Macy’s, Inc. Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 29, 2022, compared with periods ended October 30, 2021. Although the request metadata identifies “2021 Q3,” the filing is for fiscal 2022 third quarter. Macy’s operates Macy’s, Bloomingdale’s and bluemercury through stores, websites and mobile applications.
Financial Results and Key Metrics
| Metric | Q3 2022 | Q3 2021 | 39 Weeks 2022 | 39 Weeks 2021 |
|---|---|---|---|---|
| Net sales | $5.230 billion | $5.440 billion | $16.178 billion | $15.794 billion |
| Credit card revenues, net | $206 million | $213 million | $601 million | $568 million |
| Operating income | $192 million | $523 million | $1.054 billion | $1.335 billion |
| Net income | $108 million | $239 million | $668 million | $687 million |
| Diluted EPS | $0.39 | $0.76 | $2.37 | $2.17 |
| Gross margin | 38.7% | 41.0% | 39.1% | 40.2% |
| Adjusted EBITDA | $439 million | $765 million | $1.738 billion | $2.073 billion |
Third-quarter comparable sales decreased 3.1% on an owned basis and 2.7% on an owned-plus-licensed basis. Macy’s comparable sales declined 4.4% on an owned basis, while Bloomingdale’s increased 5.3% and bluemercury increased 14.0%.
Digital sales declined 9% year over year and represented 31% of net sales, compared with 33% in the prior-year quarter. SG&A increased to $2.057 billion, or 39.3% of sales, from $1.973 billion, or 36.3% of sales. Inventory was $6.403 billion at October 29, 2022, up 4.3% from the prior-year quarter.
Cash Flow, Liquidity and Capital Structure
- Operating cash flow for the first 39 weeks was $488 million, down from $841 million in the prior-year period.
- Investing cash flow was negative $869 million, including $655 million of property and equipment purchases and $328 million of capitalized software. Capital expenditures totaled $983 million, compared with $385 million in 2021.
- Financing cash flow was negative $1.005 billion, including $601 million of share repurchases, $130 million of dividends and net debt repayments.
- Cash and cash equivalents were $326 million, compared with $316 million at October 30, 2021 and $1.712 billion at January 29, 2022.
- Short-term debt was $183 million and long-term debt was $2.996 billion. The ABL facility had $183 million of borrowings, $65 million of standby letters of credit and approximately $2.935 billion of available borrowing capacity.
- Long-term lease liabilities were $2.988 billion. The estimated fair value of long-term debt was $2.371 billion versus a carrying amount of $2.996 billion.
- The company repurchased approximately 24 million shares for $600 million during the first 39 weeks, with approximately $1.4 billion remaining under its authorization.
Material Changes Versus the Prior Comparable Period
- Quarterly net sales declined 3.9%, while first-nine-month sales increased 2.4%. The quarterly decline reflected a shift from pandemic-related categories toward occasion-based apparel and renewed in-store shopping.
- Gross margin fell 230 basis points in the quarter because of increased promotional and clearance markdowns, particularly in casual apparel, soft home and warmer-weather seasonal merchandise.
- Quarterly SG&A increased $84 million, primarily because the company filled previously open positions and increased compensation to attract and retain employees.
- Quarterly operating income declined $331 million and net income declined $131 million. The prior-year quarter included a $185 million loss on early debt retirement, but also benefited from stronger sales and margins.
- Net interest expense declined to $42 million from $53 million in the quarter and to $131 million from $211 million for the first nine months, reflecting debt refinancing and repayment activity.
- First-nine-month adjusted diluted EPS declined to $2.60 from $2.91, while reported diluted EPS increased to $2.37 from $2.17 because of lower debt-retirement losses and a substantially reduced share count.
- Non-cash pension settlement charges were $32 million in the first nine months, compared with $90 million in the prior-year period. Impairment, restructuring and other costs were $25 million versus $21 million.
Guidance, Outlook, Risks and Unusual Items
On November 17, 2022, Macy’s reaffirmed its annual 2022 sales guidance and raised earnings guidance. It expected digital sales of approximately 33% of net sales, net credit card revenues of approximately 3.4% of sales, benefit plan income of approximately $21 million, net interest expense of approximately $180 million, diluted shares of approximately 281 million, adjusted diluted EPS of $4.07 to $4.27 and capital expenditures of approximately $1.2 billion.
Management continued executing its Polaris strategy, including investments in digital personalization, the Macy’s digital Marketplace, off-mall store formats, supply-chain modernization, technology and data analytics. A new Texas distribution facility was expected in mid-2023 and a North Carolina fulfillment center was planned for 2025.
Key risks include weaker consumer spending, inflation and economic conditions, changing shopping behavior, competitive pressure, markdown and inventory risk, labor shortages and wage costs, supply-chain disruption, foreign sourcing and transportation constraints, cybersecurity incidents, real estate transactions, indebtedness, interest rates, seasonality, weather and public-health events. The company stated that routine legal proceedings were not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors.
Unusual items included real-estate sale gains of $74 million year to date, pension settlement charges of $32 million, impairment and restructuring costs of $25 million, and debt-retirement losses of $31 million. Management’s non-GAAP measures exclude certain of these items and may not be comparable with other companies’ measures.
Important Facts for Investors to Verify
- Confirm that the applicable period is fiscal 2022 third quarter ended October 29, 2022, not 2021 Q3.
- Assess whether elevated inventory and lower gross margins require additional markdowns during the holiday season.
- Compare actual full-year sales, adjusted EPS, credit-card revenue, capital expenditures and interest expense with the November guidance.
- Evaluate liquidity after seasonal working-capital needs, planned capital spending, dividends and share repurchases.
- Review debt maturities beginning in 2023, ABL availability and the company’s below-investment-grade ratings from Moody’s and S&P; Fitch rated the long-term debt BBB-.
- Separate operating performance from gains on real estate, pension charges, debt-retirement losses and other nonrecurring items.
- Monitor the continued shift between digital and store shopping and the performance gap among Macy’s, Bloomingdale’s and bluemercury.