Macy’s, Inc. Form 10-Q Summary
Reporting period: 13 weeks ended May 1, 2010, compared with the 13 weeks ended May 2, 2009. The request identifies “2009 Q1,” but the supplied filing is the first quarter of fiscal 2010 and was filed June 7, 2010.
Business context
Macy’s operates approximately 850 Macy’s and Bloomingdale’s stores, along with macys.com and bloomingdales.com. The company sells apparel, accessories, cosmetics, home furnishings and other consumer goods. Management’s priorities include localized merchandise assortments through “My Macy’s,” value, improved shopping environments and stronger customer engagement.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $5,574 million | $5,199 million | Up 7.2% |
| Comparable-store sales | Up 5.5% | Not clearly provided | Improved |
| Gross margin | $2,196 million; 39.4% | $1,980 million; 38.1% | Up 130 basis points |
| Operating income (loss) | $203 million; 3.6% | $(114) million; (2.2%) | Improved by $317 million |
| Net income (loss) | $23 million | $(88) million | Improved by $111 million |
| Diluted EPS | $0.05 | $(0.21) | Improved by $0.26 |
| Net interest expense | $162 million | $141 million | Up $21 million |
| Net cash used in operations | $(149) million | $(3) million | Higher use of $146 million |
Internet sales increased 34.0% and contributed 0.9 percentage points to comparable-store sales. Sales were strongest in men’s, home and several women’s categories, while young businesses were weaker. Cost of sales declined to 60.6% of sales from 61.9%, and SG&A declined to 35.8% from 37.6%.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $981 million at May 1, 2010, compared with $1,686 million at January 30, 2010 and $420 million at May 2, 2009.
- Merchandise inventories were $4,921 million, up from $4,615 million at fiscal year-end but below $5,026 million a year earlier.
- Short-term debt was $685 million and long-term debt was $7,503 million, for total reported debt of $8,188 million.
- Total debt declined from $8,854 million at May 2, 2009 and $8,698 million at January 30, 2010.
- The company used approximately $526 million of cash to repurchase approximately $500 million of debt before maturity. The transactions generated approximately $27 million of additional interest expense.
- The company had no borrowings outstanding under its $2.0 billion revolving credit facility, which may be increased to $2.5 billion subject to lender commitments. The facility expires August 30, 2012.
- At May 1, 2010, the company reported an interest coverage ratio of 4.84 against a 3.00 covenant and a leverage ratio of 2.80 against a 4.75 covenant.
- The company made a $325 million pension contribution in the quarter, compared with approximately $30 million in the prior-year quarter.
Cash flow and capital allocation
- Investing cash use was $44 million, including $36 million of property and equipment purchases and $24 million of capitalized software.
- Financing cash use was $512 million, including $505 million of debt repayment and $21 million of dividends.
- Cash declined by $705 million during the quarter, ending at $981 million.
- No shares were repurchased under the company’s repurchase program during the quarter; management anticipated no share repurchases for the remainder of fiscal 2010.
- The board declared a quarterly dividend of $0.05 per share payable July 1, 2010.
Material changes versus the prior comparable period
- Sales increased 7.2%, with comparable-store sales up 5.5% and Internet sales up 34.0%.
- The company returned to profitability, largely reflecting higher sales, improved gross-margin performance, lower SG&A as a percentage of sales and the absence of $138 million of prior-year division-consolidation costs.
- Operating income improved to $203 million from a $114 million loss.
- Net interest expense increased because of costs associated with early debt retirement, partly offset by lower borrowings.
- Operating cash flow weakened primarily because of the substantially larger pension contribution and working-capital movements.
- Beginning in the first quarter of 2010, sales of certain private-brand goods and excess inventory to third parties were included in net sales rather than reported net of cost in SG&A. Management stated that the presentation change had an immaterial effect on reported sales and no effect on comparable-store sales, net income or EPS; prior periods were not recast.
Guidance, outlook, risks and unusual items
- Management assumed fiscal 2010 comparable-store sales would increase 3.0% to 3.5% from 2009 levels.
- The company planned to open one new Bloomingdale’s store, four Bloomingdale’s Outlet stores and one new Macy’s store during the remainder of fiscal 2010.
- Management believed cash on hand, operating funds, the credit facility and other resources would be sufficient for foreseeable working-capital, capital-expenditure, debt-service and other requirements.
- A 0.50 percentage-point reduction in the interest rate on $650 million of senior notes became effective in May 2010 following a rating-agency upgrade.
- Healthcare legislation resulted in a $4 million deferred tax expense related to the future loss of deductibility for retiree prescription-drug benefits supported by Medicare Part D subsidies. The broader effect of the legislation on company-sponsored medical plans remained under evaluation.
- The company retained a $20 million severance accrual related to the My Macy’s division-consolidation initiative and expected to pay it before July 31, 2010.
- Key risks include weak consumer spending, unemployment and consumer credit conditions, competitive pressures, weather, supply-chain and foreign-sourcing risks, vendor disruptions, import duties, currency and geopolitical conditions, and systems or data-security breaches.
- A purported ERISA class action relating to the company’s 401(k) plans remained pending. Macy’s considered the lawsuit without merit and did not expect its ordinary-course proceedings to materially affect financial position or results.
Important facts for investors to verify
- Whether comparable-store sales and Internet growth continued to support management’s 3.0%–3.5% full-year comparable-sales assumption.
- Whether gross-margin improvement was sustained without excessive markdowns or inventory accumulation.
- The effect of the $325 million pension contribution and future pension funding requirements on cash generation.
- The timing, pricing and future interest savings from debt repurchases, together with upcoming maturities and covenant compliance.
- Whether the new Bloomingdale’s Outlet concept and planned store openings generated expected returns.
- The ultimate financial and operational effects of healthcare reform, pending litigation and the disclosed retail, supply-chain and cybersecurity risks.