Macy’s, Inc. Form 10-Q Summary
Reporting period: 13 weeks ended May 2, 2020, compared with May 4, 2019. The provided filing is for the first quarter of fiscal 2020, not 2019 Q1. The report was filed July 2, 2020, under the SEC’s COVID-19 filing extension.
Business Context
Macy’s is an omnichannel retailer operating Macy’s, Bloomingdale’s and bluemercury stores, websites and mobile applications. The company temporarily closed all stores on March 18, 2020 because of COVID-19; the first stores reopened May 4, 2020. Nearly all stores had reopened by July 1, 2020, according to the filing.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $3,017 million | $5,504 million | Down 45.2% |
| Credit card revenues, net | $131 million | $172 million | Down 23.8% |
| Gross margin | 17.1% | 38.2% | Down 21.1 percentage points |
| Operating income (loss) | $(4,119) million | $203 million | Declined $4,322 million |
| Net income (loss) | $(3,581) million | $136 million | Declined $3,717 million |
| Diluted EPS | $(11.53) | $0.44 | Down $11.97 |
| Adjusted diluted EPS | $(2.03) | $0.44 | Down $2.47 |
| Net cash used in operating activities | $(164) million | $(38) million | Use increased $126 million |
| Net cash used in investing activities | $(113) million | $(237) million | Use decreased $124 million |
| Net cash provided by financing activities | $1,148 million | $(158) million | Improved $1,306 million |
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $1,523 million at May 2, 2020, compared with $685 million at February 1, 2020 and $737 million at May 4, 2019. Cash, cash equivalents and restricted cash totaled $1,602 million at quarter-end.
- Merchandise inventories were $4,923 million, down from $5,188 million at fiscal year-end and $5,498 million a year earlier.
- Short-term debt was $739 million and long-term debt was $4,918 million, compared with $539 million and $3,621 million, respectively, at February 1, 2020.
- The company drew the full $1.5 billion available under its revolving credit facility on March 19, 2020. It had no commercial paper borrowings outstanding at May 2, 2020.
- Shareholders’ equity declined to $2,697 million from $6,377 million at February 1, 2020, primarily reflecting the quarterly net loss.
- The company paid $117 million in dividends during the quarter and suspended quarterly cash dividends beginning in the second quarter of 2020.
Material Changes Versus the Prior Comparable Period
- COVID-19 store closures caused a 45.2% decline in net sales. Digital sales declined only in the low single digits year over year, while store sales fell significantly.
- Gross margin fell to 17.1%, driven by increased markdowns and an approximately $300 million inventory write-down, primarily involving fashion merchandise.
- SG&A expense decreased $514 million because of a discretionary spending freeze and other cost controls.
- Impairment, restructuring and other costs increased to $3,184 million from $1 million. The amount included $3,070 million of goodwill impairment and $80 million of store-related long-lived asset impairments.
- Goodwill declined from $3,908 million at February 1, 2020 to $838 million at May 2, 2020. The goodwill impairment consisted of $2,972 million for the Macy’s reporting unit and $98 million for bluemercury.
- Operating cash flow remained negative, although reduced capital spending and extended payment terms partially mitigated the impact of the net loss.
Outlook, Management Commentary and Risks
- Management stated that the full financial impact of COVID-19 could not be reasonably estimated because the severity and duration of the pandemic remained uncertain.
- In June 2020, Macy’s announced a restructuring expected to reduce corporate and management headcount by approximately 3,900 positions. The company expected approximately $180 million of pretax cash restructuring costs in fiscal 2020, primarily in the second quarter.
- The restructuring was expected to generate approximately $365 million of fiscal 2020 expense savings and approximately $630 million of annualized savings, in addition to the previously announced $1.5 billion annual expense-savings target under the Polaris strategy.
- The Polaris strategy includes strengthening customer relationships, improving merchandise assortment, accelerating digital growth, closing approximately 125 lower-productivity Macy’s stores over three years, and resetting the cost base.
- On June 8, 2020, Macy’s issued $1.3 billion of 8.375% senior secured notes due 2025 and entered into a $2.851 billion revolving asset-based credit facility plus a $300 million bridge facility. The proceeds and cash on hand were used to repay the existing $1.5 billion unsecured revolver.
- The company identified risks from additional COVID-19 outbreaks, renewed store closures, weaker consumer demand, supply-chain disruptions, vendor financial pressure, liquidity constraints, covenant compliance and potential further asset impairments.
- The filing disclosed a California hazardous-waste investigation involving alleged non-compliance at stores and distribution centers. Macy’s reserved $1 million and stated that a penalty exceeding $100,000 was possible, but that a material adverse impact was not expected.
Important Facts for Investors to Verify
- Whether store reopenings and consumer demand recover sufficiently to restore positive operating and free cash flow.
- The company’s post-June financing liquidity, borrowing-base availability, collateral requirements and maturity profile.
- Whether additional goodwill, store-asset or inventory impairments occur as projections and market conditions change.
- The timing and realization of Polaris and COVID-19 restructuring savings, including the approximately $180 million of expected fiscal 2020 cash costs.
- The sustainability of the dividend suspension and any future capital allocation changes.
- The effect of COVID-19 on merchandise markdowns, gross margin, inventory levels and vendor relationships.
- The outcome of the hazardous-waste matter and any other legal or regulatory contingencies.