Macy’s, Inc. Form 10-Q Summary
Reporting period: 13 and 39 weeks ended October 29, 2016, compared with October 31, 2015. The source filing is for the third quarter of fiscal 2016, although the request metadata identifies “2015 Q3.” Results are unaudited and exclude the holiday season, which is significant to the company’s retail business.
Business Context
Macy’s is an omnichannel retailer operating approximately 880 Macy’s, Bloomingdale’s and Bluemercury stores, together with related websites and mobile applications. Management’s strategy emphasizes localization and personalization, digital and omnichannel growth, customer engagement, Macy’s Backstage, Bluemercury expansion and real estate monetization.
Financial Performance
| Metric | Q3 2016 | Q3 2015 | 39 Weeks 2016 | 39 Weeks 2015 |
|---|---|---|---|---|
| Net sales | $5,626 million | $5,874 million | $17,263 million | $18,210 million |
| Gross margin | 39.8% | 39.8% | 39.9% | 39.9% |
| Operating income | $107 million | $258 million | $500 million | $1,103 million |
| Operating margin | 1.9% | 4.4% | 2.9% | 6.1% |
| Net income attributable to Macy’s shareholders | $17 million | $118 million | $144 million | $528 million |
| Diluted EPS | $0.05 | $0.36 | $0.46 | $1.56 |
| Net cash from operating activities | Not separately provided | Not separately provided | $308 million | $278 million |
Third-quarter net sales declined 4.2%, while owned comparable sales declined 3.3% and owned-plus-licensed comparable sales declined 2.7%. For the first 39 weeks, net sales declined 5.2%, owned comparable sales declined 4.0% and owned-plus-licensed comparable sales declined 3.5%.
Gross margin rates were stable, but SG&A increased to 36.8% of sales in the quarter from 33.5% and to 35.1% for the 39-week period from 33.2%. SG&A included continued investment in selling, digital operations, Bluemercury, China and Backstage, as well as lower credit income and lower asset-sale gains.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $457 million at October 29, 2016, compared with $474 million at October 31, 2015 and $1,109 million at January 30, 2016.
- Net cash provided by operating activities was $308 million for the first 39 weeks, versus $278 million in the prior-year period.
- Net cash used in investing activities was $491 million, including $451 million of property and equipment purchases and $230 million of capitalized software. Prior-year investing outflows were $861 million, including the $212 million Bluemercury acquisition.
- Net cash used in financing activities was $469 million, including $344 million of dividends, $230 million of share repurchases and $174 million of debt repayments.
- Short-term debt was $938 million and long-term debt was $6,563 million at October 29, 2016. The company had $52 million of commercial paper outstanding at a weighted-average interest rate of 0.7% and weighted-average maturity of three days.
- The company reported an interest coverage ratio of 7.46 against a minimum covenant of 3.25 and a leverage ratio of 2.53 against a maximum covenant of 3.75.
- The company repaid $59 million of senior debentures at maturity and redeemed $108 million of senior debentures during the period. It also repaid $577 million of 5.9% senior notes on December 1, 2016, after the reporting date.
Material Changes and Unusual Items
- Third-quarter results included $62 million of non-cash pension and postretirement settlement charges; the 39-week amount was $81 million.
- The first 39 weeks included $249 million of impairment and other costs, primarily related to planned store closures, compared with $111 million in the prior-year period.
- Macy’s announced plans to close approximately 100 Macy’s stores, mostly in early 2017, and to redirect investment toward stronger stores, digital operations, staffing, exclusive merchandise and new formats.
- Third-quarter asset-sale gains totaled $41 million, including $32 million from sales to General Growth Properties. The company expects to recognize an approximately $36 million gain from the planned sale of its downtown Portland store.
- The company announced the planned sale of its San Francisco Union Square Men’s building for $250 million, expected to close in January 2017, with an expected gain of approximately $235 million in January 2018.
- The company established a strategic alliance with Brookfield Asset Management covering approximately 50 real estate assets, with potential development, joint ventures or asset sales.
- Digital sales at macys.com and bloomingdales.com recorded double-digit growth during the quarter, while performance remained weaker in handbags, cosmetics and fashion watches.
Guidance, Outlook and Risks
Management expects fiscal 2016 owned-plus-licensed comparable sales to decline 2.5% to 3.0% from fiscal 2015, with owned comparable sales approximately 50 basis points lower. Fiscal 2016 diluted EPS is expected to be $3.15 to $3.40, excluding non-cash settlement charges and asset impairment and other store-closing costs.
Management believes cash on hand, operating cash flow, the credit facility and other capital resources will be sufficient for foreseeable working capital, capital expenditure, debt-service and other requirements. Key risks include declining consumer spending, competitive pressure from online and off-price retailers, international-tourist weakness, execution of store closures and real estate transactions, inventory and seasonal risks, economic and weather conditions, supply-chain disruptions, cybersecurity incidents, interest rates and foreign exchange movements.
The company reported no material changes to previously disclosed market risks or risk factors, and stated that its disclosure controls and procedures were effective as of October 29, 2016. It also stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
Investor Verification Points
- Verify the filing period, because the source document is for Q3 fiscal 2016 rather than Q3 2015.
- Assess whether comparable-sales declines and lower operating margins are stabilizing, particularly after the holiday season.
- Evaluate the cash, debt and covenant impact of the December 2016 debt maturity and planned store closures.
- Confirm the timing, proceeds and accounting gains from announced real estate sales and the Brookfield alliance.
- Separate recurring operating performance from impairment charges, pension settlement charges and asset-sale gains.
- Monitor execution of the approximately 100-store closure program, associated severance and lease costs, and potential additional impairments.
- Review the sustainability of dividends and share repurchases relative to operating cash flow and debt obligations.