Macy’s, Inc. Form 10-Q Summary
Reporting period: Fiscal second quarter and first 26 weeks ended August 3, 2013, compared with the periods ended July 28, 2012. The request metadata identifies “2012 Q2,” but the filing itself is for 2013 Q2. Results are unaudited and retail seasonality limits comparability with full-year results.
Business Context
Macy’s is an omnichannel retailer operating approximately 840 Macy’s and Bloomingdale’s stores, plus macys.com and bloomingdales.com. Management highlighted its My Macy’s localization, omnichannel fulfillment and MAGIC Selling initiatives. Approximately 500 Macy’s stores were fulfilling store, Internet and mobile orders at August 3, 2013, versus 292 at February 2, 2013.
Financial Performance and Position
| Metric | 13 Weeks Ended August 3, 2013 | 13 Weeks Ended July 28, 2012 | 26 Weeks Ended August 3, 2013 | 26 Weeks Ended July 28, 2012 |
|---|---|---|---|---|
| Net sales | $6,066 million | $6,118 million | $12,453 million | $12,261 million |
| Comparable sales growth | (0.8%) | 3.0% | 1.5% | 3.7% |
| Gross margin | 41.8% | 41.9% | 40.2% | 40.4% |
| Operating income | $534 million | $554 million | $969 million | $945 million |
| Operating margin | 8.8% | 9.1% | 7.8% | 7.7% |
| Net income | $281 million | $279 million | $498 million | $460 million |
| Diluted EPS | $0.72 | $0.67 | $1.27 | $1.09 |
- First-half net cash provided by operating activities was $664 million, compared with $638 million in the prior-year period.
- Investing cash outflows were $316 million, including $206 million for property and equipment and $110 million for capitalized software.
- Financing cash outflows were $760 million, including $785 million of share repurchases and $173 million of dividends. Approximately 17.5 million shares were repurchased for approximately $806 million during the first half.
- Cash and cash equivalents were $1.424 billion at August 3, 2013, versus $1.836 billion at February 2, 2013.
- Short-term debt was $575 million and long-term debt was $6.339 billion, for total reported debt of $6.914 billion. Approximate debt net of cash was $5.490 billion.
- The company had a $1.5 billion revolving credit facility, expandable to $1.75 billion subject to lender commitments, expiring May 10, 2018. No borrowings were outstanding under its credit agreements.
- Credit agreement ratios were well within stated requirements: interest coverage was 8.89 versus a minimum of 3.25, and leverage was 1.80 versus a maximum of 3.75.
Material Changes Versus Prior Comparable Period
- Second-quarter sales declined 0.8%, and comparable sales declined 0.8%, partly due to a promotional-calendar shift, conversion of certain businesses to licensed departments and new licensed brands.
- First-half sales increased 1.6%, while comparable sales increased 1.5%; management attributed performance to the My Macy’s, omnichannel and MAGIC Selling strategies.
- Second-quarter operating income decreased $20 million, with operating margin declining 30 basis points. First-half operating income increased $24 million and margin improved 10 basis points.
- Gross margin declined 10 basis points in the second quarter and 20 basis points for the first half, reflecting additional seasonal markdowns, omnichannel growth and free-shipping costs.
- Net income increased modestly in the second quarter and 8.3% for the first half. Lower net interest expense and lower income taxes helped offset weaker second-quarter sales and gross margin.
- Net interest expense declined $9 million in the second quarter and $24 million for the first half because of lower borrowings and rates.
- Income from credit operations increased to $177 million in the second quarter from $146 million and to $343 million for the first half from $289 million, driven by improved collection rates. Management expected the year-over-year improvement to moderate materially in the third and fourth quarters.
- Cash flow from operations improved by $26 million, while financing outflows were substantially lower than the prior year because the prior-year period included $797 million of debt repayments.
Guidance, Outlook, Risks and Unusual Items
- Management projected fiscal 2013 comparable-sales growth of 2.0% to 2.9% and diluted EPS of $3.80 to $3.90.
- Management expected cash on hand, operating cash flow, the credit facility and other capital resources to fund foreseeable working capital, capital expenditures, debt service and other requirements.
- On August 15, 2013, Macy’s repaid $109 million of 7.625% senior debentures at maturity. On September 3, 2013, it announced a planned $400 million senior-notes offering due 2023 at a 4.375% coupon; proceeds could be used for general corporate purposes, debt retirement or share repurchases.
- The company declared a quarterly dividend of $0.25 per share payable October 1, 2013.
- The annual goodwill and indefinite-lived intangible-asset impairment test completed during the quarter indicated no impairment. The filing cautions that changes in assumptions, estimated cash flows or discount rates could affect future impairment conclusions.
- The company completed settlement of a class-action ERISA lawsuit on May 8, 2013; the judgment became final without appeal. The filing states that other routine proceedings were not expected to have a material adverse effect.
- No material changes were reported to the risk factors in the 2012 Form 10-K. Key risks include consumer spending, competition, weather, supply-chain and foreign-production risks, imports and tariffs, capital-market conditions, systems failures and data-security breaches.
- Defined-benefit pension and SERP plans were closed to new participants, and with limited exceptions employees would stop earning future pension service credits after December 31, 2013.
Investor Verification Checklist
- Verify that the filing period is August 3, 2013, despite the request metadata referencing 2012 Q2.
- Reconcile comparable-sales trends with reported sales and assess the effects of promotional timing, licensed departments and free shipping.
- Monitor inventory of $5.357 billion, markdown activity and gross-margin pressure.
- Assess the sustainability of higher credit-operation income as management expects the improvement to moderate.
- Review the effect of share repurchases, the planned $400 million notes issuance and debt maturities on leverage and liquidity.
- Confirm execution of the fiscal 2013 guidance, including 2.0%–2.9% comparable-sales growth and $3.80–$3.90 diluted EPS.