Macy’s, Inc. — Form 10-K Summary
Reporting period: Fiscal year 2015 ended January 30, 2016; fiscal years 2014 and 2013 ended January 31, 2015 and February 1, 2014, respectively. Each period included 52 weeks. The request metadata identifies “2014 Q4,” but the supplied filing is the fiscal 2015 annual Form 10-K. Fourth-quarter 2015 results are included below where disclosed.
Business context
Macy’s is an omnichannel retailer operating Macy’s, Bloomingdale’s and Bluemercury stores, websites and mobile applications. At year-end, the Company operated 870 stores in 45 states, the District of Columbia, Guam and Puerto Rico, with approximately 141.9 million square feet of selling space. Merchandise mix was 38% women’s accessories, intimate apparel, shoes and cosmetics; 23% women’s apparel; 23% men’s and children’s; and 16% home and miscellaneous.
Key 2015 developments included the acquisition of Bluemercury, the launch of Macy’s Backstage pilot stores, the launch of Macy’s China Limited through Alibaba’s Tmall Global, continued omnichannel investment and significant real-estate monetization.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $27,079 million | $28,105 million | Down 3.7% |
| Comparable sales, owned basis | (3.0)% | 0.7% | Down 3.7 percentage points |
| Comparable sales, owned plus licensed | (2.5)% | 1.4% | Down 3.9 percentage points |
| Gross margin | $10,583 million; 39.1% | $11,242 million; 40.0% | Margin down 90 basis points |
| Operating income | $2,039 million; 7.5% | $2,800 million; 10.0% | Down 27.2% |
| Net income attributable to Macy’s shareholders | $1,072 million | $1,526 million | Down 29.7% |
| Diluted EPS | $3.22 | $4.22 | Down 23.7% |
| Adjusted diluted EPS | $3.77 | $4.40 | Down 14% |
| Adjusted EBITDA | $3,388 million; 12.5% of sales | $3,923 million; 14.0% of sales | Margin down 150 basis points |
| ROIC | 20.1% | 22.4% | Down 230 basis points |
Fourth-quarter 2015 net sales were $8,869 million versus $9,364 million in fourth-quarter 2014. Net income attributable to Macy’s shareholders was $544 million versus $793 million, and diluted EPS was $1.73 versus $2.26.
Cost of sales increased to 60.9% of sales from 60.0%, primarily because of higher markdowns required to clear inventory and the impact of omnichannel free shipping. SG&A declined to $8,256 million from $8,355 million, but increased to 30.5% of sales from 29.7% because of lower sales and continued investments.
Cash flow, liquidity and capital structure
- Operating cash flow was $1,984 million, down from $2,709 million in 2014.
- Investing cash flow used $1,092 million, including $212 million for the Bluemercury acquisition, $777 million of property and equipment purchases and $336 million of capitalized software.
- Financing cash flow used $2,029 million, including approximately $2,001 million of share repurchases, $456 million of dividends and $152 million of debt repayment, partially offset by $499 million of debt issuance.
- Cash and cash equivalents were $1,109 million at year-end, down from $2,246 million. Merchandise inventories were $5,506 million, compared with $5,417 million.
- Short-term debt was $642 million and long-term debt was $6,995 million. Contractual obligations totaled $20,755 million, including debt, interest, leases and other obligations.
- The Company had a $1,500 million revolving credit facility, expandable to $1,750 million subject to lender commitments, expiring May 10, 2018. No revolving borrowings were outstanding at year-end.
- The commercial paper program also had a $1,500 million capacity. Seasonal borrowings reached approximately $1,100 million during the fourth quarter, but none remained outstanding at year-end.
- Credit agreement compliance remained substantial: interest coverage was 8.85 versus a 3.25 minimum, and leverage was 2.21 versus a 3.75 maximum.
Material changes versus the prior period
- Sales weakened materially, reflecting unfavorable weather, lower international-tourist spending and broader retail pressure. Digital sales continued to grow strongly.
- Gross margin declined because of increased markdowns and omnichannel fulfillment costs.
- Impairments, store-closing and other costs increased to $288 million from $87 million, including $148 million of asset impairments and $123 million of severance and human-resource costs.
- The Company announced the closure of 40 Macy’s stores and additional cost-efficiency measures in January 2016.
- Bluemercury was acquired in March 2015 for $212 million net of cash acquired; 62 Bluemercury stores were included in the year-end store count.
- Real-estate transactions generated approximately $212 million of gains in 2015, including $84 million recognized from the Brooklyn transaction and $57 million from the downtown Seattle transaction.
- Share repurchases increased to approximately $2.0 billion from $1.9 billion, while annualized dividends increased 15% to $1.44 per share. Average shares outstanding declined to 328.4 million from 355.2 million.
- Retirement expenses increased to $77 million from $65 million, although pension and supplementary-plan obligations remain a significant long-term exposure.
Guidance, outlook and risks
For fiscal 2016, management expected total sales to decline approximately 2%, comparable sales on an owned-plus-licensed basis to decline approximately 1%, asset-sale gains of approximately $235 million, capital expenditures of approximately $900 million and adjusted diluted EPS of $3.80 to $3.90, excluding anticipated defined-benefit settlement charges. Management expected approximately $135 million of non-cash pension settlement charges and planned to fund capital expenditures with cash on hand and operating cash flow.
Planned growth initiatives included approximately 42 new Bluemercury locations, 16 Macy’s Backstage locations, omnichannel and mobile investments, beauty expansion, real-estate monetization and continued localization and personalization initiatives.
- Principal risks include intense competition from online, off-price, specialty and department-store retailers; changing consumer preferences; discretionary-spending weakness; weather and natural disasters; and lower international tourism.
- Supply-chain risks include foreign sourcing, tariffs, transportation disruptions, vendor performance and product-safety concerns.
- Cybersecurity incidents or systems failures could disrupt operations, expose customer information and create litigation, regulatory, reputational and remediation costs.
- Pension and SERP plans had unrecognized actuarial losses of $1,451 million and $261 million, respectively. The Company anticipated approximately $135 million of non-cash settlement charges in 2016.
- Debt agreements contain interest-coverage, leverage, cross-default and change-of-control provisions. A covenant breach could accelerate debt obligations.
- The filing states that ordinary-course legal proceedings were not expected to have a material adverse effect, but the Company remains subject to litigation, tax examinations and regulatory requirements.
Investor verification items
- Verify that the applicable comparison is fiscal 2015 rather than the “2014 Q4” period identified in the request metadata.
- Reconcile GAAP EPS of $3.22 with adjusted EPS of $3.77, particularly the $288 million of impairments, store-closing and other costs.
- Assess the sustainability of earnings supported by credit operations of $831 million and real-estate gains of approximately $212 million.
- Monitor comparable sales, gross margin, inventory levels, markdown rates and digital fulfillment costs.
- Evaluate liquidity after share repurchases and dividends, upcoming debt maturities, lease commitments and commercial-paper usage.
- Assess execution of Bluemercury, Macy’s Backstage, Macy’s China, omnichannel investments and planned store closures.
- Review pension funding status, settlement accounting exposure, actuarial assumptions and the anticipated 2016 charges.