Macy’s, Inc. Form 10-K Summary
Reporting period: Fiscal year ended January 30, 2010, comprising 52 weeks. The request references 2008 Q4; this filing is the fiscal 2009 annual report but includes unaudited fourth-quarter comparisons for fiscal 2009 and 2008.
Business context
Macy’s operates Macy’s and Bloomingdale’s department stores and related e-commerce websites in 45 states, the District of Columbia, Guam and Puerto Rico. At year-end, the Company operated 850 stores and had approximately 161,000 employees. Macy’s and Bloomingdale’s, including their Internet operations, are reported as one operating segment.
The Company continued implementing its “My Macy’s” localization strategy and reorganized Macy’s branded stores into a unified operating structure. It also operates under a long-term credit-card marketing and servicing alliance with Citibank.
Key financial metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net sales | $23.489 billion | $24.892 billion | Down 5.6% |
| Comparable-store sales | Down 5.3% | Down 4.6% | Further decline |
| Gross margin | $9.516 billion; 40.5% | $9.883 billion; 39.7% | Rate improved |
| SG&A | $8.062 billion; 34.3% of sales | $8.481 billion; 34.1% | Expense down; rate higher |
| Operating income | $1.063 billion | $(4.378) billion | Returned to profit |
| Net income | $350 million | $(4.803) billion | Returned to profit |
| Diluted EPS | $0.83 | $(11.40) | Improved |
| Operating cash flow | $1.750 billion | $1.866 billion | Down $116 million |
| Capital expenditures and capitalized software | $460 million | $897 million | Down $437 million |
| Cash and equivalents | $1.686 billion | $1.385 billion | Up $301 million |
| Short-term debt | $242 million | $966 million | Down $724 million |
| Long-term debt | $8.456 billion | $8.733 billion | Down $277 million |
Cost of sales declined to 59.5% of sales from 60.3%, primarily reflecting improved inventory management. Credit-card program income declined to $525 million from $594 million, and net income from credit operations declined to $323 million from $372 million. Internet sales increased 19.6% year over year and contributed 0.6 percentage points to comparable-store sales.
Fourth-quarter information
Fiscal 2009 fourth-quarter net sales were $7.849 billion versus $7.934 billion in fiscal 2008. Fourth-quarter 2009 net income was $466 million, or $1.10 diluted EPS, compared with a net loss of $4.773 billion, or $(11.33) diluted EPS, in fourth-quarter 2008. The 2008 quarter included the $5.382 billion goodwill impairment charge.
Material changes and unusual items
- Fiscal 2008 included a $5.382 billion pre-tax goodwill impairment charge, reducing goodwill from $9.125 billion to $3.743 billion. The charge was non-cash and resulted primarily from deteriorated economic conditions, lower consumer spending and reduced market capitalization.
- Fiscal 2009 included $276 million of division-consolidation and store-closing costs and $115 million of asset impairment charges.
- The Company recorded more than $350 million of SG&A savings in 2009 from the 2008 and 2009 restructuring initiatives. It expects approximately $400 million of annual savings from the 2009 consolidation beginning in 2010, net of My Macy’s investments.
- Five underperforming Macy’s stores were announced for closure in January 2010.
- The Company reduced debt by repaying $966 million during 2009. Between January 30, 2010 and March 31, 2010, it used approximately $526 million of cash to repurchase approximately $500 million of debt before maturity and recorded approximately $27 million of related expense.
- The share-repurchase program remained suspended. Approximately $852 million of authorization was unused at year-end.
Liquidity, debt and outlook
Macy’s had no borrowings under its $2.0 billion revolving credit facility at year-end, although $52 million of standby letters of credit were outstanding. The facility expires August 30, 2012. The 2009 interest-coverage ratio was 4.54 versus a minimum of 3.00, and the leverage ratio was 3.15 versus a maximum of 4.75. Covenant thresholds tighten after October 2010.
Management stated that cash on hand, operating cash flow, available credit and other resources should be sufficient for foreseeable working capital, capital expenditures and debt-service requirements. Planned 2010 capital expenditures were approximately $550 million. Management forecast comparable-store sales growth of 1% to 2% in 2010.
The pension plan was underfunded by approximately $1.014 billion at year-end. Macy’s contributed $370 million during 2009 and made an additional $325 million contribution on February 22, 2010. Pension and supplementary retirement expense was expected to increase by approximately $30 million in 2010.
Risks and contingencies
- Weak consumer spending, unemployment, consumer credit conditions, economic deterioration and changing fashion preferences could pressure sales and margins.
- Retail competition includes department stores, discounters, specialty retailers, mass merchants and Internet channels.
- Seasonality creates significant fourth-quarter revenue concentration and requires substantial inventory, staffing and advertising commitments before the holiday period.
- Further goodwill or long-lived-asset impairment charges remain possible if operating performance, market capitalization or economic conditions deteriorate.
- Debt covenant breaches could trigger defaults and potential acceleration of debt, including cross-default provisions in senior notes and debentures.
- The Company faces pension funding, healthcare-cost, supply-chain, foreign sourcing, weather, disaster, systems, privacy, regulatory and litigation risks.
- A purported ERISA class action concerning the Macy’s and May 401(k) plans remained pending; management considered it without merit and did not expect ordinary-course proceedings to materially affect financial position or results.
Investor verification points
- Confirm the intended period: the filing is fiscal 2009, while the request identifies 2008 Q4.
- Reconcile reported annual and fourth-quarter results after excluding the 2008 goodwill impairment and other restructuring or impairment charges.
- Review debt maturities, covenant thresholds and the effect of post-year-end debt repurchases on liquidity.
- Assess whether the 1% to 2% comparable-store sales outlook and planned 2010 capital spending were achieved.
- Monitor pension funding requirements, actuarial assumptions and the $1.014 billion funded-status deficit.
- Evaluate the sustainability of My Macy’s sales benefits, restructuring savings and declining credit-card program income.