Macy’s, Inc. Form 10-Q Summary
Reporting period: 13 weeks ended April 28, 2012, compared with the 13 weeks ended April 30, 2011. The supplied metadata identifies “2011 Q1,” but the filing is for first quarter 2012. Macy’s operated approximately 850 Macy’s and Bloomingdale’s stores across 45 states, the District of Columbia, Guam and Puerto Rico, together with its websites.
Financial Performance and Position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $6,143 million | $5,889 million | Up 4.3% |
| Gross margin | $2,386 million; 38.8% | $2,303 million; 39.1% | Up $83 million; rate down approximately 30 bps |
| Operating income | $391 million; 6.4% | $330 million; 5.6% | Up $61 million |
| Income before taxes | $279 million | $214 million | Up $65 million |
| Net income | $181 million | $131 million | Up 38.2% |
| Diluted EPS | $0.43 | $0.30 | Up $0.13 |
| Operating cash flow | $265 million | $67 million | Up $198 million |
- Comparable-store sales increased 4.4%; Internet sales increased 33.7% and contributed approximately 1.5 percentage points to comparable-store sales.
- Cost of sales increased to 61.2% of sales from 60.9%, primarily reflecting growth in omnichannel sales and free-shipping costs.
- SG&A increased $22 million to $1,995 million, but declined to 32.4% of sales from 33.5%. The improvement reflected higher credit-operation income, partially offset by higher selling costs, pension expense and omnichannel investments.
- Income from credit operations increased to $143 million from $100 million, primarily because of improved actual and expected collection rates.
- Net interest expense declined to $112 million from $116 million, despite approximately $4 million of expense associated with early debt redemption.
- Cash and cash equivalents were $1,891 million at April 28, 2012, versus $1,152 million at April 30, 2011 and $2,827 million at January 28, 2012.
- Total debt, including short-term and long-term debt, was $6,957 million at April 28, 2012, compared with $7,084 million at April 30, 2011 and $7,758 million at January 28, 2012.
- The company had no borrowings under its $1.5 billion revolving credit facility, which expires June 20, 2015. Reported covenant ratios were an interest coverage ratio of 7.67 and leverage ratio of 1.92, compared with required minimum and maximum levels of 3.25 and 3.75, respectively.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected strength in both Macy’s and Bloomingdale’s, stores and online channels, with particularly strong performance in men’s, center-core categories and home. Junior merchandise was comparatively weaker.
- Operating leverage improved profitability even though gross margin rate declined modestly.
- Operating cash flow benefited from higher earnings and the absence of the $225 million pension contribution made in the first quarter of 2011.
- Investing cash outflow increased to $202 million from $64 million. Property and equipment purchases were $168 million versus $61 million, and capitalized software was $46 million versus $33 million.
- Capital expenditures included purchases of two parcels at the Macy’s Union Square location in San Francisco. The company increased its estimated 2012 capital expenditures budget to approximately $950 million.
- Financing cash outflow increased to $999 million from $315 million, including $795 million of debt repayments, $83 million of dividends and $246 million for share acquisitions and employee tax liabilities.
- The company repurchased 5.4 million shares under its authorization for approximately $214 million; approximately $1.138 billion remained available for repurchases at quarter-end.
- On January 10, 2012, Macy’s issued $550 million of 3.875% senior notes due 2022 and $250 million of 5.125% senior notes due 2042. It repaid $616 million of 5.35% senior notes at maturity and redeemed $173 million of 8.0% senior debentures early.
Guidance, Outlook, Risks and Unusual Items
- Management assumed that 2012 comparable-store sales would increase approximately 3.7% from 2011 levels.
- Management stated that cash on hand, operating funds, the credit facility and other capital resources should be sufficient for foreseeable working capital, capital expenditure, debt-service and other cash requirements.
- Management expects continued near-term improvement in credit-collection rates, but indicated that the rate of improvement in credit-operation income should moderate and be lower in the third quarter of fiscal 2012 than in the comparable prior-year quarter.
- Results are seasonal and the first quarter excludes the Christmas selling season; quarterly results are therefore not necessarily indicative of full-year performance.
- Key risks include competitive retail and Internet pressure, consumer spending and confidence, employment and consumer credit conditions, weather and natural disasters, foreign sourcing and import restrictions, supplier disruptions, systems failures and security breaches.
- A conditionally certified ERISA class action alleges fiduciary-duty breaches relating to statements about integration of the May Department Stores acquisition and Macy’s stock in employee retirement plans. The plaintiff seeks unspecified damages; the company considers the lawsuit without merit and does not expect its legal proceedings to have a material adverse effect.
- The filing reported no material changes to the risk factors in the 2011 Form 10-K, no material control deficiencies, and no material impact from adopted accounting updates.
Important Facts for Investors to Verify
- Confirm the reported period is Q1 2012, not Q1 2011, and assess the sustainability of the 4.4% comparable-sales increase.
- Evaluate whether higher omnichannel and free-shipping costs continue to pressure gross margin.
- Assess the sustainability of the $143 million credit-operation contribution and the expected moderation in collection-rate improvements.
- Reconcile planned approximately $950 million of 2012 capital expenditures with operating cash generation and shareholder distributions.
- Review debt maturities, refinancing needs, interest costs and compliance with the revolving-credit-facility covenants.
- Consider the effect of ongoing share repurchases and dividends on liquidity and leverage.
- Monitor consumer demand, competitive conditions, sourcing and supply-chain risks, cybersecurity exposure and the pending ERISA litigation.