Macy’s, Inc. Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended November 1, 2014, compared with November 2, 2013. Although the request metadata states “2013 Q3,” the filing is the third-quarter 2014 Form 10-Q. Macy’s operated approximately 840 stores, including Macy’s and Bloomingdale’s locations, plus related websites and mobile applications.
Financial Results and Key Metrics
| Metric | Q3 2014 | Q3 2013 | 39 Weeks 2014 | 39 Weeks 2013 |
|---|---|---|---|---|
| Net sales | $6,195 million | $6,276 million | $18,741 million | $18,729 million |
| Gross margin | 39.2% | 39.2% | 39.8% | 39.9% |
| Operating income | $422 million | $360 million | $1,436 million | $1,329 million |
| Operating margin | 6.8% | 5.7% | 7.7% | 7.1% |
| Net income | $217 million | $177 million | $733 million | $675 million |
| Diluted EPS | $0.61 | $0.47 | $2.01 | $1.74 |
- Third-quarter sales declined 1.3%, while comparable sales declined 1.4%. For the first 39 weeks, sales and comparable sales increased 0.1%.
- Third-quarter SG&A declined 4.4% to $2,007 million, reducing the SG&A rate from 33.5% to 32.4% of sales. For the 39-week period, SG&A declined 1.8% and the rate improved by 70 basis points to 32.1%.
- Net interest expense was $96 million in the quarter and $296 million for the 39-week period, compared with $289 million for the prior-year 39-week period.
- Effective tax rates were 33.5% in the quarter and 35.7% for the 39-week period, versus 33.0% and 35.1%, respectively, in the comparable periods.
- Cash flow from operations was $777 million for the first 39 weeks, compared with $819 million in 2013. Investing cash outflow was $596 million, including $483 million of property and equipment purchases and $190 million of capitalized software.
- Financing cash outflow was $1,406 million, including $1,456 million of share repurchases, $314 million of dividends and $462 million of debt repayments.
- At November 1, 2014, cash and cash equivalents were $1,048 million, merchandise inventories were $7,789 million and total current assets were $9,553 million. Short-term debt was $76 million and long-term debt was $7,143 million.
Material Changes Versus the Prior Comparable Period
- Quarterly profitability improved despite lower sales: net income rose 22.6%, operating income rose 17.2%, and diluted EPS increased 29.8%, aided by lower SG&A and reduced diluted shares.
- For the first 39 weeks, net income increased 8.6%, operating income increased 8.0%, and diluted EPS increased 15.5%.
- Quarterly gross margin percentage was unchanged, while the 39-week gross margin rate declined 10 basis points, primarily reflecting the growth of omnichannel sales and free shipping.
- SG&A benefited from cost-reduction initiatives, lower retirement expenses, higher credit-operation income, and $48 million of gains on property sales or lease settlements. Retirement expense declined to $14 million in the quarter from $56 million and to $51 million for the 39 weeks from $172 million.
- Income from credit operations increased to $182 million in the quarter from $170 million and to $536 million for the 39 weeks from $513 million.
- The company repurchased approximately 25.3 million shares for approximately $1,483 million during the first 39 weeks, compared with $1,228 million of share acquisitions in the prior-year period. Approximately $1,449 million remained authorized for repurchases at November 1, 2014.
- Cash declined $1,225 million from the beginning of the fiscal year, primarily because of share repurchases, dividends, capital expenditures and debt activity.
Guidance, Outlook, Risks and Unusual Items
- Management projected fiscal 2014 comparable-sales growth of 0.7% to 1.0% and diluted EPS of $4.25 to $4.35.
- Management stated that cash on hand, operating cash flow, the credit facility and other capital resources should be sufficient for foreseeable working capital, capital expenditures, debt service and other cash requirements.
- The company continued expanding its omnichannel capabilities. Nearly all stores were fulfilling orders from stores or online fulfillment centers, and same-day delivery pilots were being tested in eight Macy’s markets and four Bloomingdale’s markets.
- On November 18, 2014, after quarter-end, the company issued $550 million of 4.5% senior notes due 2034. It had announced redemption of $407 million of 7.875% senior notes due 2015, expected to be completed December 15, 2014, with estimated additional interest expense of $16 million to $18 million in the fourth quarter.
- The company entered into an amended credit card program agreement with Citibank on November 10, 2014, extending the scheduled expiration to March 31, 2025, subject to a potential three-year renewal.
- Credit agreement compliance remained well within stated limits: the interest coverage ratio was 9.57 versus a minimum of 3.25, and the leverage ratio was 1.81 versus a maximum of 3.75.
- Principal risks include weak consumer spending, competition from physical and online retailers, weather and natural disasters, supply-chain and foreign sourcing disruptions, import duties, interest and currency-rate changes, and systems failures or data-security breaches.
- The filing states that there were no material changes to previously disclosed risk factors and that routine legal proceedings were not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Confirm the filing period: this Form 10-Q reports the third quarter and first 39 weeks of fiscal 2014, not fiscal 2013.
- Assess whether the lower quarterly sales and comparable-sales performance affected the company’s ability to achieve its fiscal 2014 guidance.
- Separate recurring operating improvement from unusual benefits, including the $48 million of property-related gains and materially lower retirement expenses.
- Monitor inventory of $7,789 million, seasonal working-capital needs and fourth-quarter cash generation.
- Reconcile the effect of share repurchases on diluted share count, EPS growth and liquidity.
- Verify completion and accounting treatment of the $407 million debt redemption, the related $16 million to $18 million premium, and the $550 million debt issuance.
- Review ongoing exposure to consumer demand, omnichannel fulfillment costs, credit-card operations, cybersecurity and supply-chain risks.