Macy’s, Inc. Form 10-Q Summary
Business context and reporting period
Macy’s, Inc. is an omnichannel retailer operating approximately 860 Macy’s, Bloomingdale’s, bluemercury, Backstage and STORY locations, plus websites and mobile applications. The filing covers the 13 and 26 weeks ended August 4, 2018, compared with the periods ended July 29, 2017. Although the request identifies 2017 Q2, the supplied filing is the second-quarter 2018 Form 10-Q.
Financial performance and liquidity
| Metric | 13 weeks ended August 4, 2018 | 13 weeks ended July 29, 2017 | 26 weeks ended August 4, 2018 | 26 weeks ended July 29, 2017 |
|---|---|---|---|---|
| Net sales | $5,572 million | $5,636 million | $11,112 million | $10,986 million |
| Credit card revenues, net | $186 million | $167 million | $343 million | $328 million |
| Operating income | $303 million | $282 million | $541 million | $501 million |
| Operating margin | 5.4% | 5.0% | 4.9% | 4.6% |
| Net income attributable to Macy’s shareholders | $166 million | $111 million | $306 million | $189 million |
| Diluted EPS | $0.53 | $0.36 | $0.98 | $0.62 |
| Gross margin | 40.4% | 39.6% | 39.7% | 39.0% |
- Second-quarter net sales declined 1.1%, while owned comparable sales were flat and owned-plus-licensed comparable sales increased 0.5%. Management estimated owned-plus-licensed comparable sales would have increased 2.9% absent a 240-basis-point timing shift in the Friends and Family promotion.
- Year-to-date net sales increased 1.1%; owned comparable sales rose 1.9% and owned-plus-licensed comparable sales rose 2.3%.
- Second-quarter SG&A increased $3 million to $2,164 million, and the SG&A rate increased to 38.8% from 38.4%. Year-to-date SG&A increased $29 million, but the rate declined to 38.2% from 38.4%.
- Net cash provided by operating activities was $544 million year to date, compared with $546 million in the prior-year period. Capital expenditures and capitalized software totaled $408 million, and net cash used in investing activities was $312 million.
- Net cash used in financing activities was $636 million, including $232 million of dividends and $357 million of debt repayments. The company repurchased approximately $344 million face value of debt for a total cost of approximately $354 million.
- At August 4, 2018, cash and cash equivalents were $1,068 million, merchandise inventory was $4,956 million, short-term debt was $63 million and long-term debt was $5,473 million. Total debt was approximately $5,536 million.
- The company had no borrowings or letters of credit outstanding under its $1.5 billion revolving credit facility and no borrowings under its $1.5 billion commercial paper program. The facility expires May 6, 2021.
- The reported interest coverage ratio was 10.23 versus a minimum requirement of 3.25; the leverage ratio was 1.89 versus a maximum requirement of 3.75.
Material changes versus the prior comparable period
- Operating income increased $21 million in the quarter and $40 million year to date, primarily reflecting improved merchandise margins and higher credit card revenues.
- Cost of sales as a percentage of net sales improved to 59.6% from 60.4% in the quarter and to 60.3% from 61.0% year to date, mainly due to improved inventory management and lower markdowns.
- Net income attributable to Macy’s shareholders increased 50% in the quarter and 62% year to date. Lower interest expense and lower tax rates were significant contributors.
- Net interest expense declined $17 million in the quarter and $35 million year to date, following debt repurchases and the July 2017 maturity of $300 million of senior debentures.
- The effective tax rate declined to 16.8% from 35.7% in the quarter and to 22.1% from 40.9% year to date, partly because of U.S. federal tax reform and tax-related items.
- Gains on real estate sales declined to $46 million from $43 million in the quarter only modestly increased, but year-to-date gains declined to $70 million from $111 million.
- The company recorded $17 million of second-quarter and $36 million of year-to-date impairment and other costs related primarily to the wind-down of Macy’s China Limited; no comparable costs were recorded in 2017.
Outlook, management commentary, risks and unusual items
- Management stated that its North Star strategy continued to gain traction. Initiatives included enhanced Star Rewards, Backstage expansion, vendor-direct assortment growth, buy-online-ship-to-store, Growth50 stores, bluemercury expansion and in-store innovation through STORY and b8ta.
- The company opened 47 Backstage locations during the quarter and expected approximately 120 new in-store Backstage locations for fiscal 2018. It also opened 13 freestanding bluemercury locations during the quarter.
- Updated fiscal 2018 guidance called for total net sales ranging from flat to up 0.7%, owned-plus-licensed comparable sales growth of 2.1% to 2.5%, slightly higher gross margin, credit income of approximately $720 million to $735 million, interest expense of approximately $245 million excluding debt-repurchase effects, a 23% effective tax rate and adjusted diluted EPS of $3.95 to $4.15.
- Non-GAAP adjusted diluted EPS was $0.70 in the quarter and $1.19 year to date, versus $0.46 and $0.72, respectively, in the prior-year periods. Excluding real estate gains and other identified items, adjusted diluted EPS was $0.59 in the quarter and $1.02 year to date.
- Non-cash pension settlement charges were $50 million in both the quarter and year-to-date period. These charges resulted from actuarial loss recognition associated with lump-sum distributions, retiree elections and restructuring activity.
- The company expects the lease accounting standard effective February 3, 2019 to materially increase recognized right-of-use assets and lease liabilities and may affect the timing of certain real estate sale gains.
- Key risks include changing consumer spending and shopping behavior, intense retail and digital competition, execution of strategic initiatives, cybersecurity and systems disruptions, employee benefit costs, real estate transactions, seasonality, supply-chain and foreign sourcing disruptions, tariffs, interest rates and macroeconomic conditions.
- The filing reports no material changes to previously disclosed risk factors or market-risk exposures, and management does not expect existing legal proceedings to have a material adverse effect.
Most important facts for investors to verify
- Confirm that the filing period is the second quarter of 2018, not 2017, and reconcile the 52-week 2018 guidance with the 53-week 2017 comparison.
- Assess the sustainability of sales and margin gains after adjusting for promotional-event timing, real estate gains, pension settlement charges, China wind-down costs and debt-repurchase effects.
- Monitor inventory levels, markdown rates, digital sales growth, comparable sales and the performance of Growth50, Backstage, bluemercury and other strategic initiatives.
- Verify debt-reduction plans, future interest expense, pension obligations and compliance with the revolving-credit facility covenants.
- Evaluate the effect of the new lease standard on reported assets, liabilities, leverage and real estate-related earnings.
- Review the assumptions underlying the 23% tax-rate and $3.95-to-$4.15 adjusted EPS guidance, as the filing does not provide a directly comparable forward-looking GAAP EPS measure.