Macy’s, Inc. Form 10-Q Summary
Reporting period: Third quarter and first 39 weeks of fiscal 2019, ended November 2, 2019, compared with the corresponding periods ended November 3, 2018. Although the request identifies “2018 Q3,” the filing is the 2019 third-quarter Form 10-Q, filed December 10, 2019.
Business Context
Macy’s is an omnichannel retailer operating Macy’s, Bloomingdale’s and bluemercury stores, websites and mobile applications. Its merchandise includes apparel, accessories, cosmetics, home furnishings and other consumer goods. The filing notes that retail results are seasonal and the reported periods exclude the Christmas season.
Key Financial Metrics
| Metric | 13 weeks ended Nov. 2, 2019 | 13 weeks ended Nov. 3, 2018 | 39 weeks ended Nov. 2, 2019 | 39 weeks ended Nov. 3, 2018 |
|---|---|---|---|---|
| Net sales | $5,173 million | $5,404 million | $16,223 million | $16,516 million |
| Credit card revenues, net | $183 million | $185 million | $531 million | $528 million |
| Gross margin | 40.0% | 40.3% | 38.9% | 39.9% |
| Operating income | $52 million | $147 million | $411 million | $688 million |
| Operating margin | 1.0% | 2.7% | 2.5% | 4.2% |
| Net income attributable to Macy’s shareholders | $2 million | $62 million | $224 million | $368 million |
| Diluted EPS | $0.01 | $0.20 | $0.72 | $1.18 |
| Adjusted diluted EPS | $0.07 | $0.27 | $0.79 | $1.45 |
Cash Flow, Liquidity and Capital Structure
- Cash provided by operating activities was $172 million for the first 39 weeks, down from $429 million in the prior-year period.
- Cash used in investing activities was $729 million, including $812 million of capital expenditures for property, equipment and capitalized software, compared with $677 million in the prior year.
- Cash used in financing activities was $340 million, including $349 million of dividends and $42 million of debt repayment.
- Cash, cash equivalents and restricted cash declined to $351 million at November 2, 2019, from $777 million at November 3, 2018. Cash and cash equivalents alone were $301 million.
- Long-term debt was $4,677 million, compared with $5,469 million at November 3, 2018. Long-term lease liabilities were $2,819 million following adoption of the new lease accounting standard.
- The $1.5 billion revolving credit facility had no borrowings or letters of credit outstanding. The company also had no commercial paper outstanding.
- Macy’s reported an interest coverage ratio of 13.07 and leverage ratio of 1.89, versus covenant requirements of at least 3.25 and no more than 3.75, respectively.
Material Changes Versus the Prior Comparable Period
- Third-quarter net sales declined 4.3%; owned comparable sales decreased 3.9% and owned-plus-licensed comparable sales decreased 3.5%.
- For the first 39 weeks, net sales decreased 1.8%; owned comparable sales declined 1.0% and owned-plus-licensed comparable sales declined 0.8%.
- Third-quarter operating income fell $95 million, and the operating margin contracted to 1.0% from 2.7%. Year-to-date operating income declined $277 million.
- Third-quarter SG&A decreased in dollars but increased to 42.6% of sales from 41.7%. Year-to-date SG&A was 40.0% of sales, up from 39.4%.
- Year-to-date gross margin declined to 38.9% from 39.9%, while third-quarter gross margin declined modestly to 40.0% from 40.3%.
- Net income attributable to shareholders decreased $60 million in the quarter and $144 million year to date. Lower operating income was partly offset by lower settlement charges, interest expense and income taxes.
- Interest expense declined because of debt reductions from 2018 tender offers and open-market repurchases.
- The company adopted ASC 842 leases on February 3, 2019, recording additional net lease assets of $2,519 million and lease liabilities of $2,728 million. Management stated that adoption did not materially affect net income or cash flows.
Management Commentary, Outlook and Risks
- Management attributed the third-quarter sales deceleration to soft international tourism, weaker performance in lower-tier malls and the late arrival of cold weather. Digital growth also slowed during website system enhancements, which management said were completed before the holiday season.
- Growth100 renovations were completed, Macy’s Backstage expanded to 222 locations, and vendor-direct assortment reached 1 million SKUs. Bloomingdale’s and bluemercury continued to report growth in selected channels and categories.
- On November 21, 2019, Macy’s lowered 2019 guidance: net sales down 2.5% to 2.0%; owned-plus-licensed comparable sales down 1.5% to 1.0%; credit card revenue of approximately $750 million; asset-sale gains of approximately $150 million; and adjusted diluted EPS of $2.57 to $2.77, or $2.20 to $2.40 excluding asset-sale gains.
- Management expects SG&A dollars to be slightly below 2018 and gross margin to decline moderately. The filing states that depreciation and amortization, net interest expense, effective tax rate and capital expenditure expectations were unchanged from prior guidance.
- On December 3, 2019, the company commenced a tender offer for up to $450 million of certain unsecured notes and debentures. The filing does not state the final amount repurchased.
- Key risks include weak consumer demand, mall and tourism trends, competition and channel migration, weather and seasonality, digital and cybersecurity issues, goodwill impairment, supply-chain disruptions, foreign sourcing, tariffs and retaliatory trade restrictions.
- The company disclosed that a sustained decline in market capitalization or deterioration in macroeconomic or business conditions could result in future goodwill impairment. No goodwill impairment was recorded in the quarter.
- Legal proceedings were described as incidental to the ordinary course of business and not expected to have a material adverse effect based on the filing.
Most Important Facts to Verify
- Confirm the company’s holiday-quarter sales, comparable-sales trends and whether the lowered 2019 guidance was achieved.
- Verify the final outcome, pricing and debt impact of the $450 million tender offer announced after the reporting date.
- Monitor cash generation, inventory levels, capital expenditures and dividend coverage given the decline in operating cash flow.
- Assess the effect of tariffs, sourcing changes and freight costs on gross margin and merchandise availability.
- Evaluate whether continued sales weakness or a lower market valuation creates goodwill or store-asset impairment risk.
- Reconcile reported GAAP earnings with adjusted EPS, particularly restructuring costs, pension settlement charges and real-estate gains.