Macy’s, Inc. Form 10-Q Summary
Reporting period: The supplied filing is for the 13 and 39 weeks ended October 31, 2009, compared with November 1, 2008. Although the request identifies “2008 Q3,” the filing text clearly represents the third quarter of fiscal 2009. Macy’s operates more than 850 Macy’s and Bloomingdale’s stores and related websites.
Financial performance and position
| Metric | 13 weeks ended Oct. 31, 2009 | 13 weeks ended Nov. 1, 2008 | 39 weeks ended Oct. 31, 2009 | 39 weeks ended Nov. 1, 2008 |
|---|---|---|---|---|
| Net sales | $5,277 million | $5,493 million | $15,640 million | $16,958 million |
| Comparable sales change | Down 3.6% | Not provided | Down 7.5% | Not provided |
| Gross margin | 40.2% | 39.5% | 39.9% | 39.9% |
| SG&A as percentage of sales | 38.5% | 38.0% | 37.4% | 36.7% |
| Operating income | $55 million | $68 million | $189 million | $357 million |
| Net loss | $35 million | $44 million | $116 million | $30 million |
| Diluted loss per share | $0.08 | $0.10 | $0.27 | $0.07 |
| Net interest expense | $137 million | $143 million | $417 million | $417 million |
For the nine months, net cash provided by operating activities was $384 million, compared with $317 million in the prior-year period. Investing activities used $275 million, including $238 million for property and equipment and $64 million for capitalized software. Financing activities used $926 million, principally reflecting $964 million of debt repayment and $63 million of dividends.
Cash and cash equivalents were $489 million at October 31, 2009, compared with $1.306 billion at January 31, 2009 and $300 million at November 1, 2008. Merchandise inventories were $6.406 billion, compared with $4.769 billion at fiscal year-end and $6.915 billion a year earlier.
Total debt consisted of $92 million of short-term debt and $8.618 billion of long-term debt at October 31, 2009. The $2.0 billion revolving credit facility, which may be increased to $2.5 billion subject to lender commitments, had no borrowings outstanding. The facility expires August 30, 2012.
Material changes versus the prior comparable period
- Third-quarter sales declined $216 million, or 3.9%, while comparable sales declined 3.6%. Internet sales increased 21.1% and contributed 0.6 percentage points to comparable sales.
- Nine-month sales declined $1.318 billion, or 7.8%, while comparable sales declined 7.5%. Internet sales increased 15.6% and contributed 0.5 percentage points to comparable sales.
- Third-quarter gross margin improved to 40.2% from 39.5%, benefiting from an improving sales trend and lower inventory levels. Nine-month gross margin was essentially unchanged at 39.9%.
- SG&A declined in dollars but increased as a percentage of sales because of weaker sales. Reported SG&A included benefits from consolidation-related savings, partly offset by higher stock-based and performance-based compensation and lower credit income.
- Operating income declined to $189 million from $357 million for the nine-month period. The prior-year period included a $50 million impairment charge, while the current period included higher division consolidation costs.
- Third-quarter division consolidation costs were $33 million versus $16 million; nine-month costs were $205 million versus $129 million. Current-year costs primarily related to severance and other human-resource expenses.
- Nine-month net loss increased to $116 million from $30 million, despite the absence of the prior-year $50 million asset impairment charge, primarily because of lower sales and higher consolidation costs.
- Debt declined from $9.699 billion at November 1, 2008 to $8.710 billion at October 31, 2009. Macy’s used cash to retire debt early and reported approximately $7 million of net interest savings from the debt tender offer.
Guidance, outlook, risks and unusual items
- Management projected fourth-quarter fiscal 2009 comparable sales to decline 1.0% to 2.0% from the comparable 2008 period and full-year 2009 comparable sales to decline 5.4% to 5.7%.
- The February 2009 expansion of the My Macy’s localization initiative is expected to reduce annual SG&A, relative to expected costs without the consolidation, by approximately $400 million beginning in fiscal 2010. The estimated fiscal 2009 partial-year benefit is approximately $250 million.
- Macy’s expected to record approximately $165 million of additional restructuring costs during the remainder of fiscal 2009. Most of the $33 million severance accrual outstanding at October 31, 2009 was expected to be paid before January 30, 2010.
- Management stated that cash on hand, operating cash flow, the credit facility and other resources should cover foreseeable working capital, capital expenditure, debt service and other cash requirements. It also disclosed that an additional pension contribution of approximately $150 million to $225 million was being considered before December 31, 2009, after $146 million contributed during the first nine months.
- Credit agreement covenants required a minimum trailing-four-quarter interest coverage ratio of 3.00 and a maximum leverage ratio of 4.90, with tighter thresholds scheduled subsequently. Actual ratios at October 31, 2009 were 4.21 and 3.38, respectively.
- The company’s senior-note interest rate increased by 1 percentage point in April 2009 following specified ratings downgrades and could change by up to 1 percentage point with further ratings actions.
- Key risks include weak consumer spending and credit availability, competitive pressure, weather and natural disasters, vendor and import disruptions, foreign sourcing, duties and quotas, legal and regulatory developments, cybersecurity and system failures.
- A previously recorded $5.382 billion goodwill impairment related to the May acquisition was finalized in the first quarter of 2009 without further adjustment. The filing also discusses a $25 million wage-and-hour class-action settlement paid in the first quarter.
- An ERISA-related purported class action remains pending; the company believes it is without merit and intends to contest it. The filing does not provide a clear quantified exposure for this matter.
Investor verification checklist
- Verify the filing period, because the supplied document is a fiscal 2009 third-quarter Form 10-Q rather than a 2008 Q3 filing.
- Reconcile reported sales declines with comparable-sales trends and the strong growth in Internet sales.
- Assess inventory levels, markdown risk and the sustainability of the third-quarter gross-margin improvement.
- Confirm the timing and total cost of the remaining My Macy’s restructuring program, including the projected $165 million of additional costs.
- Monitor debt maturities, ratings-related interest-rate increases and compliance with credit agreement covenants.
- Evaluate liquidity after potential pension contributions, seasonal working-capital requirements and the January 2010 dividend.
- Review the effect of weak consumer demand, unemployment, consumer credit conditions, weather, import exposure and cybersecurity risks on future sales and cash flow.