M

Business Context and Reporting Period

Company: Macy's, Inc. (formerly Federated Department Stores, Inc.)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended January 31, 2009 (52 weeks)
Operations: The Company operates department stores under the Macy's and Bloomingdale's banners, along with e-commerce sites. As of January 31, 2009, continuing operations included 847 stores across 45 states, D.C., Guam, and Puerto Rico. The Company divested the Lord & Taylor division and bridal group businesses (reported as discontinued operations) following the 2005 merger with The May Department Stores Company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 5.4% to $24.892 billion, driven by a 4.6% decline in comparable store sales. Sales were weakest at Bloomingdale's, Macy's West, and Macy's Florida, while Internet sales increased 29.0%.
• Significant Impairment Charges: The Company recorded a non-cash goodwill impairment charge of $5,382 million in the fourth quarter of 2008 due to deteriorating economic conditions and a decline in market capitalization. Additional asset impairment charges totaled $211 million.
• Restructuring Costs: The Company incurred $187 million in division consolidation and store closing costs, primarily related to the "My Macy's" localization initiative and the closure of 11 underperforming stores.
• Profitability: The Company swung from a net income of $893 million in 2007 to a net loss of $4,803 million in 2008. Operating margin turned negative primarily due to the goodwill impairment and restructuring charges.
• Dividend Reduction: On February 2, 2009, the Board reduced the quarterly dividend from $0.1325 to $0.05 per share to conserve cash.

Guidance, Outlook, and Risks

• 2009 Outlook: Management expects comparable store sales for 2009 to be down in the range of 6% to 8% compared to 2008 levels.
• Organizational Restructuring: The Company announced a consolidation of all Macy's branded operations into a single organization effective Q2 2009. This is expected to reduce SG&A expenses by approximately $400 million annually starting in 2010, with an estimated $250 million benefit in 2009. One-time costs for this expansion are estimated at $400 million.
• Liquidity and Debt: The Company maintains a $2 billion credit facility (unused as of Jan 31, 2009). It completed a cash tender offer in February 2009 to retire approximately $680 million of debt maturing in 2009. The Company is in compliance with its financial covenants (Leverage ratio: 3.66; Interest coverage: 4.32).
• Key Risks:
  • Economic Conditions: Continued weakness in consumer spending, high unemployment, and tight credit markets.
  • Goodwill Impairment: Risk of further non-cash impairment charges if market conditions or stock prices deteriorate further.
  • Competition: Intense competition from discounters, specialty stores, and online retailers.
  • Pension Funding: Anticipated pension funding contributions of $295 million to $370 million prior to January 30, 2010.

Investor Verification Checklist

• Goodwill Valuation: Verify the assumptions used in the goodwill impairment test, specifically the discount rates and projected cash flows, given the $5.38 billion charge.
• Restructuring Execution: Monitor the realization of the projected $400 million annual SG&A savings from the "My Macy's" expansion and the associated one-time costs.
• Debt Maturity Wall: Confirm the successful management of debt maturities in 2009 and 2010, particularly following the recent tender offer.
• Comparable Store Sales: Track whether the 6-8% sales decline forecast for 2009 materializes or worsens given the economic environment.
• Pension Obligations: Review the funded status of the pension plan and the impact of the required $295-$370 million cash contributions on liquidity.