Macy’s, Inc. Form 10-Q Summary
Reporting period: The supplied filing is for the 13 and 26 weeks ended July 30, 2016, compared with August 1, 2015. Although the request metadata identifies “2015 Q2,” the filing text clearly covers the second quarter of fiscal 2016 and was filed August 26, 2016.
Business context
Macy’s is an omnichannel retailer operating approximately 880 Macy’s, Bloomingdale’s and Bluemercury stores, plus related websites and mobile applications. The company also operates Macy’s Backstage locations and a majority-owned Macy’s China e-commerce joint venture.
Results are seasonal and exclude the important holiday period. The company continued emphasizing localization and personalization, omnichannel fulfillment, digital investment, Bluemercury, Macy’s Backstage and customer engagement.
Financial performance and liquidity
| Metric | 13 weeks ended July 30, 2016 | 13 weeks ended August 1, 2015 | 26 weeks ended July 30, 2016 | 26 weeks ended August 1, 2015 |
|---|---|---|---|---|
| Net sales | $5,866 million | $6,104 million | $11,637 million | $12,336 million |
| Gross margin | $2,398 million; 40.9% | $2,494 million; 40.9% | $4,653 million; 40.0% | $4,926 million; 39.9% |
| Operating income | $117 million; 2.0% | $436 million; 7.1% | $393 million; 3.4% | $845 million; 6.8% |
| Net income attributable to Macy’s shareholders | $11 million | $217 million | $127 million | $410 million |
| Diluted EPS | $0.03 | $0.64 | $0.41 | $1.19 |
| Net cash from operating activities | Not separately provided | Not separately provided | $560 million | $398 million |
Second-quarter sales declined 3.9%, while comparable sales decreased 2.6% on an owned basis and 2.0% on an owned-plus-licensed basis. For the first 26 weeks, sales declined 5.7%, comparable sales declined 4.4% on an owned basis and 3.8% on an owned-plus-licensed basis.
SG&A expense declined in dollars but increased as a percentage of sales to 34.5% from 33.8% in the quarter and to 34.3% from 33.1% for the 26-week period. Gross margin was stable in the quarter and improved modestly year to date.
At July 30, 2016, cash and cash equivalents were $1,000 million, merchandise inventories were $5,322 million and total current assets were $7,216 million. Short-term debt was $1,063 million, long-term debt was $6,567 million and total current liabilities were $5,477 million.
The company generated $560 million of operating cash flow, used $338 million in investing activities and used $331 million in financing activities during the first 26 weeks. Capital expenditures were $293 million and capitalized software was $151 million. Dividends paid were $228 million, and approximately $129 million was used to repurchase 3.0 million shares.
A new revolving credit facility entered into May 6, 2016 provides capacity of up to $1.5 billion, potentially increasing to $1.75 billion, and expires in May 2021. The company reported an interest coverage ratio of 8.19 versus a minimum of 3.25 and a leverage ratio of 2.35 versus a maximum of 3.75 under the agreement.
Material changes versus the prior comparable period
- Second-quarter net sales decreased $238 million, or 3.9%; first-half sales decreased $699 million, or 5.7%.
- Second-quarter operating income fell $319 million, primarily because of $249 million of impairments and other costs and $6 million of non-cash pension settlement charges.
- First-half operating income declined $452 million to $393 million, including the same $249 million impairment charge and $19 million of settlement charges.
- Second-quarter diluted EPS declined 95.3% to $0.03; excluding impairments and settlement charges, diluted EPS was $0.54 versus $0.64.
- First-half diluted EPS declined 65.5% to $0.41; excluding those items, diluted EPS was $0.94 versus $1.19.
- Operating cash flow increased $162 million, primarily because of lower merchandise inventories and related working-capital changes.
- Net cash used in financing declined to $331 million from $1,186 million, principally because share repurchases fell to approximately $130 million from $909 million.
- Long-term debt declined to $6,567 million from $7,151 million at the prior-year comparable date, while short-term debt increased to $1,063 million from $83 million.
Guidance, outlook, risks and unusual items
Management expected fiscal 2016 comparable sales on an owned-plus-licensed basis to decline 3% to 4% from fiscal 2015, with owned comparable sales approximately 50 basis points lower. Fiscal 2016 diluted EPS was expected to be $3.15 to $3.40, excluding non-cash pension settlement charges and asset impairment and other costs associated primarily with planned store closures.
Macy’s announced plans to close approximately 100 full-line Macy’s stores, most early in 2017, and to redirect resources toward stronger stores, digital operations, new vendor shops, licensing, staffing and customer experience. The store-closing plan resulted in a $220 million long-lived asset impairment charge; total impairments and other costs were $249 million. Future severance, contractual obligations and other restructuring costs may arise, and additional impairment charges are possible if projected cash flows deteriorate.
The company recognized $21 million of second-quarter gains on property sales, including $11 million related to the Macy’s Brooklyn transaction. The Brooklyn transaction is expected to produce approximately $250 million of gain over time; $99 million had been recognized through the reporting date, with approximately $36 million expected in fiscal 2016.
Key risks include weak discretionary consumer spending, competitive pressure from physical and online retailers, lower international tourism, macroeconomic and foreign-exchange conditions, weather and supply-chain disruptions, store-closing execution, real-estate transactions, cybersecurity incidents and changes in vendor relationships. Management stated that cash on hand, operating cash flow, the credit facility and other resources should cover reasonably foreseeable needs.
On August 15, 2016, after the quarter end, the company redeemed $108 million of 7.875% senior debentures due 2036. On August 26, 2016, the board declared a quarterly dividend of $0.3775 per share.
The company reported no material changes to previously disclosed risk factors and stated that its disclosure controls and procedures were effective. The filing text does not identify legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether the planned closure of approximately 100 stores delivers expected cost savings and avoids further impairment, severance or lease-related charges.
- Whether comparable-sales declines stabilize and whether the fiscal 2016 sales and EPS guidance is achieved.
- The sustainability of operating cash flow amid lower sales, ongoing digital and store investments, dividends and share repurchases.
- Debt maturities, borrowing levels, interest costs and continued compliance with the credit facility’s interest coverage and leverage covenants.
- The assumptions supporting long-lived-asset and tradename valuations, including projected cash flows and discount rates.
- The timing and amount of future gains from the Brooklyn and other real-estate transactions.
- The effect of weaker tourist spending, consumer confidence, online competition and potential cybersecurity or supply-chain disruptions.