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. This filing covers the 13 and 26 weeks ended August 3, 2019, compared with the periods ended August 4, 2018. Although the request metadata references 2018 Q2, the filing text is for the second quarter of fiscal 2019. Results are seasonal and exclude the holiday period.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | 26 weeks 2019 | 26 weeks 2018 |
|---|---|---|---|---|
| Net sales | $5,546 million | $5,572 million | $11,050 million | $11,112 million |
| Credit card revenues, net | $176 million | $186 million | $348 million | $343 million |
| Gross margin | 38.8% | 40.4% | 38.5% | 39.7% |
| Operating income | $155 million | $303 million | $359 million | $541 million |
| Net income attributable to Macy’s shareholders | $86 million | $166 million | $223 million | $306 million |
| Diluted EPS | $0.28 | $0.53 | $0.71 | $0.98 |
| Cash flow from operations | Not separately provided | Not separately provided | $350 million | $544 million |
At August 3, 2019, cash and cash equivalents were $674 million, merchandise inventories were $5.029 billion, total assets were $20.741 billion and shareholders’ equity was $6.315 billion. Short-term debt was $6 million and long-term debt was $4.680 billion. Lease adoption added $2.636 billion of right-of-use assets and $3.187 billion of lease liabilities.
Capital expenditures and capitalized software totaled $501 million during the first 26 weeks, compared with $408 million in the prior-year period. Net cash used in investing activities was $454 million, while net cash used in financing activities was $397 million. Cash, cash equivalents and restricted cash declined by $501 million to $747 million at period-end.
Material changes versus the prior comparable period
- Q2 net sales declined 0.5%, while owned comparable sales increased 0.2% and owned-plus-licensed comparable sales increased 0.3%. For the first half, net sales declined 0.6%, while comparable sales increased 0.4% on an owned basis and 0.5% on an owned-plus-licensed basis.
- Gross margin fell 160 basis points in Q2 and 120 basis points for the first half, primarily because of additional markdowns to clear excess spring inventory and higher delivery expense associated with free shipping and digital growth.
- SG&A increased $13 million in Q2 and $40 million for the first half, reflecting investments in Macy’s Backstage and other strategic initiatives.
- Operating income declined 49% in Q2 and 34% for the first half. Net income attributable to Macy’s shareholders declined $80 million in Q2 and $83 million for the first half.
- Credit card revenue declined 5.4% in Q2 because of increased fraud and bad debt, but increased $5 million for the first half due to higher proprietary card usage and consumer credit balances.
- Prior-year results included $50 million of non-cash pension settlement charges, $5 million of debt-retirement losses and $17 million of impairment and other costs in Q2. These items were absent or substantially lower in 2019, partially offsetting the operating deterioration.
- Real-estate sale gains declined to $7 million in Q2 from $46 million and to $49 million for the first half from $70 million.
Guidance, outlook, risks and unusual items
- Management reaffirmed annual sales guidance but reduced adjusted diluted EPS guidance, excluding settlement charges, impairment and other costs, from $3.05–$3.25 to $2.85–$3.05. Adjusted EPS excluding asset-sale gains was expected to be $2.60–$2.80.
- The revised guidance excluded the potential impact of a fourth tranche of tariffs; management estimated tariffs could reduce fiscal 2019 earnings by up to $0.05.
- Management reported elevated spring inventories and weaker early-quarter sales, particularly from declining international tourism, which led to additional markdowns. Inventory was described as better positioned at quarter-end, with leaner fall receipts planned.
- Strategic initiatives include Growth100/Growth150 stores, expansion of Macy’s Backstage, vendor-direct assortment growth, mobile-first initiatives and investment in destination categories. Macy’s Backstage operated in 219 locations at quarter-end, while bluemercury operated in 187 locations.
- A new $1.5 billion revolving credit facility was entered into on May 9, 2019, with possible expansion to $1.75 billion and maturity in 2024, subject to extensions. No borrowings or letters of credit were outstanding under the facility at quarter-end, and no commercial paper was outstanding.
- The company was in compliance with its credit agreement covenants, reporting an interest coverage ratio of 12.72 and leverage ratio of 1.84 versus maximum or minimum thresholds of 3.75 and 3.25, respectively.
- Key risks include consumer demand and confidence, intense retail and digital competition, inventory and markdown execution, reliance on foreign sourcing, tariffs and trade restrictions, supply-chain disruption, international tourism, cybersecurity, labor costs and potential goodwill or intangible-asset impairment. The Macy’s reporting unit’s estimated fair value exceeded carrying value by approximately 29% at the latest annual test, but management noted that a sustained decline in market capitalization could result in future impairment.
- The company adopted ASC 842 leases on February 3, 2019. The adoption materially increased reported assets and liabilities but did not materially affect net income or cash flows.
Investor verification items
- Verify the filing period: the source is a fiscal 2019 second-quarter 10-Q, not a 2018 second-quarter filing.
- Reconcile GAAP EPS with adjusted EPS and identify the effect of markdowns, asset-sale gains and other excluded items.
- Monitor gross-margin recovery, inventory levels, markdown rates and delivery costs in subsequent quarters.
- Assess whether comparable-sales growth and digital, Growth, Backstage and destination-category investments offset declining international tourism and weaker apparel and home performance.
- Evaluate tariff exposure, sourcing changes and the potential earnings impact of additional trade restrictions.
- Review liquidity after capital expenditures, dividends and debt service, including the effect of the newly recognized lease obligations.
- Track goodwill fair-value headroom and other impairment indicators if market capitalization or operating performance deteriorates.