Macy’s, Inc. Form 10-Q Summary
Business context and reporting period
Macy’s, Inc. operates approximately 850 Macy’s and Bloomingdale’s stores and related Internet businesses. This filing covers the 13 and 26 weeks ended July 30, 2011, compared with the periods ended July 31, 2010. The filing metadata references “2010 Q2,” but the reported quarter is the second quarter of fiscal 2011.
Key financial metrics
| Metric | 13 weeks ended July 30, 2011 | 13 weeks ended July 31, 2010 | 26 weeks ended July 30, 2011 | 26 weeks ended July 31, 2010 |
|---|---|---|---|---|
| Net sales | $5,939 million | $5,537 million | $11,828 million | $11,111 million |
| Gross margin | $2,482 million; 41.8% | $2,323 million; 41.9% | $4,785 million; 40.5% | $4,519 million; 40.7% |
| Operating income | $506 million; 8.5% | $370 million; 6.7% | $836 million; 7.1% | $573 million; 5.2% |
| Net income | $241 million | $147 million | $372 million | $170 million |
| Diluted EPS | $0.55 | $0.35 | $0.86 | $0.40 |
| Operating cash flow | Not separately provided | Not separately provided | $587 million | $288 million |
- Second-quarter sales increased 7.3%; comparable-store sales increased 6.4%. First-half sales increased 6.5%; comparable-store sales increased 5.9%.
- Internet sales increased 40.2% in the quarter and 39.2% year to date.
- Cost of sales was 58.2% of sales in the quarter and 59.5% year to date, modestly higher than the prior-year rates, principally due to expanded free shipping.
- SG&A declined to 33.3% of sales in the quarter and 33.4% year to date, versus 35.2% and 35.5%, respectively, in the comparable periods.
- Net interest expense declined to $111 million in the quarter and $227 million year to date, reflecting lower borrowings and the absence of the prior-year debt retirement expense.
- At July 30, 2011, cash and cash equivalents were $1,495 million, merchandise inventories were $4,948 million, short-term debt was $914 million and long-term debt was $6,162 million.
Material changes versus the prior comparable period
- Quarterly net income rose 64% and first-half net income rose 119%, while diluted EPS increased from $0.35 to $0.55 and from $0.40 to $0.86, respectively.
- Operating income increased $136 million in the quarter and $263 million year to date, supported by higher sales and SG&A leverage.
- Operating cash flow more than doubled to $587 million, aided by higher earnings and a pension contribution of $225 million versus $325 million in the prior year.
- The company repaid $337 million of debt in the first half, including $330 million of senior notes at maturity. Prior-year financing activity included $500 million of debt repurchased before maturity and approximately $27 million of related expense.
- The company entered into a new $1.5 billion revolving credit facility, expandable to $1.75 billion subject to lender commitments, expiring June 20, 2015. No borrowings were outstanding under the credit agreements.
- Goodwill and indefinite-lived intangible assets were tested during the quarter and were not impaired; the filing states that the Macy’s reporting unit’s estimated fair value substantially exceeded its carrying value.
Guidance, outlook, commentary and risks
- Management assumed fiscal 2011 comparable-store sales growth of 4.8% to 5.1% versus fiscal 2010.
- Management cited the My Macy’s localization initiative, customer-centric selling and omnichannel expansion as key growth strategies. Three additional Bloomingdale’s Outlet stores were expected to open during the remainder of fiscal 2011.
- Management believed cash on hand, operating cash flow, the credit facility and other resources would cover reasonably foreseeable working capital, capital expenditure, debt service and other requirements.
- Credit agreement covenants required an interest coverage ratio of at least 3.25 and a leverage ratio of no more than 3.75. Reported ratios were 6.59 and 2.08, respectively.
- After quarter-end, Macy’s repurchased 1.361 million shares for approximately $35 million through September 5, 2011, leaving approximately $817 million of authorization.
- Principal risks include consumer spending and confidence, competition across retail and Internet channels, weather and natural disasters, supplier and import disruptions, foreign exchange and geopolitical conditions, cybersecurity and system failures, and legal or regulatory developments.
- A conditionally certified ERISA class action concerning the company’s 401(k) plans remained pending. The company considered the lawsuit without merit and did not expect the proceedings to materially affect financial position or results of operations.
Important facts for investors to verify
- Confirm the applicable period: the filing is for fiscal second quarter 2011, not 2010.
- Assess whether sales growth and online growth remain sustainable after the seasonal holiday period, which is not included in these results.
- Monitor merchandise inventory growth, gross-margin pressure from free shipping and the effect of promotional activity.
- Review debt maturities, interest-rate adjustments tied to credit ratings and compliance with the new credit agreement covenants.
- Evaluate the cash impact of share repurchases, dividends, pension funding, capital expenditures and planned store openings.
- Consider the sensitivity of goodwill valuations and future results to consumer demand, discount rates, competition and other risks identified in the filing.