Macy’s, Inc. Form 10-Q Summary
Reporting period: The supplied filing is for the 13 and 39 weeks ended October 29, 2011, compared with October 30, 2010. Although the request identifies “2010 Q3,” the filing itself reports third-quarter 2011 results. Financial statements are unaudited.
Business context
Macy’s operates approximately 850 Macy’s and Bloomingdale’s stores in 45 states, the District of Columbia, Guam and Puerto Rico, along with macys.com and bloomingdales.com. Key strategies were My Macy’s localization, omnichannel retailing and customer-centric selling. Results exclude the Christmas season and are not necessarily indicative of the full fiscal year.
Financial performance
| Metric | 13 weeks ended Oct. 29, 2011 | 13 weeks ended Oct. 30, 2010 | 39 weeks ended Oct. 29, 2011 | 39 weeks ended Oct. 30, 2010 |
|---|---|---|---|---|
| Net sales | $5,853 million | $5,623 million | $17,681 million | $16,734 million |
| Operating income | $291 million | $177 million | $1,127 million | $750 million |
| Net income | $139 million | $10 million | $511 million | $180 million |
| Diluted EPS | $0.32 | $0.02 | $1.18 | $0.42 |
| Operating margin | 5.0% | 3.1% | 6.4% | 4.5% |
| Gross margin | 39.4% | 40.0% | 40.1% | 40.4% |
Third-quarter comparable-store sales increased 4.0%; comparable sales increased 5.3% for the first 39 weeks. Internet sales rose 39.8% in the quarter and 39.4% year to date, contributing 1.5 and 1.4 percentage points, respectively, to comparable-store sales.
- Cost of sales increased to 60.6% of sales in the quarter from 60.0%, and to 59.9% year to date from 59.6%, primarily because of expanded free shipping.
- SG&A declined to 34.4% of sales in the quarter from 36.9%, and to 33.7% year to date from 35.9%. The improvement reflected higher credit-operation income and lower depreciation and amortization, partly offset by omnichannel investment and higher selling costs.
- Income from credit operations increased to $185 million in the quarter and $414 million year to date, versus $77 million and $224 million, respectively, primarily because of improved actual and expected collection rates.
- Net interest expense declined to $108 million in the quarter and $335 million year to date, versus $164 million and $456 million, respectively. Prior-year expense included approximately $39 million and $66 million of early-debt-retirement costs.
Cash flow, liquidity and capital structure
- Year-to-date operating cash flow was $627 million, compared with $346 million in 2010, supported by higher earnings and a lower pension contribution.
- Investing cash use was $472 million, including $359 million of property and equipment purchases and $141 million of capitalized software, compared with $285 million in 2010.
- Financing cash use was $522 million, including $451 million of debt repayment, $210 million of share repurchases, $106 million of dividends and $8 million of financing costs, partly offset by $113 million of common-stock issuance.
- Cash and cash equivalents were $1,097 million at October 29, 2011, versus $1,464 million at January 29, 2011 and $715 million at October 30, 2010.
- Merchandise inventories were $7,158 million, up from $4,758 million at fiscal year-end and $6,530 million a year earlier.
- Short-term debt was $805 million and long-term debt was $6,151 million at October 29, 2011. The company repaid $439 million of indebtedness at maturity during the first 39 weeks.
- A new revolving credit facility provides up to $1.5 billion, potentially expandable to $1.75 billion, and expires June 20, 2015. No borrowings were outstanding under the credit agreements. The company reported an interest-coverage ratio of 7.12 versus a 3.25 minimum and a leverage ratio of 1.98 versus a 3.75 maximum.
Material changes and unusual items
- Net income rose substantially year over year, reflecting stronger sales, operating leverage, higher credit-operation income and lower interest expense.
- The prior-year period included significant early retirement of debt and associated interest expense; 2011 debt repayment was primarily at maturity.
- The company repurchased 8.162 million shares during the quarter at an average price of $27.13, leaving $631 million of authorization available.
- Pension contributions declined to $225 million from $325 million in the comparable 2010 period.
- Year-to-date SG&A benefited from a gain on the sale of the company’s investment in The Knot, Inc.; the filing does not provide the gain amount in the supplied text.
- The company opened three Bloomingdale’s Outlet stores in 2011 and reopened one Macy’s store previously closed because of flood damage.
Outlook, risks and contingencies
Management assumed fourth-quarter 2011 comparable-store sales growth of 4.0% to 4.5% over 2010 levels. Management expected continued near-term improvement in credit-collection rates but cautioned that the rate of improvement in credit-operation income would moderate. Management believed cash on hand, operating cash flow, the credit facility and other resources would cover reasonably foreseeable working capital, capital expenditures, debt service and other requirements.
Key risks include consumer spending and confidence, discretionary demand, competition across retail and online channels, merchandise availability and supplier performance, foreign sourcing and import costs, severe weather and natural disasters, security breaches and system failures, regulatory and legal developments, capital-market conditions and pension obligations. The filing reports no material change to the risk factors in the 2010 Form 10-K.
A conditionally certified ERISA class-action lawsuit alleges breaches of fiduciary duties relating to Macy’s and May employee retirement plans and alleged stock-price inflation. The plaintiff seeks unspecified compensatory damages. Macy’s considers the lawsuit without merit and intends to defend it vigorously; management does not expect the disclosed proceedings to materially affect financial position or results of operations.
Investor verification points
- Confirm that the intended period is third-quarter 2011, not third-quarter 2010.
- Assess whether inventory growth and the seasonal holiday period create markdown, working-capital or cash-flow risk.
- Evaluate the sustainability of credit-operation income gains and the expected moderation in collection-rate improvement.
- Review the effect of free shipping and omnichannel investments on gross margin and future SG&A.
- Track debt maturities, interest-rate sensitivity, facility covenants and the company’s ongoing share-repurchase activity.
- Review the ERISA litigation, pension funding needs and any subsequent developments after the filing date.