Macy’s, Inc. Form 10-Q Summary
Business Context and Reporting Period
Macy’s, Inc. is an omnichannel retailer operating Macy’s, Bloomingdale’s and bluemercury stores, websites and mobile applications. The filing covers the 13 and 26 weeks ended July 30, 2022, compared with the corresponding periods ended July 31, 2021. Although the request identifies “2021 Q2,” the supplied filing is for the second quarter of fiscal 2022 and was filed August 26, 2022.
The company operated stores in 43 states, the District of Columbia, Puerto Rico and Guam. Macy’s accounted for 86% of net sales in both the quarter and first half. Digital sales represented approximately 30% of second-quarter net sales and 32% of first-half net sales.
Financial Performance and Liquidity
| Metric | 13 Weeks Ended July 30, 2022 | 13 Weeks Ended July 31, 2021 | 26 Weeks Ended July 30, 2022 | 26 Weeks Ended July 31, 2021 |
|---|---|---|---|---|
| Net sales | $5.600 billion | $5.647 billion | $10.948 billion | $10.353 billion |
| Credit card revenues, net | $204 million | $197 million | $395 million | $356 million |
| Operating income | $399 million | $597 million | $862 million | $812 million |
| Net income | $275 million | $345 million | $561 million | $448 million |
| Diluted EPS | $0.99 | $1.08 | $1.97 | $1.41 |
| Gross margin | 38.9% | 40.6% | 39.2% | 39.7% |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $303 million | $965 million |
Second-quarter EBITDA was $614 million versus $753 million, while adjusted EBITDA was $616 million versus $836 million. Adjusted diluted EPS was $1.00 versus $1.29. First-half EBITDA increased to $1.289 billion from $1.207 billion, but adjusted EBITDA declined to $1.299 billion from $1.309 billion.
As of July 30, 2022, cash and cash equivalents were $300 million, compared with $1.712 billion at January 29, 2022 and $2.137 billion at July 31, 2021. Merchandise inventories were $4.610 billion, up 7.3% year over year. Total assets were $16.342 billion and shareholders’ equity was $3.531 billion.
Long-term debt was $2.995 billion, with no short-term debt. Long-term lease liabilities were $3.008 billion. The company had a $3.0 billion asset-based revolving credit facility maturing in March 2027, with $65 million of standby letters of credit outstanding and $2.935 billion of reported availability; there were no borrowings under the facility.
First-half investing cash outflows were $515 million, including $378 million of property and equipment purchases and $204 million of capitalized software. Financing cash outflows were $1.200 billion, including $600 million of share repurchases, $87 million of dividends and net debt repayment activity. Capital expenditures totaled $582 million, compared with $230 million in the prior-year first half.
Material Changes Versus the Prior Comparable Period
- Second-quarter net sales decreased 0.8% to $5.600 billion; comparable sales decreased 1.5% on an owned basis and 1.6% on an owned-plus-licensed basis. First-half net sales increased 5.7% and comparable sales increased 5.1% on an owned basis.
- Second-quarter digital sales declined 5.4%, and digital penetration fell to 30.2% from approximately 32%, as consumers shifted toward in-store shopping.
- Gross margin declined 170 basis points in the quarter and 50 basis points in the first half, primarily because of higher clearance and promotional markdowns.
- Second-quarter SG&A increased $83 million to $1.981 billion, and the SG&A rate deteriorated to 35.4% from 33.6%. The company cited staffing normalization and the $15 per hour minimum wage effective May 1, 2022.
- Second-quarter operating income fell $198 million and net income fell $70 million. First-half operating income increased $50 million and net income increased $113 million.
- Net credit card revenue increased 3.6% in the quarter and 11.0% in the first half, supported by higher credit sales, co-brand card spending and lower bad debt.
- Bloomingdale’s and bluemercury outperformed Macy’s in the quarter. Owned comparable sales increased 8.8% and 7.6%, respectively, while Macy’s declined 2.9%.
- The company issued $850 million of senior notes in March 2022, repaid approximately $1.139 billion of debt during the first half and recorded $31 million of early debt-retirement losses.
- The company repurchased approximately 24 million shares for approximately $600 million, leaving $1.4 billion under the repurchase authorization as of July 30, 2022.
Guidance, Outlook, Commentary and Risks
On August 23, 2022, management updated full-year 2022 guidance to net sales of $24.3 billion to $24.6 billion, gross margin approximately 150 basis points below 2021, SG&A rate deterioration of approximately 120 basis points, net credit card revenues of approximately 3.3% of net sales, asset-sale gains of $75 million to $90 million, adjusted EBITDA of approximately 10.5% of net sales and adjusted diluted EPS of $4.00 to $4.20.
Management cited ongoing execution of its Polaris strategy, including merchandise and private-brand repositioning, pricing and inventory analytics, off-mall store expansion, digital improvements, Macy’s Marketplace planned for the third quarter of 2022, supply-chain modernization and additional fulfillment capacity. Management also expects the Toys “R” Us partnership to expand to every Macy’s location by October 15, 2022.
Key risks include changing consumer demand and channel mix, inflation and economic conditions, competitive pricing and markdown pressure, elevated inventory, labor shortages and wage costs, supply-chain disruptions, foreign sourcing, cybersecurity and systems failures, seasonal volatility, real-estate transactions, leverage and interest rates, impairment charges, and the amount and timing of future dividends and share repurchases.
The company stated that no material changes had occurred in its previously disclosed risk factors, market risk or ordinary-course contractual obligations. It also stated that current legal proceedings were not expected to have a material adverse effect on financial position or results of operations. The filing notes that second-quarter and first-half results exclude the Christmas season and are not necessarily indicative of full-year performance.
Important Facts for Investors to Verify
- Confirm that the applicable filing period is fiscal 2022, not 2021, and assess the effect of the 2021 comparison’s unusually strong post-pandemic recovery.
- Monitor inventory levels, clearance activity and gross margin, particularly in pandemic-related, seasonal and private-brand categories.
- Evaluate whether the reduced digital penetration and weaker Macy’s comparable sales persist as customer shopping behavior changes.
- Reconcile cash usage from share repurchases, dividends, capital expenditures and debt transactions with the company’s reduced cash balance.
- Review the terms, borrowing-base availability and covenant triggers of the $3.0 billion ABL facility.
- Assess the achievability of the revised 2022 guidance, especially the projected gross-margin and SG&A-rate deterioration.
- Distinguish GAAP results from adjusted EPS and adjusted EBITDA; the company’s non-GAAP measures exclude items that may be financially significant.
- Verify the timing and economics of planned Marketplace, store, distribution-center and fulfillment investments.