Macy’s, Inc. Form 10-K Summary
Reporting period: Fiscal year 2016 ended January 28, 2017, comprising 52 weeks. The provided filing is not a 2015 Q4 filing; it is the fiscal 2016 annual report filed March 29, 2017.
Business Context
Macy’s is an omnichannel retailer operating Macy’s, Bloomingdale’s, Bluemercury, Macy’s Backstage and related digital businesses. At year-end, the Company operated 829 stores in 45 states, the District of Columbia, Guam and Puerto Rico, with approximately 130 million square feet and 148,300 employees. The Company reports one operating segment.
Merchandise mix was 38% women’s accessories, intimate apparel, shoes, cosmetics and fragrances; 23% women’s apparel; 23% men’s and children’s; and 16% home and miscellaneous products.
Key Financial Metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $25.778 billion | $27.079 billion |
| Gross margin | $10.157 billion; 39.4% | $10.583 billion; 39.1% |
| Operating income | $1.315 billion; 5.1% | $2.039 billion; 7.5% |
| Net income attributable to Macy’s shareholders | $619 million | $1.072 billion |
| Diluted EPS | $1.99 | $3.22 |
| Adjusted diluted EPS | $3.11 | $3.77 |
| Operating income excluding certain items | $1.892 billion; 7.3% | $2.327 billion; 8.6% |
| Adjusted EBITDA | $2.950 billion; 11.4% of sales | $3.388 billion; 12.5% of sales |
| Comparable sales, owned basis | Down 3.5% | Down 3.0% |
| Comparable sales, owned plus licensed basis | Down 2.9% | Down 2.5% |
| Cash flow from operations | $1.801 billion | $1.984 billion |
| Capital expenditures | $912 million | $1.113 billion |
| Cash and cash equivalents | $1.297 billion | $1.109 billion |
| Short-term and long-term debt | $309 million and $6.562 billion | $642 million and $6.995 billion |
Material Changes Versus 2015
- Sales declined 4.8%, while owned comparable sales declined 3.5%. Management cited changing consumer buying habits and spending patterns; digital sales continued to grow at a double-digit rate.
- Gross margin rate improved 30 basis points to 39.4%, primarily because of fewer markdowns, partly offset by higher delivery costs from omnichannel activity and free shipping.
- SG&A increased $9 million to $8.265 billion, and the SG&A rate rose 150 basis points to 32.0%, reflecting investments in omnichannel operations, Bluemercury, Macy’s Backstage and Macy’s China, as well as lower credit income.
- Operating income declined 35.5% to $1.315 billion. Results included $479 million of impairment, store-closing and other costs versus $288 million in 2015, and $98 million of non-cash pension settlement charges.
- Credit income declined to $736 million from $831 million. Amounts received under the Citibank credit-card program declined to $912 million from $1.026 billion.
- Operating cash flow decreased to $1.801 billion, but investing cash usage improved substantially to $187 million from $1.092 billion, aided by $673 million of property and equipment sale proceeds.
- Financing cash usage decreased to $1.426 billion from $2.029 billion. Share repurchases fell to $316 million from approximately $2.0 billion, while debt repayments increased to $751 million.
- The store portfolio declined from 868 to 829 locations. The Company announced closure of 68 Macy’s stores by mid-2017, as part of approximately 100 planned closures, together with field and central-operations restructuring.
Guidance, Outlook and Unusual Items
- For 2017, management forecast total sales to decline approximately 3.2% to 4.3%, including a 53rd week, and owned comparable sales to decline approximately 2.2% to 3.3%.
- Management forecast adjusted diluted EPS of $3.37 to $3.62, including approximately $0.47 per share from an expected $235 million gain on the Union Square Men’s store sale. The guidance excludes store-closing, restructuring and defined-benefit settlement charges.
- Expected 2017 asset-sale gains were approximately $415 million to $435 million, including the Union Square gain and approximately $100 million of additional Brooklyn real-estate gain.
- Management expected approximately $550 million of SG&A savings from restructuring and store closures, partially offset by approximately $250 million of growth spending, for net expense savings of approximately $300 million.
- Planned 2017 capital expenditures were approximately $900 million. Excess cash after capital expenditures, dividends and a $300 million debt maturity was expected to be used to repurchase debt.
- The Brookfield strategic alliance provides an exclusive right for up to 24 months to develop pre-development plans for approximately 50 Macy’s real-estate assets; future transactions remain subject to the Company’s decisions and market conditions.
- The Company reported $1.232 billion of unrecognized actuarial losses in its funded pension plan and $248 million in its SERP. It expected approximately $80 million to $90 million of additional non-cash settlement charges in 2017 and did not anticipate pension-plan funding contributions in 2017.
- CEO succession occurred March 23, 2017, when Jeff Gennette succeeded Terry Lundgren. Mr. Lundgren remained Executive Chairman and Chairman of the Board.
Liquidity, Debt and Contingencies
The Company had $1.297 billion of cash, no borrowings under its $1.5 billion revolving credit facility, and no commercial-paper borrowings at January 28, 2017. The facility expires May 6, 2021. The Company reported an interest-coverage ratio of 7.36 against a minimum of 3.25 and a leverage ratio of 2.38 against a maximum of 3.75.
Contractual obligations totaled $19.019 billion, including $6.767 billion of short-term and long-term debt, $4.162 billion of interest on debt, $3.683 billion of operating leases and $4.325 billion of other obligations. The Company stated that cash on hand, operating cash flow, available credit and other capital resources should cover reasonably foreseeable requirements.
Principal risks include prolonged weakness in discretionary consumer spending, intense competition and online migration, weather and supply-chain disruption, foreign sourcing and trade restrictions, cybersecurity incidents, pension and healthcare costs, real-estate execution risk, debt covenant compliance, and adverse litigation or regulatory developments. The filing states that ordinary-course legal proceedings are not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Confirm the filing period: fiscal 2016 ended January 28, 2017, rather than 2015 Q4.
- Reconcile GAAP EPS of $1.99 with adjusted EPS of $3.11, including the $479 million of impairment, store-closing and other costs and $98 million of settlement charges.
- Assess whether planned store closures, restructuring savings and growth investments can offset declining comparable sales and lower credit income.
- Verify the timing, amount and accounting treatment of expected real-estate gains, especially the Union Square, Brooklyn and Brookfield-related transactions.
- Monitor the $300 million July 2017 debt maturity, future debt repayments, covenant headroom and the Company’s stated intention to repurchase debt.
- Evaluate pension settlement exposure, actuarial assumptions and the projected 2017 settlement charges.
- Review the impact of upcoming revenue-recognition and lease-accounting standards, which management expected to materially affect presentation and balance-sheet amounts, particularly for operating leases.