Business Context and Reporting Period
Company: Macy's, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 13 and 39 weeks ended November 1, 2008 (Fiscal Third Quarter 2008)
Business Overview: A retail organization operating over 850 stores and websites (macys.com, bloomingdales.com) selling apparel, cosmetics, home furnishings, and consumer goods. The company operates under the Macy's and Bloomingdale's brands.
Key Financial Metrics
| Metric (in millions) | 13 Weeks Ended Nov 1, 2008 | 39 Weeks Ended Nov 1, 2008 |
|---|---|---|
| Net Sales | $5,493 | $16,958 |
| Gross Margin | $2,169 (39.5% of sales) | $6,761 (39.9% of sales) |
| Operating Income | $68 | $357 |
| Net Income (Loss) | $(44) | $(30) |
| Diluted EPS (Loss) | $(0.10) | $(0.07) |
| Cash and Equivalents | $300 (as of Nov 1, 2008) | N/A |
| Net Cash from Operating Activities | N/A | $317 |
| Total Debt (Short + Long Term) | $9,834 | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 7.0% ($413 million) in the quarter and 4.3% ($761 million) year-to-date compared to 2007. Comparable store sales were down 6.0% for the quarter and 3.5% year-to-date.
- Profitability Reversal: The company reported a net loss of $44 million for the quarter and $30 million year-to-date, contrasting with net income of $33 million and $143 million, respectively, in the prior year periods.
- One-Time Charges: Results were impacted by $16 million in division consolidation costs (quarter) and $129 million year-to-date, plus $50 million in asset impairment charges related to private brand tradenames (Karen Scott and John Ashford).
- Expense Management: Selling, general, and administrative (SG&A) expenses decreased slightly in absolute dollars but increased as a percentage of sales due to lower revenue volumes.
- Share Repurchases: The company repurchased no shares of common stock in 2008, compared to $3,003 million in repurchases during the same period in 2007.
Guidance, Outlook, and Risks
- Outlook: Management expects fourth-quarter 2008 comparable store sales to be down 1% to 6% compared to the prior year, with a tendency toward the lower end of the range if third-quarter trends persist.
- Strategic Initiatives: The "My Macy's" localization initiative and division consolidations are expected to reduce SG&A expenses by approximately $100 million annually starting in 2009.
- Liquidity: The company maintains a $2,000 million credit facility (expandable to $2,500 million). As of November 1, 2008, $120 million was outstanding; this was fully repaid by December 8, 2008.
- Covenant Compliance: The company is in compliance with its credit agreement, with an interest coverage ratio of 5.07 and a leverage ratio of 0.49 (limit 0.62).
- Risks: Significant risk exists regarding potential goodwill impairment. A write-down exceeding $3.9 billion (approx. 43% of goodwill) would trigger a default on the credit agreement. The company also faces risks from general economic conditions, consumer confidence, and credit availability.
- Legal: A wage and hour class action settlement of approximately $25 million was recorded in 2008, subject to court approval.
Investor Verification Checklist
- Goodwill Valuation: Verify the assumptions used in the goodwill impairment test, given the sensitivity of the leverage ratio to potential write-downs.
- Inventory Levels: Review the $6,915 million inventory balance against the 6.0% comparable store sales decline to assess potential future markdown risks.
- Debt Maturities: Confirm funding plans for $350 million and $600 million in senior notes maturing in April and July 2009, respectively.
- Legal Settlement: Monitor court approval status of the $25 million wage and hour settlement.
- Consumer Trends: Assess the impact of the "My Macy's" initiative on same-store sales growth in the upcoming holiday quarter.