Macy’s, Inc. Form 10-Q Summary
Business context and reporting period
This filing covers the 13 and 26 weeks ended July 28, 2012, compared with the periods ended July 30, 2011. Macy’s operates approximately 850 Macy’s and Bloomingdale’s stores, plus digital channels, across the United States and related territories. The filing identifies localization, omnichannel retailing and customer-centric selling as key growth strategies. The provided metadata states “2011 Q2,” but the filing itself is for second-quarter 2012.
Financial performance and liquidity
| Metric | 13 weeks ended July 28, 2012 | 13 weeks ended July 30, 2011 | 26 weeks ended July 28, 2012 | 26 weeks ended July 30, 2011 |
|---|---|---|---|---|
| Net sales | $6,118 million | $5,939 million | $12,261 million | $11,828 million |
| Gross margin | $2,563 million | $2,482 million | $4,949 million | $4,785 million |
| Operating income | $554 million | $506 million | $945 million | $836 million |
| Net income | $279 million | $241 million | $460 million | $372 million |
| Diluted EPS | $0.67 | $0.55 | $1.09 | $0.86 |
| Net cash from operations | Not provided for quarter | Not provided for quarter | $638 million | $587 million |
- Second-quarter sales increased 3.0%; comparable sales also increased 3.0%. First-half sales and comparable sales increased 3.7%.
- Second-quarter gross margin was approximately 41.9% of sales versus 41.8% in the prior year. First-half gross margin was approximately 40.4% versus 40.5%.
- Second-quarter operating margin was approximately 9.1% versus 8.5%; first-half operating margin was approximately 7.7% versus 7.1%.
- Second-quarter net margin was approximately 4.6% versus 4.1%; first-half net margin was approximately 3.8% versus 3.1%.
- Internet sales grew 36.1% in the second quarter and 34.8% in the first half. Approximately 280 Macy’s stores were fulfilling store, Internet or mobile orders at July 28, 2012, compared with approximately 20 a year earlier.
- At July 28, 2012, cash and equivalents were $1,604 million, merchandise inventories were $5,036 million, short-term debt was $313 million and long-term debt was $6,637 million.
- The company had no borrowings outstanding under its $1.5 billion revolving credit facility, which could be increased to $1.75 billion subject to lender commitments. Its reported interest coverage ratio was 7.89 and leverage ratio was 1.90, against covenant limits of at least 3.25 and no more than 3.75, respectively.
Material changes versus the prior comparable period
- Second-quarter net income rose $38 million, or approximately 15.8%, while first-half net income rose $88 million, or approximately 23.7%.
- Operating income increased $48 million in the second quarter and $109 million in the first half. SG&A increased in dollars but declined as a percentage of sales to 32.8% from 33.3% in the quarter and to 32.7% from 33.4% year to date.
- First-half cost of sales increased to 59.6% of sales from 59.5%, principally reflecting omnichannel growth and free shipping. Second-quarter cost of sales was slightly lower at 58.1% versus 58.2%.
- Income from credit operations increased to $146 million from $129 million in the quarter and to $289 million from $229 million year to date.
- Net interest expense declined to $105 million from $111 million in the quarter and to $217 million from $227 million year to date, despite approximately $4 million of expense from early debt redemption.
- Operating cash flow increased to $638 million from $587 million. Investing cash use increased to $393 million from $222 million, including $310 million of property and equipment purchases and $109 million of capitalized software.
- Financing cash use increased to $1,468 million from $334 million, primarily due to $797 million of debt repayments, $615 million of share acquisitions and $165 million of dividends.
- Cash declined by $1,223 million from the beginning of the year, primarily reflecting financing outflows. The company repurchased approximately 16.0 million shares for approximately $588 million during the first half and had approximately $764 million of authorization remaining at July 28, 2012.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2012 comparable-store sales to increase approximately 3.7%, adjusted for the fiscal year’s 53rd week, and anticipated approximately $950 million of capital expenditures.
- Management expected to repurchase at least $1.0 billion of shares during fiscal 2012, subject to market conditions and alternative capital uses.
- Management expected income from credit operations to improve for fiscal 2012 overall, but to decline during the 2012 fall season, with a decrease expected in the third quarter partly offset by an increase in the fourth quarter.
- The company opened two Macy’s stores and two Bloomingdale’s Outlet stores, planned three additional Bloomingdale’s Outlet stores, and opened a 1.3 million-square-foot fulfillment center in Martinsburg, West Virginia.
- Debt activity included issuance of $800 million of senior notes in January 2012, repayment of $616 million of senior notes at maturity and early redemption of $173 million of 8.0% senior debentures. The early redemption generated approximately $4 million of additional interest expense and was expected to save approximately $4 million of interest expense during the first half.
- The company completed its annual goodwill and indefinite-lived intangible-asset impairment testing and reported no impairment as of May 26, 2012. Valuations remain sensitive to sales projections, royalty rates, discount rates and other assumptions.
- Material risks include competitive retail pressure, consumer spending and credit conditions, weather and natural disasters, supplier and foreign-production disruptions, import duties, cybersecurity or systems failures, and broader economic and capital-market conditions.
- An ERISA-related 401(k) class action was conditionally certified; the parties reached a settlement agreement subject to court approval. Management did not expect ordinary-course proceedings to materially affect financial position or results.
- Management stated that cash on hand, operating cash flow, the credit facility and other capital resources should cover reasonably foreseeable working capital, capital expenditures, debt service and other requirements.
Important facts for investors to verify
- Confirm that the applicable reporting period is second-quarter 2012, not 2011, and reconcile the filing’s fiscal calendar with reported comparable-sales growth.
- Assess whether omnichannel growth and free shipping continue to pressure merchandise margins and capital spending.
- Evaluate liquidity after debt repayments, dividends and planned share repurchases, including seasonal working-capital needs.
- Review debt maturities, refinancing requirements, interest rates and compliance with the revolving-credit covenants.
- Monitor the expected fall-season decline in credit-operation income and the company’s assumptions behind fiscal 2012 sales and capital-expenditure guidance.
- Review the status and final cost of the ERISA settlement, along with impairment sensitivities for goodwill and indefinite-lived intangible assets.