Macy’s, Inc. Form 10-Q Summary
Reporting period: The provided filing is for the 13 and 26 weeks ended August 1, 2009, compared with August 2, 2008. Although the request identifies “2008 Q2,” the filing itself is Macy’s fiscal second quarter of 2009. Financial statements are unaudited.
Business Context
Macy’s operates more than 840 Macy’s and Bloomingdale’s stores across 45 states, the District of Columbia, Guam and Puerto Rico, together with macys.com and bloomingdales.com. Merchandise includes apparel, accessories, cosmetics, home furnishings and other consumer goods.
The company continued its nationwide “My Macy’s” localization initiative, intended to improve local merchandise assortments and selling service while reducing administrative costs through division consolidation.
Key Financial Metrics
| Metric | 13 Weeks Ended August 1, 2009 | 13 Weeks Ended August 2, 2008 | 26 Weeks Ended August 1, 2009 | 26 Weeks Ended August 2, 2008 |
|---|---|---|---|---|
| Net sales | $5,164 million | $5,718 million | $10,363 million | $11,465 million |
| Gross margin | $2,143 million; 41.5% | $2,372 million; 41.5% | $4,123 million; 39.8% | $4,592 million; 40.1% |
| SG&A expense | $1,861 million; 36.0% of sales | $2,037 million; 35.6% | $3,817 million; 36.8% | $4,140 million; 36.1% |
| Operating income | $248 million | $259 million | $134 million | $289 million |
| Net income (loss) | $7 million | $73 million | $(81) million | $14 million |
| Diluted EPS | $0.02 | $0.17 | $(0.19) | $0.03 |
| Net cash from operating activities | Not separately provided | Not separately provided | $436 million | $592 million |
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $515 million at August 1, 2009, down from $1,306 million at January 31, 2009 and $1,293 million at August 2, 2008.
- Merchandise inventories were $4,634 million, compared with $4,769 million at January 31, 2009 and $5,008 million a year earlier.
- Short-term debt was $92 million and long-term debt was $8,632 million at August 1, 2009. Estimated fair value of long-term debt was $7,046 million.
- The company had a $2.0 billion revolving credit facility, expandable to $2.5 billion subject to lender commitments, expiring August 30, 2012. No borrowings were outstanding under the facility during the period.
- At August 1, 2009, the leverage ratio was 3.38 versus a maximum of 4.90, and the interest coverage ratio was 4.17 versus a minimum of 3.00.
- The company repaid $958 million of debt during the first six months, including debt repurchased or retired through a February 2009 tender offer. Management stated that cash on hand, operating cash flow, the credit facility and other resources should cover foreseeable requirements.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 9.7% to $5,164 million; comparable-store sales declined 9.5%. Internet sales increased 9.4% and contributed 0.5 percentage points to comparable-store sales.
- Six-month sales declined 9.6% to $10,363 million; comparable-store sales declined 9.3%. Internet sales increased 12.7% and contributed 0.5 percentage points to comparable-store sales.
- Six-month gross margin declined to 39.8% from 40.1%, reflecting higher markdowns intended to keep inventories current.
- SG&A declined in dollars but increased as a percentage of sales because of weaker revenue. Consolidation savings, lower selling costs and lower workers’ compensation and general liability costs were partly offset by higher stock-based compensation and medical costs and lower credit income.
- Operating income fell to $134 million from $289 million for the six-month period, and net income shifted to an $81 million loss from $14 million of income.
- Operating cash flow declined to $436 million from $592 million. Investing cash use declined to $182 million from $312 million, primarily because of lower property and equipment and software spending.
- Financing activities used $1,045 million versus providing $430 million in the prior period, largely because of $958 million of debt repayment compared with $650 million of debt issuance in 2008.
Outlook, Unusual Items and Risks
- Management assumed full-year 2009 comparable-store sales would decline approximately 7.0% to 7.5%.
- The 2009 My Macy’s expansion was expected to reduce annual SG&A, relative to the expected cost structure without the consolidation, by approximately $400 million beginning in fiscal 2010. The company estimated approximately $250 million of fiscal 2009 partial-year benefit and anticipated approximately $200 million of additional consolidation costs in the remainder of fiscal 2009.
- Division consolidation costs were $172 million for the first six months of 2009, compared with $113 million in 2008. The remaining severance accrual at August 1, 2009 was $46 million, with most payments expected before January 30, 2010.
- The company recorded no asset impairment charge in 2009. The prior-year period included a $50 million impairment charge for private-brand tradenames. The 2009 annual goodwill and indefinite-lived intangible asset testing found no impairment, although results remain sensitive to projected sales, margins, cash flows and discount rates.
- The effective tax rate was 45.0% for the first six months of 2009, compared with 3.7% in 2008. Management estimated a fiscal 2009 effective tax rate of approximately 45.0% before anticipated tax settlements and approximately 32.0% after those settlements.
- The company’s principal risks include weak consumer spending, unemployment and credit conditions, competitive pressure, markdown risk, foreign sourcing and supply-chain disruption, severe weather, legal and regulatory matters, and system or data-security failures.
- A California wage-and-hour settlement of $25 million was paid during the first quarter of 2009. A separate ERISA-related class action remained outstanding; the company stated that it believed the claims were without merit and intended to contest them.
- The board declared a quarterly dividend of $0.05 per share on August 21, 2009, payable October 1, 2009. The company did not repurchase shares under its program during the period and anticipated no repurchases for the remainder of fiscal 2009.
- The company made a $60 million voluntary pension contribution on August 28, 2009 and was considering an additional contribution of approximately $115 million to $190 million before January 30, 2010.
Investor Verification Priorities
- Verify that the requested “2008 Q2” period is intended to refer to the filed August 1, 2009 quarter.
- Assess whether the projected 7.0% to 7.5% comparable-store sales decline and My Macy’s savings targets were achieved.
- Monitor liquidity after debt repayments, pension funding, severance payments and seasonal working-capital requirements.
- Review covenant compliance, credit-rating-related interest increases and upcoming debt maturities.
- Evaluate the sustainability of gross margins amid higher markdowns and continued weak discretionary consumer demand.
- Track tax settlements, the unusually variable effective tax rate, remaining legal matters and potential goodwill or intangible-asset impairment sensitivity.