Macy's, Inc. annual report, FY2021

Macy’s, Inc. FY2021 Form 10-K Summary

Reporting period: The supplied filing is the annual report for the 52-week fiscal year ended January 29, 2022, filed March 25, 2022. It is not a 2020 Q4 filing; fiscal 2020 ended January 30, 2021. Macy’s operates Macy’s, Bloomingdale’s and bluemercury stores, websites and mobile applications as one reporting segment.

Business Context

Operated 725 locations across 43 states, the District of Columbia, Puerto Rico and Guam, comprising approximately 112 million square feet.
Brands and formats included Macy’s, Macy’s Backstage, Market by Macy’s, Bloomingdale’s, Bloomingdale’s The Outlet, Bloomies and bluemercury.
Had 88,857 full-time and part-time employees, excluding seasonal employees, at year-end; approximately 8% were union-represented.
The business is highly seasonal, with a disproportionate amount of annual sales and operating income generated in November and December.

Financial Performance and Position

Metric	FY2021	FY2020	FY2019
Net sales	$24.460 billion	$17.346 billion	$24.560 billion
Net income (loss)	$1.430 billion	$(3.944) billion	$564 million
Diluted EPS	$4.55	$(12.68)	$1.81
Operating income (loss)	$2.350 billion	$(4.475) billion	$970 million
Gross margin	38.9%	29.2%	38.2%
SG&A as percentage of sales	32.9%	39.0%	36.6%
Adjusted EBITDA	$3.320 billion	$117 million	$2.336 billion
Net cash from operating activities	$2.712 billion	$649 million	$1.608 billion

Comparable sales increased 43.0% on an owned basis and 42.9% on an owned-plus-licensed basis versus FY2020; they increased 3.1% and 3.0%, respectively, versus FY2019.
Digital sales increased 13% from FY2020 and 39% from FY2019, representing 35.0% of net sales, compared with 44.3% in FY2020 and 25.3% in FY2019.
Credit card revenue increased to $832 million from $751 million in FY2020 and $771 million in FY2019.
Merchandise inventories were $4.383 billion at year-end, up 16% from FY2020 and down 16% from FY2019. Inventory turnover improved 21% from FY2020 and 22% from FY2019.
Cash and cash equivalents were $1.712 billion, compared with $1.679 billion at the prior year-end.
Total debt was $3.295 billion, down from $4.407 billion. The Company had no borrowings under its asset-based credit facility and reported $2.536 billion of available borrowing capacity after standby letters of credit.
Operating, investing and financing cash flows were $2.712 billion, $(370) million and $(2.381) billion, respectively. Capital expenditures were $597 million.
Shareholders’ equity increased to $3.621 billion from $2.553 billion. Shares outstanding declined to approximately 292.4 million from 310.5 million.

Material Changes Versus Prior Periods

Results rebounded sharply from the COVID-19-affected FY2020 period, when store closures led to significantly lower sales and a $3.080 billion goodwill impairment, primarily related to Macy’s and bluemercury.
Gross margin improved 970 basis points from FY2020 and 70 basis points from FY2019, driven by lower markdowns, stronger inventory productivity and Polaris strategy execution.
SG&A increased $1.280 billion in dollars from FY2020 but improved 610 basis points as a percentage of sales, reflecting cost controls and operating leverage.
FY2021 included only $30 million of impairment, restructuring and other costs versus $3.579 billion in FY2020.
The Company repaid approximately $1.6 billion of debt, including the $1.3 billion of 2025 senior secured notes and the $294 million of 2022 senior notes, but recognized $199 million of losses on early debt retirement.
The regular quarterly dividend was reinstated. The Company paid $90 million of dividends and repurchased approximately 20.5 million shares for $500 million, or an average of $24.40 per share.
The Company deferred most remaining store closures previously contemplated under the Polaris strategy to preserve cash-positive stores and support omnichannel fulfillment.

Guidance, Outlook and Management Commentary

For FY2022, management projected net sales of $24.46 billion to $24.70 billion, digital sales of approximately 37% of net sales and gross margin of 38.1% to 38.3%.
FY2022 guidance included SG&A of 33.7% to 33.9% of sales, adjusted EBITDA of 11.0% to 11.5% of sales, adjusted diluted EPS of $4.13 to $4.52 and capital expenditures of approximately $1 billion.
Management’s Polaris strategy emphasizes fashion and style, value, digital shopping, store experience, supply-chain modernization and technology-enabled transformation.
A curated digital marketplace was planned for launch in the second half of 2022. Planned capital spending was directed primarily to technology, data science, digital platforms, fulfillment and personalization.
On February 22, 2022, the Board authorized a new $2.0 billion share repurchase program without an expiration date and declared a quarterly dividend of $0.1575 per share.
Subsequent to year-end, Macy’s entered into a new $3.0 billion asset-based facility maturing in March 2027 and issued $850 million of senior notes due 2030 and 2032 to refinance debt.

Risks, Contingencies and Unusual Items

COVID-19 remained a significant risk through potential store restrictions, changes in customer demand, supply-chain disruption, labor shortages and higher health and safety costs.
Key operating risks include migration to digital channels, intense retail competition, fashion and inventory-management risk, labor cost inflation, supply-chain congestion, overseas sourcing, tariffs and transportation costs.
The Company identified cybersecurity, privacy, information-technology disruption, product safety, climate-related events, extreme weather and discretionary consumer spending as material risks.
Credit card revenue depends on the Citibank program, which was extended through March 31, 2030. FY2021 credit card revenue represented approximately 3.4% of net sales.
The Company had approximately $6.8 billion of operating lease obligations, primarily due after 2026, and approximately $3.2 billion of other obligations, primarily merchandise purchase commitments due within one year.
A California hazardous-waste investigation involving cosmetic-product disposal was expected to be resolved for $1.925 million; the amount was reserved at year-end. Other ordinary-course proceedings were not expected to have a material adverse effect.
Goodwill and indefinite-lived intangible assets were not impaired in the FY2021 annual assessment, but additional impairment could result from declines in market capitalization, operating performance or macroeconomic conditions.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matter concerned unrecognized tax benefits.

Investor Verification Checklist

Confirm that the relevant period is FY2021 ended January 29, 2022 rather than 2020 Q4.
Reconcile reported GAAP earnings with adjusted net income, adjusted EPS and adjusted EBITDA, particularly the effects of debt-retirement losses, settlement charges and restructuring items.
Assess whether FY2022 sales, margin, EBITDA, EPS and capital-expenditure guidance was achieved and how digital sales affected profitability.
Review debt maturities, refinancing transactions, asset-based borrowing capacity, covenant requirements and the effect of subsequent debt issuance on interest expense.
Evaluate inventory levels, markdown exposure, gross-margin sustainability and the effect of supply-chain and labor-cost pressures.
Assess the cash impact and authorization of the $2.0 billion repurchase program and the sustainability of reinstated dividends.
Review exposure to lease obligations, pension and SERP liabilities, uncertain tax positions, cybersecurity events and pending legal or regulatory matters.