Macy's, Inc. quarterly report, Q3 FY2012

Macy’s, Inc. Form 10-Q Summary

Reporting period: The supplied filing is for the 13 and 39 weeks ended October 27, 2012, compared with October 29, 2011. Although the request identifies “2011 Q3,” the filing itself is Macy’s fiscal third quarter of 2012 and was filed December 3, 2012.

Business Context

Macy’s operates approximately 850 Macy’s and Bloomingdale’s stores, e-commerce sites, and a licensed Bloomingdale’s location in Dubai. Management emphasizes the My Macy’s localization, omnichannel, and MAGIC customer-engagement strategies. Approximately 290 Macy’s stores were fulfilling store, Internet, or mobile orders at quarter-end, versus approximately 20 a year earlier.

Financial Performance

Metric	Q3 2012	Q3 2011	39 Weeks 2012	39 Weeks 2011
Net sales	$6,075 million	$5,853 million	$18,336 million	$17,681 million
Operating income	$325 million	$291 million	$1,270 million	$1,127 million
Net income	$145 million	$139 million	$605 million	$511 million
Diluted EPS	$0.36	$0.32	$1.45	$1.18

Third-quarter sales increased 3.8%; comparable sales increased 3.7%. Internet sales increased 40.4% and contributed 2.2 percentage points to comparable sales.
Year-to-date sales increased 3.7%; comparable sales also increased 3.7%. Internet sales increased 36.8% and contributed 1.8 percentage points to comparable sales.
Q3 gross margin was approximately 39.6%, versus 39.4% in the prior-year quarter. Operating margin was approximately 5.4%, versus 5.0%; net margin was approximately 2.4%, versus 2.4%.
Year-to-date gross margin was approximately 40.1% in both periods. Operating margin improved to approximately 6.9% from 6.4%, and net margin improved to approximately 3.3% from 2.9%.
Q3 SG&A was $2,078 million, or 34.2% of sales, versus 34.4% previously. Year-to-date SG&A was 33.2% of sales, versus 33.7%.
Income from credit operations was $162 million in Q3, down from $185 million, but $451 million year to date, up from $414 million.

Cash Flow, Capital Structure, and Liquidity

Year-to-date operating cash flow was $889 million, up from $627 million. The increase reflected higher earnings and the absence of the $225 million pension contribution made in the prior-year period.
Investing cash outflow was $615 million, including $464 million of property and equipment purchases and $169 million of capitalized software. Fiscal 2012 capital expenditures were expected to be approximately $950 million.
Financing cash outflow was $1,837 million, including $803 million of debt repayments, $1,018 million for share repurchases and employee tax obligations, and $246 million of dividends.
Cash and cash equivalents were $1,264 million at October 27, 2012, compared with $1,097 million a year earlier and $2,827 million at January 28, 2012.
Short-term debt was $123 million and long-term debt was $6,817 million at quarter-end, compared with $805 million and $6,151 million, respectively, a year earlier.
The company had no borrowings under its $1.5 billion revolving credit facility, which may be increased to $1.75 billion subject to lender commitments. The facility expires June 20, 2015.
Credit agreement compliance remained strong: the interest coverage ratio was 8.04 versus a minimum of 3.25, and the leverage ratio was 1.88 versus a maximum of 3.75.

Material Changes and Unusual Items

Macy’s issued $550 million of 3.875% senior notes due 2022 and $250 million of 5.125% notes due 2042, and repaid or redeemed $789 million of 2012 maturities. Early redemption of $173 million of 8.0% debentures produced approximately $4 million of additional interest expense and approximately $4 million of interest savings during the period.
The company repurchased 26.3 million shares year to date for approximately $991 million. Approximately $361 million remained under the repurchase authorization at October 27, 2012.
After quarter-end, Macy’s repurchased $700 million of senior notes and issued $1.0 billion of lower-rate senior notes. It expects approximately $133 million of additional interest expense, or $83 million after tax, related to the debt repurchase. Management expects annual interest expense to decline by approximately $30 million on a full-year basis.
Management planned an approximately $150 million pension contribution before February 2, 2013. The pension plan and supplementary retirement plan were closed to new participants during 2012.
The effective tax rate was 34.5% in Q3 versus 24.2% previously, and 36.3% year to date versus 35.5%, principally reflecting state and local taxes and tax settlements or examinations.

Guidance, Outlook, and Risks

Management assumed fiscal 2012 comparable-store sales would increase approximately 3.9%, adjusted for the fiscal year’s 53rd week.
Management expected credit-operation income to improve in Q4 and for full-year 2012, based on anticipated continued improvement in collection rates.
Management stated that cash on hand, operating cash flow, the credit facility, and other resources should be sufficient for foreseeable working capital, capital expenditures, debt service, and other requirements.
Key risks include competition across retail and Internet channels, consumer spending and confidence, economic conditions, weather and natural disasters, supplier and import disruptions, foreign sourcing, duties and quotas, interest rates, systems failures, and data-security breaches.
The filing reported no material changes to the risk factors in the 2011 Form 10-K. An ERISA class-action matter was conditionally certified, and the parties had agreed to a settlement subject to court approval; management did not expect the matter or other ordinary-course proceedings to materially affect financial position or results.
Disclosure controls and procedures were deemed effective, with no material changes in internal control over financial reporting during the quarter.

Investor Verification Checklist

Verify that the filing period is Q3 2012, not Q3 2011, and reconcile the 3.9% comparable-sales outlook with subsequent reported results.
Assess whether strong Internet growth and omnichannel investments translated into sustainable margins after shipping and fulfillment costs.
Review inventory growth to $7,208 million from $5,117 million at fiscal year-end and monitor markdown and holiday-season risk.
Confirm the effect of the post-quarter-end debt transactions, including the approximately $83 million after-tax charge and expected interest savings.
Evaluate liquidity after share repurchases, dividends, planned pension funding, capital expenditures, and January 2013 debt maturities.
Monitor credit-operation income, collection rates, consumer demand, and the pending ERISA settlement.