Macy’s, Inc. Form 10-Q Summary
Reporting period: The provided filing is for the 13 and 26 weeks ended July 31, 2010, filed September 7, 2010. The request metadata identifies “2009 Q2,” but the filing text clearly reports second-quarter 2010 results, with comparison periods ended August 1, 2009.
Business context
Macy’s operates approximately 850 Macy’s and Bloomingdale’s stores in 45 states, the District of Columbia, Guam and Puerto Rico, together with macys.com and bloomingdales.com. Merchandise includes apparel, accessories, cosmetics, home furnishings and other consumer goods. Management’s key initiatives include localized merchandising and marketing through “My Macy’s,” value-focused offerings, improved shopping environments and increased customer engagement.
Financial performance and liquidity
| Metric | 13 weeks ended July 31, 2010 | 13 weeks ended August 1, 2009 | 26 weeks ended July 31, 2010 | 26 weeks ended August 1, 2009 |
|---|---|---|---|---|
| Net sales | $5,537 million | $5,164 million | $11,111 million | $10,363 million |
| Comparable-store sales growth | 4.9% | Not provided | 5.2% | Not provided |
| Gross margin | $2,323 million; 41.9% | $2,143 million; 41.5% | $4,519 million; 40.7% | $4,123 million; 39.8% |
| Operating income | $370 million; 6.7% | $248 million; 4.8% | $573 million; 5.2% | $134 million; 1.3% |
| Net income (loss) | $147 million; 2.7% | $7 million; 0.1% | $170 million; 1.5% | $(81) million; (0.8%) |
| Diluted EPS | $0.35 | $0.02 | $0.40 | $(0.19) |
Second-quarter sales increased 7.2%, while Internet sales increased 28.1%. First-half sales increased 7.2%, and Internet sales increased 31.0%. Management cited strong performance in private-label and exclusive brands, men’s collections, fashion watches, updated women’s apparel, furniture and mattresses.
Cost of sales improved to 58.1% of sales in the quarter from 58.5% and to 59.3% for the first half from 60.2%, benefiting from higher sales and inventory management. SG&A declined to 35.2% of sales in the quarter from 36.0% and to 35.5% for the first half from 36.8%. SG&A increases in dollars reflected higher selling costs, performance-based incentive compensation and lower credit income, partly offset by lower stock-based compensation.
Net cash provided by operating activities was $288 million for the first half, compared with $420 million in the prior-year period. Cash used in investing activities was $124 million, including $102 million for property and equipment and $64 million for capitalized software. Cash used in financing activities was $642 million, including $584 million of debt repayment and $42 million of dividends. Ending cash and cash equivalents were $1,208 million, compared with $592 million at the prior-year comparable date and $1,686 million at January 30, 2010.
At July 31, 2010, current assets were $6,433 million and current liabilities were $4,760 million. Short-term debt was $609 million and long-term debt was $7,493 million, for total reported debt of $8,102 million. Estimated long-term debt fair value was $7,324 million versus carrying value of $7,464 million. The company had no borrowings under its $2.0 billion revolving credit facility, which may be increased to $2.5 billion subject to lender commitments. The facility expires August 30, 2012.
Material changes versus the prior comparable period
- Quarterly net income increased to $147 million from $7 million; first-half results improved to net income of $170 million from a net loss of $81 million.
- Operating income increased by $122 million in the quarter and $439 million for the first half.
- Prior-year results included division consolidation costs of $34 million in the quarter and $172 million for the first half. No such costs were recorded in 2010.
- The company completed approximately $500 million of debt repurchases before maturity, using approximately $526 million of cash, and recognized approximately $27 million of expense related to early retirement.
- Long-term debt declined from $8,456 million at January 30, 2010 and $8,632 million at August 1, 2009 to $7,493 million at July 31, 2010.
- Operating cash flow declined year over year despite improved earnings, primarily because of accelerated pension contributions and higher income taxes paid. The company contributed $325 million to its pension plan in the first half of 2010 versus approximately $60 million in the prior-year period.
- A change in the presentation of certain private-brand and excess-inventory sales increased reported sales beginning in 2010 but had an immaterial effect on net income, diluted EPS and comparable-store sales; prior periods were not retroactively adjusted.
Guidance, outlook, risks and unusual items
Management assumed 2010 comparable-store sales would increase approximately 4.0% to 4.2% from 2009 levels. Management expected cash on hand, operating cash flow, the credit facility and other capital resources to cover reasonably foreseeable working capital, capital expenditures, debt service and other cash requirements. The company did not expect to borrow under the revolving facility during fiscal 2010.
The company planned to open two Macy’s stores and two Bloomingdale’s Outlet stores during the remainder of fiscal 2010. A Bloomingdale’s store opened in Dubai under a license agreement, and four initial Bloomingdale’s Outlet stores were planned for 2010.
Key risks include weak consumer spending, unemployment, consumer confidence and credit availability; intense competition across retail channels; weather and natural disasters; supplier and import disruptions; duties and quotas; foreign currency and geopolitical conditions; legal and regulatory developments; and system failures or security breaches.
The company recorded a $4 million deferred tax expense related to 2010 health-care legislation and the future loss of deductibility for retiree prescription-drug benefits to the extent of tax-free Medicare Part D subsidies. Goodwill and indefinite-lived intangible assets passed the annual impairment test as of May 29, 2010, although the filing emphasizes sensitivity to projected sales, margins, cash flows and discount rates.
A purported ERISA class action relating to the company’s 401(k) plans remains pending. Management considers the lawsuit without merit and does not expect it, or other ordinary-course proceedings, to have a material adverse effect. Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting.
Investor verification checklist
- Verify that the intended period is second-quarter 2010 rather than 2009 Q2, based on the filing’s July 31, 2010 reporting date.
- Reconcile reported sales growth with the 4.9% quarterly and 5.2% first-half comparable-store sales increases, including the contribution from Internet sales.
- Assess whether margin improvement and lower SG&A rates are sustainable after excluding the prior-year division consolidation costs.
- Review debt maturities, interest-rate terms, covenant calculations and the effect of further debt repurchases on liquidity.
- Evaluate the decline in operating cash flow, the $325 million pension contribution and seasonal working-capital requirements.
- Monitor consumer demand, inventory levels, competitive pricing, supplier disruptions and the execution of the Bloomingdale’s Outlet rollout.
- Review the potential effects of health-care legislation, pension and postretirement obligations, impairment assumptions and the pending ERISA litigation.