-quarter comparable sales increased 3.1% on an owned basis and 3.3% on an owned-plus-licensed basis. Digital sales increased at a double-digit rate. Proprietary card penetration rose to 48.4% from 47.4%.
For the 39 weeks, net cash provided by operating activities was $429 million, versus $399 million in the prior-year period. Investing cash outflows were $549 million, primarily reflecting capital investment in strategic initiatives, while financing cash outflows were $616 million, including $347 million of dividends and debt repayments.
At November 3, 2018, cash and cash equivalents were $736 million, merchandise inventories were $7.147 billion and total assets were $20.361 billion. Short-term debt was $65 million and long-term debt was $5.469 billion. The estimated fair value of long-term debt was $5.170 billion. The company had no borrowings or letters of credit outstanding under its $1.5 billion revolving credit facility and no commercial paper outstanding.
Material changes versus the prior comparable period
- Third-quarter net sales increased 2.3%, while 39-week sales increased 1.5%.
- Credit card revenue increased $40 million in the quarter and $55 million year to date, driven by higher card usage, loyalty-program activity and consumer credit balances.
- Third-quarter operating income increased $29 million despite SG&A pressure from Backstage expansion and a new employee incentive plan. The SG&A rate increased to 41.7% from 41.4%.
- Year-to-date gross margin improved to 39.9% from 39.4%, primarily because of improved inventory management and lower markdowns.
- Real estate sale gains declined to $42 million from $65 million in the quarter and to $111 million from $176 million year to date.
- Interest expense declined by $15 million in the quarter and $50 million year to date as debt balances declined.
- The effective tax rate fell to 16.2% from 27.0% in the quarter and to 21.1% from 39.4% year to date, reflecting tax settlements, examinations and the lower federal statutory rate following U.S. tax reform.
- The company repurchased approximately $344 million face value of debt for a total cost of approximately $354 million, recognizing a $5 million early-retirement loss.
- Non-cash pension settlement charges remained $23 million in the quarter and $73 million year to date. Comprehensive income attributable to shareholders was a loss of $37 million in the quarter, primarily because of actuarial losses on benefit plans.
Guidance, outlook and management commentary
- Fiscal 2018 total net sales were expected to increase 0.3% to 0.7% versus fiscal 2017, on a 52-week basis versus 53 weeks in 2017.
- Owned-plus-licensed comparable sales were expected to increase 2.3% to 2.5%; owned comparable sales were expected to be 20 to 30 basis points lower.
- Net credit card revenue was expected to be approximately $740 million to $755 million.
- The expected effective tax rate was 22.75%.
- Adjusted diluted EPS guidance was $4.10 to $4.30, an increase of $0.15 from the prior revised guidance.
- Management stated that cash on hand, operating cash flow, the credit facility and other capital resources should cover foreseeable working capital, capital expenditure and debt-service needs.
- On November 28, 2018, Macy’s commenced a tender offer for up to $600 million of senior notes and debentures. The offer was scheduled to expire December 26, 2018.
- The company expected adoption of the new lease accounting standard on February 3, 2019 to increase reported assets and liabilities by approximately $2.0 billion to $2.5 billion, without a material expected impact on consolidated net income.
Risks, contingencies and unusual items
- Retail results are seasonal, and year-to-date results do not include the holiday period.
- Key risks include consumer spending and confidence, intense omnichannel competition, changing shopping behavior, inventory and supply-chain execution, foreign sourcing, import duties, cybersecurity and systems failures, employee costs, real estate transactions, interest rates and economic or geopolitical conditions.
- The company reported no material changes to the risk factors in its 2017 Form 10-K and did not expect ordinary-course legal proceedings to have a material adverse effect.
- Non-GAAP adjusted EPS excludes restructuring and other costs, pension settlement charges, debt-retirement losses and related tax effects. Third-quarter adjusted diluted EPS was $0.27 versus $0.21 reported for the prior-year quarter; year-to-date adjusted diluted EPS was $1.45 versus $0.93.
- The company was in compliance with its credit-agreement interest coverage and leverage requirements. Third-quarter interest coverage was 10.88 versus a minimum of 3.25, and leverage was 1.88 versus a maximum of 3.75.
Investor verification checklist
- Confirm that the applicable filing period is fiscal Q3 2018, not Q3 2017.
- Reconcile reported GAAP EPS with adjusted EPS and assess the effect of pension, restructuring, real estate and debt-retirement items.
- Monitor holiday-quarter sales, comparable sales, digital growth and inventory levels, which are not reflected in these interim results.
- Verify completion and terms of the announced debt tender offer and its effect on interest expense and leverage.
- Assess the cash-flow impact of strategic capital spending, dividends and debt repayments.
- Evaluate the effect of lease accounting adoption on reported assets, liabilities and leverage metrics.