Macy’s, Inc. Form 10-Q Summary
Reporting period: The provided filing is for the 13 and 26 weeks ended July 31, 2021, compared with August 1, 2020. This differs from the request metadata identifying “2020 Q2.” Macy’s operates omnichannel retail businesses under Macy’s, Bloomingdale’s and bluemercury.
Key Financial Metrics
| Metric | 13 Weeks Ended July 31, 2021 | 13 Weeks Ended August 1, 2020 | 26 Weeks Ended July 31, 2021 | 26 Weeks Ended August 1, 2020 |
|---|---|---|---|---|
| Net sales | $5.647 billion | $3.559 billion | $10.353 billion | $6.576 billion |
| Net credit card revenues | $197 million | $168 million | $356 million | $299 million |
| Operating income (loss) | $597 million | $(631) million | $812 million | $(4.749) billion |
| Net income (loss) | $345 million | $(431) million | $448 million | $(4.012) billion |
| Diluted EPS | $1.08 | $(1.39) | $1.41 | $(12.91) |
| Gross margin | 40.6% | 23.6% | 39.7% | 20.6% |
| Adjusted EBITDA | $836 million | $(142) million | $1.309 billion | $(830) million |
Second-quarter comparable sales increased 61.2% on an owned basis and 62.2% on an owned-plus-licensed basis versus 2020; versus 2019, comparable sales increased 5.8% and 5.9%, respectively. Digital sales declined 6% year over year in the quarter but increased 45% versus 2019. Digital penetration was 32% of net sales.
Net cash provided by operating activities was $965 million for the first 26 weeks of 2021, compared with cash used of $7 million in 2020. Investing cash outflow was $144 million, including $142 million of property and equipment purchases and $88 million of capitalized software. Financing cash outflow was $360 million.
At July 31, 2021, cash and cash equivalents were $2.137 billion, total assets were $18.417 billion, short-term debt was $1.546 billion and long-term debt was $3.295 billion. The company had no borrowings under its $2.941 billion asset-based revolving facility, $136 million of standby letters of credit outstanding and $2.457 billion of borrowing capacity.
Material Changes Versus the Prior Comparable Period
- Sales recovered substantially as stores reopened and consumer demand improved following pandemic-related closures in 2020.
- Gross margin expanded by approximately 17 percentage points in the quarter, supported by store recovery, inventory productivity, pricing initiatives and lower clearance markdowns.
- SG&A increased in dollars with higher sales but declined to 33.6% of sales from 39.2% in the prior-year quarter.
- Impairment, restructuring and other costs fell to $2 million in the quarter and $21 million year to date, compared with $242 million and $3.426 billion, respectively, in 2020. The 2020 year-to-date amount primarily included $3.080 billion of goodwill impairments.
- Inventory was 20% above the prior-year quarter but 14.5% below the second quarter of 2019.
- The company issued $500 million of 5.875% senior notes due 2029 and used proceeds with cash on hand to fund a $500 million debt tender offer. It recognized $14 million of early debt-retirement losses year to date.
- A non-cash pension settlement charge of $81 million was recorded after transferring $256 million of pension assets and related obligations to an insurer.
Outlook, Commentary and Risks
Management stated that second-quarter results exceeded expectations, supported by strong consumer behavior, disciplined cost and inventory management, digital investments and execution of the Polaris strategy. The company continued initiatives involving merchandise expansion, pricing analytics, digital search, store layouts, supply-chain modernization and technology.
Updated fiscal 2021 guidance calls for net sales of $23.550 billion to $23.950 billion, digital sales of $8.350 billion to $8.450 billion, gross-margin expansion of up to 9 percentage points from 2020, adjusted EBITDA of approximately 11% to 11.5% of sales, net interest expense of approximately $270 million and adjusted diluted EPS of $3.41 to $3.75. Net credit card revenue is expected to equal approximately 3.1% of sales, and the effective tax rate excluding certain items is expected to be approximately 24%.
Citibank gave notice on June 4, 2021, to terminate the credit card program agreement after sales fell below the agreement’s benchmark threshold. Macy’s is evaluating a transfer to another financial-services entity or a modified arrangement with Citibank. Management does not expect an impact on fiscal 2021 credit-card results but cannot estimate the effect beyond fiscal 2021.
Subsequent to quarter-end, Macy’s redeemed the $1.3 billion of 8.375% senior secured notes due 2025. The transaction is expected to produce a $185 million pretax charge in the quarter ended October 30, 2021. The company also reinstated a $0.15 quarterly dividend and authorized a $500 million share-repurchase program.
Principal risks include COVID-19 variants and related restrictions, consumer demand, supply-chain disruptions, labor shortages and wage pressure, intense retail competition, digital transformation, cybersecurity, substantial indebtedness, potential goodwill or asset impairments, import and vendor risks, and uncertainty regarding the credit-card program transition. A California hazardous-waste matter remains under settlement discussion; potential penalties are estimated at $1 million to $2 million and are not expected to be material.
Investor Verification Items
- Confirm that the intended period is second quarter 2021 rather than second quarter 2020.
- Reconcile GAAP results with management’s adjusted EBITDA, adjusted net income and adjusted EPS measures.
- Assess the sustainability of gross-margin gains, inventory productivity and store traffic after pandemic-related comparisons normalize.
- Review the final accounting and liquidity impact of the August 2021 $1.3 billion debt redemption, including the $185 million pretax charge.
- Monitor the Citibank credit-card agreement termination, any replacement arrangement and potential effects on future credit-card revenue.
- Evaluate the company’s ability to fund dividends, share repurchases, capital expenditures and debt service while maintaining liquidity.
- Track COVID-19 developments, supply-chain constraints, labor availability and the California hazardous-waste settlement.