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Business Context and Reporting Period

Company: Macy's, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 2, 2009 (13 weeks)
Business Overview: A retail organization operating over 840 stores and internet websites under the Macy's and Bloomingdale's brands, selling apparel, cosmetics, home furnishings, and consumer goods across 45 states and territories.

Key Financial Metrics

Margins: Gross margin rate was 38.1% in Q1 2009 compared to 38.6% in Q1 2008. SG&A expenses were 37.6% of net sales in Q1 2009 versus 36.6% in Q1 2008.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased by $548 million (9.5%) year-over-year. Comparable store sales declined 9.0%, driven by adverse economic conditions and reduced consumer spending. Internet sales grew 16.2%, offsetting declines slightly.
• Profitability Deterioration: The company reported an operating loss of $114 million compared to operating income of $30 million in the prior year. This shift was primarily due to lower sales and increased restructuring costs.
• Restructuring Costs: Division consolidation costs increased to $138 million in Q1 2009 from $87 million in Q1 2008. These costs relate to the "My Macy's" localization initiative and the elimination of division central offices.
• Liquidity Reduction: Cash and cash equivalents dropped from $1,306 million at the start of the period to $295 million at the end, a decrease of $1,011 million. This was largely driven by $837 million in debt repayments.
• Goodwill Impairment Finalization: The company finalized a goodwill impairment test as of January 31, 2009, confirming a $5,382 million pre-tax charge recorded in the fourth quarter of 2008. No adjustment was necessary in Q1 2009.

Guidance, Outlook, and Risks

• Outlook: Management expects comparable store sales for 2009 to be down in the range of 6% to 8% from 2008 levels due to economic conditions.
• Cost Savings: The expansion of the "My Macy's" initiative is expected to reduce SG&A expenses by approximately $400 million annually starting in 2010, with a partial-year benefit of $250 million in 2009. The company anticipates incurring an additional $230 million in division consolidation costs for the remainder of fiscal 2009.
• Debt Management: The company completed a cash tender offer in February 2009, repurchasing approximately $680 million of senior notes. Interest rates on $650 million of senior notes increased by 1% due to credit rating downgrades.
• Liquidity Position: The company maintains a $2 billion credit facility (expandable to $2.5 billion) with no borrowings outstanding as of May 2, 2009. Leverage ratio was 3.37 and interest coverage ratio was 4.24, both within covenant requirements.
• Risks: Significant risks include continued adverse economic conditions, consumer pessimism, unemployment, tightening of consumer credit, and competitive pressures from various retail channels.

Investor Verification Checklist

• Cash Burn Rate: Verify the sustainability of the $1,011 million cash decrease, specifically the impact of the $837 million debt repayment on future liquidity.
• Restructuring Execution: Monitor the realization of the projected $400 million annual SG&A savings from the "My Macy's" initiative against the $230 million in remaining 2009 consolidation costs.
• Comparable Store Sales: Track actual comparable store sales performance against the management guidance of a 6% to 8% decline for the full year 2009.
• Debt Covenants: Confirm continued compliance with the credit agreement's leverage ratio (max 4.90) and interest coverage ratio (min 3.00) given the recent credit rating downgrade and interest rate increase.
• Legal Contingencies: Review the status of the $25 million wage and hour class action settlement paid in Q1 2009 and ongoing litigation regarding the May merger and 401(k) plan.