Macy’s, Inc. Form 10-Q Summary
Reporting period: The supplied filing is for the 13 and 39 weeks ended October 28, 2017, compared with October 29, 2016. Although the request metadata identifies “2016 Q3,” the filing itself is Macy’s fiscal third quarter of 2017 and was filed December 4, 2017.
Business Context
Macy’s is an omnichannel retailer operating approximately 860 Macy’s, Bloomingdale’s, Bloomingdale’s Outlet, Macy’s Backstage and bluemercury stores, together with online channels. The company continued implementing its North Star strategy, emphasizing customer engagement, digital growth, cost efficiency, store portfolio optimization and real estate monetization.
Key Financial Metrics
| Metric | 13 Weeks Ended Oct. 28, 2017 | 13 Weeks Ended Oct. 29, 2016 | 39 Weeks Ended Oct. 28, 2017 | 39 Weeks Ended Oct. 29, 2016 |
|---|---|---|---|---|
| Net sales | $5.281 billion | $5.626 billion | $16.171 billion | $17.263 billion |
| Gross margin | 39.9% | 39.8% | 39.4% | 39.9% |
| Operating income | $121 million | $107 million | $594 million | $500 million |
| Operating margin | 2.3% | 1.9% | 3.7% | 2.9% |
| Net income attributable to Macy’s shareholders | $36 million | $17 million | $222 million | $144 million |
| Diluted EPS | $0.12 | $0.05 | $0.73 | $0.46 |
| Net cash from operations | Not separately provided | Not separately provided | $389 million | $308 million |
Third-quarter net sales declined 6.1%, while owned comparable sales declined 4.0% and owned-plus-licensed comparable sales declined 3.6%. Digital sales increased at a double-digit rate. The sales decline reflected prior-year store closures, hurricanes, warmer fall weather, weaker international tourism and softness in cold-weather and home-related categories.
Third-quarter gross margin improved modestly to 39.9%, while SG&A declined 5.5% but increased to 37.8% of sales from 37.5%. For the nine-month period, gross margin declined to 39.4% and SG&A increased to 36.1% of sales from 35.5%.
At October 28, 2017, cash and cash equivalents were $534 million, merchandise inventories were $7.065 billion, short-term debt was $22 million and long-term debt was $6.297 billion. The company generated $389 million of operating cash flow, used $346 million in investing activities and used $806 million in financing activities, ending with a $763 million decrease in cash from the beginning of the fiscal year.
Material Changes Versus the Prior Comparable Period
- Operating income increased $14 million in the quarter and $94 million for the first 39 weeks, despite lower sales.
- Net income attributable to Macy’s shareholders increased $19 million in the quarter and $78 million year to date.
- Real estate gains increased to $65 million in the quarter and $176 million year to date, compared with $41 million and $76 million, respectively, in the prior periods.
- Restructuring and other costs were $33 million in the quarter and year to date, compared with no such quarterly charge and $249 million year to date in 2016.
- Non-cash pension settlement charges declined to $22 million in the quarter and $73 million year to date, compared with $62 million and $81 million, respectively.
- Debt declined by approximately $1.2 billion year over year to approximately $6.3 billion, reducing third-quarter net interest expense by $7 million and year-to-date net interest expense by $39 million.
- Operating cash flow improved by $81 million year to date, while capital expenditures and capitalized software declined from the prior year.
- The company repaid $554 million of debt, including $300 million of senior debentures at maturity, and repurchased approximately $247 million face value of debt for a cash cost of approximately $257 million.
Guidance, Outlook and Unusual Items
- Fiscal 2017 guidance was reaffirmed: owned comparable sales decline of 2.2% to 3.3%, owned-plus-licensed comparable sales decline of 2.0% to 3.0%, and total sales decline of 3.2% to 4.3%. Total sales include a 53rd week.
- Adjusted fiscal 2017 diluted EPS guidance was $3.38 to $3.63, excluding anticipated settlement charges, restructuring costs and debt-repurchase premiums and fees. Excluding the expected Union Square Men’s building gain and those other items, adjusted EPS guidance was $2.91 to $3.16.
- The August 2017 restructuring is expected to generate approximately $38 million of annual savings, with approximately $0.01 of diluted EPS benefit expected in the fourth quarter.
- The company expects to recognize an approximately $235 million gain in January 2018 on the sale of the Union Square Men’s building in San Francisco.
- On November 27, 2017, Macy’s commenced a tender offer for up to $400 million of certain senior notes and debentures. Redemption premiums and related costs are expected to be recorded in the fourth quarter of 2017.
- Macy’s had no borrowings or letters of credit outstanding under its $1.5 billion revolving credit facility and no borrowings under its $1.5 billion commercial paper program. Its interest coverage ratio was 7.92 versus a 3.25 minimum, and its leverage ratio was 2.36 versus a 3.75 maximum.
- Management stated that cash on hand, operating cash flow, the credit facility and other resources should cover reasonably foreseeable working capital, capital expenditure, debt service and other requirements.
- Key risks include changing consumer behavior, online and off-price competition, discretionary spending, weather and natural disasters, international tourism, store closures and restructuring execution, real estate transactions, vendor and supply-chain disruption, interest and currency rates, cybersecurity and seasonal volatility.
Accounting and Contingencies
The company adopted ASU 2016-09 for share-based payments and recognized approximately $12 million of additional tax expense from net tax deficiencies during the first 39 weeks. It was evaluating the impact and adoption method for the new revenue standard effective February 4, 2018, and expected material effects related to sales returns, credit operations, online revenue timing and certain real estate gains. The company also expected the new lease standard, effective February 3, 2019, to materially increase recognized operating lease assets and liabilities.
Macy’s reported no material changes to previously disclosed market risks or risk factors, and stated that ordinary-course legal proceedings were not expected to have a material adverse effect on financial position or results of operations. Management concluded that disclosure controls and procedures were effective as of October 28, 2017.
Investor Verification Items
- Confirm the fiscal 2017 sales and adjusted EPS guidance against subsequent fourth-quarter results, including the 53rd week and the Union Square real estate gain.
- Assess whether comparable-sales trends, digital growth and the Star Rewards, Backstage and bluemercury initiatives offset continued store closures and declining physical-store sales.
- Review the effect of real estate monetization on recurring earnings, cash generation and future store operations.
- Monitor debt tender-offer results, redemption premiums, maturities, interest expense and compliance with credit agreement covenants.
- Evaluate inventory levels, markdown risk and gross-margin pressure, particularly in home, beauty and cold-weather categories.
- Reconcile GAAP EPS with management’s adjusted EPS measures and the excluded restructuring, pension, debt and real estate items.
- Verify the eventual effects of the new revenue and lease accounting standards on reported revenue, assets, liabilities and earnings.