Macy’s, Inc. Form 10-K Summary
Reporting period: Fiscal year 2017 ended February 3, 2018. Fiscal 2017 included 53 weeks; fiscal 2016 ended January 28, 2017 and included 52 weeks. The supplied filing is not a 2016 Q4 filing; it is the fiscal 2017 annual report.
Business Context
Macy’s is an omnichannel retailer operating Macy’s, Bloomingdale’s, bluemercury, Macy’s Backstage and related businesses. It operated 852 stores across 44 states, the District of Columbia, Guam and Puerto Rico, with approximately 128 million square feet and approximately 130,000 non-seasonal employees. The Company reports one operating segment.
Merchandise mix was broadly unchanged: women’s accessories, intimate apparel, shoes, cosmetics and fragrances represented 38% of sales; women’s apparel 23%; men’s and children’s 23%; and home/miscellaneous 16%.
Key Financial Metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $24.837 billion | $25.778 billion |
| Comparable sales, owned basis | Down 2.2% | Down 3.5% |
| Gross margin | $9.685 billion; 39.0% | $10.157 billion; 39.4% |
| Operating income | $1.807 billion; 7.3% | $1.315 billion; 5.1% |
| Operating income excluding certain items | $2.098 billion; 8.4% | $1.892 billion; 7.3% |
| Net income attributable to Macy’s shareholders | $1.547 billion | $619 million |
| Diluted EPS | $5.04 | $1.99 |
| Adjusted diluted EPS | $3.77 | $3.11 |
| Net cash from operating activities | $1.944 billion | $1.801 billion |
| Capital expenditures | $760 million | $912 million |
| Cash and cash equivalents | $1.455 billion | $1.297 billion |
| Total debt | Approximately $5.883 billion | Approximately $6.871 billion |
Adjusted EBITDA was $3.089 billion, or 12.4% of sales, compared with 11.4% in 2016. ROIC was 20.8%, compared with 18.5%. Income from credit operations increased to $768 million from $736 million.
Material Changes Versus the Prior Comparable Period
- Sales declined 3.7%, although the extra 53rd week contributed to reported sales. Fourth-quarter comparable sales increased 1.3% on an owned basis and 1.4% on an owned-plus-licensed basis.
- Gross margin rate declined 40 basis points, primarily because of higher delivery costs associated with omnichannel operations and free-shipping promotions.
- SG&A expense declined $343 million, reflecting store closures and restructuring, partly offset by investments in digital operations, bluemercury and Macy’s Backstage.
- Operating income increased $492 million, supported by $544 million of real-estate gains versus $209 million in 2016 and lower restructuring costs.
- Net income and EPS benefited materially from a $571 million non-cash tax benefit from U.S. federal tax reform. The reported 2017 effective tax rate was a 1.9% benefit versus a 35.8% expense in 2016.
- The Company repaid or repurchased approximately $954 million of debt, including a $400 million tender offer, $247 million of open-market repurchases and a $300 million maturity repayment.
- Store count increased from 829 to 852, primarily because of 36 new freestanding bluemercury locations and other openings, despite closures. Macy’s-branded stores declined from 673 to 660.
Liquidity, Debt and Cash Flow
Operating cash flow was $1.944 billion. Investing activities used $373 million, including $760 million of capital expenditures and $411 million of real-estate proceeds. Financing activities used $1.413 billion, including $954 million of debt repayment and $461 million of dividends.
The Company had no borrowings under its $1.5 billion revolving credit facility or $1.5 billion commercial-paper program at year-end. The revolving facility expires May 6, 2021. The reported interest-coverage ratio was 8.94 versus a minimum of 3.25, and the leverage ratio was 2.04 versus a maximum of 3.75.
Contractual obligations totaled $17.089 billion, including $5.827 billion of short-term and long-term debt, $3.114 billion of interest on debt, $3.595 billion of lease obligations and $4.525 billion of other obligations. Management stated that cash on hand, operating cash flow and available credit should cover foreseeable requirements.
Guidance, Outlook and Management Commentary
- 2018 net sales were expected to decline approximately 0.5% to 2.0% from 2017, which included the 53rd week.
- 2018 comparable sales were expected to be flat to up 1.0% on both owned and owned-plus-licensed bases.
- Gross margin on retail sales was expected to be flat to slightly higher; SG&A dollars were expected to be approximately flat or slightly higher.
- Credit income was expected to be $645 million to $665 million, asset-sale gains $300 million to $325 million, and interest expense $255 million to $260 million.
- Adjusted diluted EPS guidance was $3.55 to $3.75, with an expected effective tax rate of 23.25% and capital expenditures of approximately $1.050 billion.
- Management planned to use excess cash for business investment, dividends and debt repayment, including investments in digital capabilities, Backstage, bluemercury, store pickup and the Growth 50 initiative.
Risks, Contingencies and Unusual Items
- Results depend heavily on discretionary consumer spending, fashion trends, store traffic, weather, economic conditions and intense competition from online, off-price, specialty and mass-market retailers.
- Real-estate monetization and redevelopment transactions generated significant gains and cash proceeds but may be volatile and are not representative of recurring retail performance.
- Restructuring, impairment, store-closing and other costs were $186 million, including $120 million of severance and human-resource costs and $53 million of impairments. Settlement charges were $105 million and primarily reflected pension-related actuarial losses.
- The Company had $992 million of unrecognized actuarial losses in its funded pension plan and $244 million in its unfunded SERP. No pension contribution was expected for 2018, but benefit payments and changes in assumptions could affect future cash flow and earnings.
- The Company relies substantially on foreign sourcing, particularly Asia, exposing it to tariffs, trade restrictions, supply-chain disruption, transportation issues, political instability and currency risk.
- Cybersecurity incidents, systems failures, data breaches, product safety issues, litigation, labor costs and changes in tax or regulatory requirements could materially affect results.
- The Company disclosed $3.546 billion of operating lease commitments and potential contingent lease guarantees, although management considered the risk of significant loss from certain legacy guarantees remote.
- The adoption of the new revenue standard was expected to change presentation and timing, but not materially affect operations or cash flow. The upcoming lease standard was expected to have a material balance-sheet impact through recognition of right-of-use assets and lease liabilities.
- Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. Management and KPMG reported effective internal control over financial reporting and issued an unqualified audit opinion.
Investor Verification Checklist
- Separate recurring retail operating performance from the $544 million of real-estate gains and the $571 million non-cash tax benefit.
- Reconcile reported sales and comparable sales for the 53rd week and assess the underlying 52-week trend.
- Evaluate whether gross-margin pressure from shipping and omnichannel fulfillment persists.
- Review the sustainability of credit-program income, including the Citibank agreement and the expected 2018 reduction in credit income.
- Assess debt maturities, lease commitments, covenant compliance and the effect of continued debt repayment on liquidity.
- Monitor store closures, real-estate redevelopment approvals, asset-sale proceeds and the execution of the North Star and Growth 50 initiatives.
- Adjust comparisons for the 2018 adoption of revenue, pension, cash-flow and lease accounting standards.