Macy’s, Inc. Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 31, 2015, compared with the periods ended November 1, 2014. The request metadata identifies “2014 Q3,” but the filing itself is for the third quarter of fiscal 2015.
Business Context
Macy’s is an omnichannel retailer operating approximately 900 Macy’s, Bloomingdale’s, Bluemercury and related stores, together with online and mobile channels. During 2015, the company acquired Bluemercury, launched Macy’s Backstage pilots, established a 65%-owned Macy’s China joint venture and expanded same-day delivery to 17 markets.
Retail results are seasonal, and the reported periods exclude the Christmas season; therefore, interim results are not necessarily indicative of full-year performance.
Financial Results and Key Metrics
| Metric | Q3 2015 | Q3 2014 | 39 Weeks 2015 | 39 Weeks 2014 |
|---|---|---|---|---|
| Net sales | $5,874 million | $6,195 million | $18,210 million | $18,741 million |
| Gross margin | $2,337 million; 39.8% | $2,429 million; 39.2% | $7,263 million; 39.9% | $7,467 million; 39.8% |
| SG&A | $1,968 million; 33.5% of sales | $2,007 million; 32.4% | $6,049 million; 33.2% | $6,031 million; 32.1% |
| Asset impairments | $111 million | None | $111 million | None |
| Operating income | $258 million; 4.4% | $422 million; 6.8% | $1,103 million; 6.1% | $1,436 million; 7.7% |
| Net income attributable to Macy’s shareholders | $118 million | $217 million | $528 million | $733 million |
| Diluted EPS | $0.36 | $0.61 | $1.56 | $2.01 |
Q3 net sales decreased 5.2%, while owned comparable sales declined 3.9% and owned-plus-licensed comparable sales declined 3.6%. For the first 39 weeks, net sales declined 2.8%, owned comparable sales declined 2.2% and owned-plus-licensed comparable sales declined 1.7%.
Interest expense declined to $80 million in Q3 from $97 million and to $269 million for the first 39 weeks from $298 million. The effective tax rate was 34.6% in Q3 and 36.9% for the first 39 weeks, compared with 33.5% and 35.7%, respectively, in the comparable periods.
Income from credit operations was $177 million in Q3 and $551 million for the first 39 weeks, compared with $182 million and $536 million, respectively, in 2014.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $474 million at October 31, 2015, compared with $1,048 million at November 1, 2014 and $2,246 million at January 31, 2015.
- Net cash provided by operating activities was $278 million for the first 39 weeks, down from $841 million. The decline reflected lower earnings and a larger increase in merchandise inventories, partly offset by increased merchandise accounts payable.
- Merchandise inventories were $8,145 million, up from $7,789 million at November 1, 2014 and $5,516 million at January 31, 2015.
- Net cash used in investing activities was $861 million, including $591 million of property and equipment purchases, $249 million of capitalized software and $212 million for the Bluemercury acquisition.
- Net cash used in financing activities was $1,189 million, including $1,785 million of treasury-stock purchases and $344 million of dividends, partly offset by $791 million of commercial paper issuance.
- Short-term debt was $857 million, including $791 million of seasonal commercial paper borrowings at a weighted-average interest rate of 0.42% and weighted-average maturity of less than ten days. Long-term debt was $7,106 million.
- The company’s interest coverage ratio was 9.62 and leverage ratio was 2.10, compared with covenant limits of at least 3.25 and no more than 3.75, respectively.
- Approximately 30.6 million shares were repurchased for approximately $1,837 million during the first 39 weeks. Remaining repurchase authorization was $695 million at October 31, 2015.
Material Changes and Unusual Items
- The company recorded $111 million of asset impairment charges, primarily related to planned closures of 35 to 40 Macy’s and Bloomingdale’s stores in early 2016. Related severance and other closure liabilities may be recorded later, and additional impairments remain possible if projected cash flows deteriorate.
- The company sold underutilized space in its downtown Seattle store for $65 million and recorded an approximately $57 million gain in Q3.
- The company expected to receive $170 million in fiscal 2015 from the sale of portions of its Brooklyn store and related assets and expected to record an approximately $250 million gain in Q4.
- The Bluemercury acquisition, Macy’s China joint venture and Macy’s Backstage expansion increased investment and operating complexity.
- SG&A dollars declined in Q3 but increased as a percentage of sales because of lower revenue. SG&A included $78 million of gains on property transactions, compared with $48 million in Q3 2014.
- The company redeemed $76 million of 8.125% senior debentures and repaid $69 million of 7.5% senior debentures during the first 39 weeks.
Guidance, Outlook and Risks
Management expected fiscal 2015 owned-plus-licensed comparable sales to decline approximately 1.8% to 2.2%, owned comparable sales to be approximately 50 basis points lower, and total sales to decline approximately 2.7% to 3.1%. Fiscal 2015 EPS guidance was $4.20 to $4.30, excluding asset impairment charges associated primarily with store closures. The guidance included approximately $60 million from the Seattle real estate sale and an expected $250 million Brooklyn real estate gain.
Management stated that cash on hand, operating cash flow, the credit facility and other capital resources should be sufficient for foreseeable working capital, capital expenditure, debt service and other cash requirements. The company intends to reduce expenses and tighten capital expenditures while continuing to fund selected growth initiatives.
Key risks include weak consumer spending, severe or unseasonable weather, competition from online and off-price retailers, lower international tourism, inventory management, foreign sourcing and supply-chain disruption, currency and interest-rate movements, real estate transaction execution, cybersecurity and systems failures, and potential additional store-closing or restructuring costs. The filing reported no material changes to the risk factors in the prior Form 10-K and no legal proceedings expected to have a material adverse effect.
Investor Verification Checklist
- Verify the requested period against the filing: this is a fiscal Q3 2015 Form 10-Q, not Q3 2014.
- Assess whether declining comparable sales and elevated SG&A as a percentage of sales indicate continuing operating pressure.
- Monitor inventory growth, operating cash flow conversion and the effect of seasonal commercial paper borrowings on liquidity.
- Verify completion and accounting treatment of the Brooklyn transaction and whether the expected approximately $250 million gain was realized.
- Evaluate the financial impact of planned store closures, including future severance, contractual obligations and possible additional impairments.
- Review the sustainability of large share repurchases and dividends relative to cash generation and debt levels.
- Track performance and integration costs for Bluemercury, Macy’s Backstage and Macy’s China.