Macy’s, Inc. Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended November 2, 2013, compared with October 27, 2012. The request metadata identifies “2012 Q3,” but the filing is for the third quarter of fiscal 2013. Macy’s operated approximately 840 stores under the Macy’s and Bloomingdale’s brands, plus related e-commerce websites.
Financial Performance and Position
| Metric | 13 Weeks Ended Nov. 2, 2013 | 13 Weeks Ended Oct. 27, 2012 | 39 Weeks Ended Nov. 2, 2013 | 39 Weeks Ended Oct. 27, 2012 |
|---|---|---|---|---|
| Net sales | $6,276 million | $6,075 million | $18,729 million | $18,336 million |
| Gross margin | $2,459 million; 39.2% | $2,403 million; 39.6% | $7,468 million; 39.9% | $7,352 million; 40.1% |
| Operating income | $360 million; 5.7% | $325 million; 5.4% | $1,329 million; 7.1% | $1,270 million; 6.9% |
| Net income | $177 million; 2.8% | $145 million; 2.4% | $675 million; 3.6% | $605 million; 3.3% |
| Diluted EPS | $0.47 | $0.36 | $1.74 | $1.45 |
- Third-quarter net sales increased 3.3%, while comparable sales increased 3.5%. For the first 39 weeks, sales increased 2.1% and comparable sales increased 2.2%.
- Net interest expense declined to $96 million in the quarter and $289 million year to date, compared with $103 million and $320 million, respectively, in the prior comparable periods.
- Income from credit operations increased to $170 million in the quarter from $162 million and to $513 million year to date from $451 million.
- Net cash provided by operating activities was $819 million for the first 39 weeks, compared with $889 million in the prior year.
- Capital spending comprised $381 million of property and equipment purchases and $180 million of capitalized software. Net cash used in investing activities was $541 million.
- Cash and cash equivalents were $1,171 million at November 2, 2013, compared with $1,264 million at October 27, 2012 and $1,836 million at February 2, 2013.
- Short-term debt was $465 million and long-term debt was $6,732 million at November 2, 2013. The estimated fair value of long-term debt was $7,002 million.
- The company had a $1.5 billion revolving credit facility, expandable to $1.75 billion subject to lender commitments, expiring May 10, 2018. No borrowings were outstanding under the credit agreements.
- Interest coverage was 9.13 and leverage was 1.87 under the credit agreement, versus required minimum interest coverage of 3.25 and maximum leverage of 3.75.
Material Changes Versus the Prior Comparable Period
- Third-quarter net income increased $32 million, or 22.1%, and diluted EPS rose from $0.36 to $0.47. Year-to-date net income increased $70 million, or 11.6%, and diluted EPS rose from $1.45 to $1.74.
- Operating income improved despite a decline in gross margin rate. SG&A increased only 1.0% in the quarter and 0.9% year to date, causing SG&A as a percentage of sales to decline by 70 and 40 basis points, respectively.
- Gross margin rate declined 40 basis points in the quarter and 20 basis points year to date. Management attributed the quarterly pressure primarily to higher markdowns and the cost of free shipping associated with omnichannel growth.
- Inventory increased to $7,716 million from $7,208 million year over year. Management attributed the working-capital effect partly to the calendar shift caused by the 53rd week in fiscal 2012.
- Financing cash use declined to $943 million from $1,837 million. The prior year included substantially higher debt repayments, while 2013 included $400 million of new debt issuance.
- Macy’s repurchased approximately 27.6 million shares for approximately $1,254 million during the first 39 weeks. The company had $1,748 million remaining under its authorization at November 2, 2013.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2013 comparable sales growth of 2.0% to 2.9% and diluted EPS of $3.80 to $3.90.
- Management stated that cash on hand, operating cash flow, the credit facility and other capital resources should be sufficient for foreseeable working-capital, capital-expenditure, debt-service and other cash requirements.
- Growth initiatives included My Macy’s localization, omnichannel fulfillment and customer-centric MAGIC Selling. Approximately 500 Macy’s stores were fulfilling orders from stores, Internet and mobile channels at November 2, 2013, compared with 292 at February 2, 2013.
- On September 6, 2013, the company issued $400 million of 4.375% senior notes due 2023. It also repaid $121 million of debt, including $109 million of 7.625% senior debentures at maturity.
- The company declared a quarterly dividend of $0.25 per share payable January 2, 2014.
- Retail results are seasonal, and the reported periods exclude the Christmas season; therefore, interim results are not necessarily indicative of full-year performance.
- Key risks include competition across retail channels, consumer spending and confidence, economic conditions, weather and natural disasters, supply-chain and foreign-production exposure, import duties, interest rates, systems failures and data-security breaches.
- Legal proceedings were described as ordinary-course matters that management did not expect to have a material adverse effect. The filing reported no material changes to the risk factors in the prior Form 10-K.
- After December 31, 2013, with limited exceptions, employees would no longer earn future pension service credits under the defined benefit pension and supplementary retirement plans; future benefits would generally be provided through defined contribution plans.
Investor Verification Points
- Verify the filing period because the supplied metadata says “2012 Q3,” while the filing reports the quarter ended November 2, 2013.
- Assess whether comparable-sales growth and the $3.80-$3.90 EPS guidance were achieved for the full fiscal year, particularly after the holiday season.
- Monitor gross-margin pressure from markdowns and free shipping against the benefits of SG&A leverage and credit operations.
- Reconcile inventory growth, operating cash flow and seasonal working-capital requirements.
- Review the effect of approximately $1.25 billion of share repurchases, dividends and new debt issuance on leverage, liquidity and per-share results.
- Evaluate the sustainability of improved credit-operations income and the company’s exposure to consumer credit performance.