Macy’s, Inc. Form 10-Q Summary
Business Context and Reporting Period
Macy’s, Inc. is an omnichannel retailer operating approximately 840 Macy’s and Bloomingdale’s stores, plus macys.com and bloomingdales.com. The filing covers the 13 weeks ended May 4, 2013, compared with the 13 weeks ended April 28, 2012. Although the request identifies “2012 Q1,” the filing itself is for the first quarter of fiscal 2013.
Results are seasonal and exclude the Christmas selling period; first-quarter results are therefore not necessarily indicative of full-year performance.
Financial Results and Key Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $6.387 billion | $6.143 billion | Up 4.0% |
| Comparable sales | Up 3.8% | Up 4.4% | Growth moderated |
| Gross margin | $2.476 billion; 38.8% | $2.386 billion; 38.8% | Up $90 million |
| SG&A | $2.041 billion; 32.0% of sales | $1.995 billion; 32.4% | Up $46 million; rate improved |
| Operating income | $435 million; 6.8% | $391 million; 6.4% | Up $44 million |
| Net income | $217 million; 3.4% | $181 million; 3.0% | Up 19.9% |
| Diluted EPS | $0.55 | $0.43 | Up $0.12 |
| Net interest expense | $97 million | $112 million | Down $15 million |
| Effective tax rate | 35.8% | 34.9% | Up 0.9 percentage points |
Net cash provided by operating activities was $298 million, compared with $265 million in the prior-year quarter. Investing cash outflow was $107 million, including $65 million of property and equipment purchases and $50 million of capitalized software. Financing cash outflow was $275 million, including $336 million for share repurchases and $78 million of dividends, partially offset by $100 million of common-stock issuance.
Cash and cash equivalents were $1.752 billion at May 4, 2013, versus $1.836 billion at February 2, 2013 and $1.891 billion at April 28, 2012. Merchandise inventories were $5.631 billion, up from $5.308 billion at fiscal year-end and $5.465 billion in the prior-year quarter.
Short-term debt was $124 million and long-term debt was $6.797 billion at May 4, 2013. Estimated fair value of long-term debt was $7.536 billion versus a carrying amount of $6.765 billion, excluding capitalized leases. The company had no borrowings outstanding under its revolving credit facility during the quarter. Its credit-agreement interest coverage ratio was 8.77 versus a minimum of 3.25, and its leverage ratio was 1.79 versus a maximum of 3.75.
Material Changes Versus the Prior Comparable Period
- Sales increased $244 million, supported by the My Macy’s localization, omnichannel and MAGIC Selling strategies. Stronger categories included handbags, watches, active apparel, men’s, home textiles, luggage, furniture and mattresses.
- Gross margin remained unchanged at 38.8% of sales. Neither period included a LIFO charge or credit.
- SG&A increased in absolute dollars but declined as a percentage of sales by 40 basis points. Higher selling costs and omnichannel investments were partly offset by improved credit-operation income.
- Income from credit operations increased to $166 million from $143 million, primarily reflecting improved collection rates. Management expected the year-over-year increase to moderate in the third and fourth quarters.
- Lower borrowings and lower interest rates reduced net interest expense by $15 million.
- Operating cash flow improved by $33 million, while investing outflows declined by $95 million because the prior-year period included the purchase of two parcels at the San Francisco Union Square flagship location.
- Debt repayment declined substantially to $5 million from $795 million in the prior-year quarter, which included repayment of senior notes and early redemption of senior debentures.
- The company repurchased approximately 8.4 million shares for approximately $360 million. Remaining authorization was $1.142 billion at May 4, 2013, and the board approved an additional $1.5 billion on May 14, 2013.
Outlook, Commentary, Risks and Unusual Items
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 did not expect to borrow under its new credit agreement during fiscal 2013.
On May 10, 2013, Macy’s entered into a new revolving credit agreement providing up to $1.5 billion of borrowings and letters of credit, with an option to increase the facility to $1.75 billion, subject to lender commitments. The agreement expires May 10, 2018 and replaced a facility scheduled to expire in 2015.
The company opened one new Macy’s store and expanded into an additional Macy’s location during the quarter. For the remainder of fiscal 2013, it intended to open one additional new Macy’s store, a Macy’s replacement store, a new Bloomingdale’s store and a Bloomingdale’s Outlet store. Approximately 500 Macy’s stores were expected to fulfill orders from stores, Internet and mobile channels by year-end, compared with 292 stores at February 2, 2013.
On May 14, 2013, the board increased the quarterly dividend to $0.25 per share from $0.20, payable July 1, 2013. The company also stated that it may use excess cash for debt or equity repurchases, pension obligations, acquisitions or other corporate purposes.
Principal risks include competitive pressure across retail channels, consumer spending and credit conditions, economic and weather volatility, supply-chain and foreign-sourcing exposure, import duties, systems failures and cybersecurity breaches. The filing reported no material changes to the risk factors in the 2012 Form 10-K.
A previously disclosed ERISA-related 401(k) litigation matter received final settlement approval on May 8, 2013, terminating the litigation. Other ordinary-course proceedings were not expected to materially affect the company’s financial position or results of operations. Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the reporting period: the filing is for Q1 fiscal 2013, not Q1 2012.
- Assess whether comparable-sales growth and credit-operation income remain sustainable as the year progresses.
- Monitor inventory growth relative to sales and potential effects on markdowns and cash flow.
- Review the company’s substantial debt balance, debt fair value, covenant headroom and refinancing requirements.
- Track the scale and pace of share repurchases and the effect on liquidity, leverage and per-share results.
- Evaluate execution of omnichannel investments, store openings and the planned expansion of store-based fulfillment.
- Consider retail seasonality, consumer demand, competitive pressures, weather, supply-chain disruption and cybersecurity risks when extrapolating first-quarter results.