Macy’s, Inc. Form 10-Q Summary
Reporting period: 13 and 39 weeks ended October 31, 2020, compared with November 2, 2019. Although the request metadata references “2019 Q3,” the supplied filing is Macy’s Form 10-Q for the third quarter of fiscal 2020, filed December 8, 2020.
Business Context
Macy’s is an omnichannel retailer operating Macy’s, Bloomingdale’s and bluemercury stores, websites and mobile applications. Fiscal 2020 results were materially affected by COVID-19: all stores temporarily closed on March 18, 2020, began reopening May 4, and substantially all were open by the end of the second quarter.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 39 Weeks 2020 | 39 Weeks 2019 |
|---|---|---|---|---|
| Net sales | $3,990 million | $5,173 million | $10,566 million | $16,223 million |
| Credit card revenues, net | $195 million | $183 million | $494 million | $531 million |
| Gross margin | 35.6% | 40.0% | 26.3% | 38.9% |
| Operating income (loss) | $(127) million | $52 million | $(4,876) million | $411 million |
| Net income (loss) | $(91) million | $2 million | $(4,104) million | $224 million |
| Diluted EPS | $(0.29) | $0.01 | $(13.20) | $0.72 |
| Net cash from operating activities | Not separately provided | Not separately provided | $244 million | $172 million |
- Q3 comparable sales declined 21.0% on an owned basis and 20.2% on an owned-plus-licensed basis.
- Digital sales increased 27% year over year and represented approximately 38% of owned comparable sales.
- Q3 SG&A expense was $1.726 billion, down $476 million year over year.
- Q3 adjusted diluted loss per share was $0.19, compared with adjusted diluted EPS of $0.07 in the prior-year quarter.
- Inventory was $5.144 billion at October 31, 2020, down approximately 29% from the prior-year quarter.
- Cash and cash equivalents were $1.551 billion; cash, cash equivalents and restricted cash totaled $1.624 billion.
- Total debt was approximately $5.388 billion, consisting of $536 million of short-term debt and $4.852 billion of long-term debt. Long-term lease liabilities were $3.266 billion.
- Shareholders’ equity declined to $2.243 billion from $6.057 billion at November 2, 2019, primarily reflecting the year-to-date net loss.
Material Changes Versus the Prior Comparable Period
- Sales fell 22.9% in Q3 and 34.9% for the first 39 weeks, reflecting store closures, reduced store traffic and weaker apparel demand.
- Gross margin declined in Q3 to 35.6% from 40.0%, primarily because of higher delivery expense associated with digital growth. Margin improved sequentially from 23.6% in Q2 due to better sell-through, lower clearance markdowns and disciplined inventory management.
- First-nine-month operating results included $3.445 billion of impairment, restructuring and other costs, compared with $16 million in 2019.
- The company recorded $3.080 billion of goodwill impairments, including $2.982 billion for the Macy’s reporting unit and $98 million for bluemercury, plus approximately $90 million of store-related asset impairments.
- Macy’s recognized $196 million of restructuring costs for the first 39 weeks, including $154 million of severance related to a workforce reduction of approximately 3,900 corporate and management employees.
- Interest expense increased to $196 million year to date from $143 million, primarily due to new secured debt issued in June 2020.
- Capital spending and software investment declined substantially; net cash used in investing activities was $314 million versus $729 million in 2019.
- Quarterly cash dividends were suspended beginning in the second quarter, and the remaining share-repurchase authorization was rescinded.
Liquidity, Debt and Financing
- In June 2020, Macy’s issued $1.3 billion of 8.375% senior secured notes due 2025. Proceeds and cash on hand were used to repay the $1.5 billion draw on the former unsecured revolving credit facility.
- The new asset-based credit facility provided a $2.941 billion revolving facility and a $300 million bridge facility. At October 31, 2020, no borrowings were outstanding and $124 million of standby letters of credit reduced available capacity.
- Management reported approximately $3 billion of untapped asset-based borrowing capacity and approximately $1.6 billion of cash and restricted cash.
- Operating cash flow was $244 million year to date, while financing activities provided $963 million, principally from debt issuance net of repayments and issuance costs.
- The company deferred approximately $75 million of store occupancy payments and approximately $100 million of employer Social Security taxes; repayment of the payroll-tax deferral is expected in the third quarter of fiscal 2021.
Guidance, Outlook and Risks
- For the second half of fiscal 2020, comparable owned-plus-licensed sales were expected to decline in the low-to-mid-20% range.
- Annual digital sales penetration was estimated in the mid-40% range; digital sales were expected to grow in the high-teens during the second half and low-to-mid-teens for the full year.
- Second-half gross margin was expected to be several percentage points below the prior year, with Q3 expected to be the peak quarterly margin.
- Fiscal 2020 capital expenditures were expected to be approximately $450 million, net interest expense approximately $300 million, and real-estate gains approximately $50 million.
- Management expected adjusted EBITDA to improve sequentially in the fourth quarter, but approached the quarter conservatively because of renewed COVID-19 cases and moderation in store recovery.
- Key risks include renewed store closures or capacity restrictions, weaker consumer spending, supply-chain disruptions and carrier surcharges, elevated delivery costs, liquidity pressure, covenant compliance, additional asset impairments, and the uncertain duration and economic effects of COVID-19.
- The company stated that further liquidity actions could be required, including asset monetization, additional furloughs, reduced capital spending and other discretionary expense reductions.
- A California hazardous-waste matter remained under settlement discussion. The company adjusted its reserve and stated that penalties could exceed $1 million, but the amount and outcome were not determinable.
Important Facts for Investors to Verify
- Whether holiday sales, store traffic and digital growth met or exceeded management’s second-half expectations.
- Actual available borrowing capacity and compliance with asset-based facility availability requirements and future fixed-charge coverage tests.
- The sustainability of cash balances and operating cash flow after seasonal inventory and holiday-related working-capital needs.
- Whether additional goodwill, store-asset or right-of-use-asset impairments become necessary as market capitalization and operating forecasts change.
- The timing of any reinstatement of dividends or share repurchases.
- The continuing effects of COVID-19, supply-chain surcharges, rent deferrals and deferred payroll taxes on margins and liquidity.
- The final resolution and financial impact of the California hazardous-waste matter.