Macy’s, Inc. Form 10-Q Summary
Reporting period: 13 weeks ended April 30, 2016, compared with 13 weeks ended May 2, 2015. The provided filing is for the first quarter of fiscal 2016, not 2015 Q1. Macy’s operated approximately 870 stores across Macy’s, Bloomingdale’s and Bluemercury brands, together with its digital channels.
Financial performance and condition
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $5,771 million | $6,232 million | Down 7.4% |
| Gross margin | $2,255 million; 39.1% | $2,432 million; 39.0% | Down $177 million; rate up 10 bps |
| SG&A | $1,966 million; 34.1% | $2,023 million; 32.4% | Down $57 million; rate up 170 bps |
| Operating income | $276 million; 4.8% | $409 million; 6.6% | Down $133 million |
| Net income attributable to Macy’s shareholders | $116 million | $193 million | Down 39.9% |
| Diluted EPS | $0.37 | $0.56 | Down 34% |
| Operating cash flow | $8 million | $53 million | Down $45 million |
Comparable sales declined 6.1% on an owned basis and 5.6% on an owned-plus-licensed basis. Management cited weaker apparel and related-category demand, lower international tourist spending and year-end 2015 store closures.
At April 30, 2016, cash and cash equivalents were $734 million, compared with $1,109 million at January 30, 2016 and $1,509 million at May 2, 2015. Merchandise inventories were $5,738 million, up from $5,506 million at fiscal year-end but below $5,929 million a year earlier.
Total debt consisted of $642 million of short-term debt and $6,990 million of long-term debt. The company reported an interest coverage ratio of 8.44 and a leverage ratio of 2.30 under its credit agreement, versus required minimum and maximum levels of 3.25 and 3.75, respectively.
Investing cash outflows were $211 million, including $153 million for property and equipment and $75 million for capitalized software. Financing cash outflows were $172 million, including $130 million of share repurchases, $112 million of dividends and $3 million of debt repayments.
Material changes versus the prior comparable period
- Sales fell $461 million, while comparable sales declined substantially from the prior-year 0.7% owned-basis decline.
- Operating income decreased $133 million and operating margin declined 180 basis points to 4.8%.
- Net income attributable to Macy’s shareholders declined $77 million; diluted EPS fell $0.19.
- Gross margin rate improved modestly by 10 basis points, but lower sales and higher SG&A as a percentage of sales reduced profitability.
- SG&A dollars declined 2.8%, reflecting cost-efficiency initiatives, lower retirement expenses and property-sale gains, partly offset by investments in omnichannel operations, Bluemercury, Macy’s Backstage and Macy’s China.
- The quarter included $13 million of non-cash pension settlement charges related to store closures, a voluntary separation program and organizational restructuring.
- Cash flow from operations declined to $8 million, while cash declined $375 million during the quarter.
- Share repurchases decreased to approximately $129 million from $359 million in the prior-year quarter. Approximately $1,903 million remained authorized for repurchases at quarter-end.
- A new $1.5 billion revolving credit facility, expandable to $1.75 billion subject to lender commitments, was entered into on May 6, 2016 and replaces the prior facility.
Guidance, outlook, commentary and risks
Management expects fiscal 2016 comparable sales on an owned-plus-licensed basis to decline 3% to 4% from fiscal 2015, with owned comparable sales approximately 50 basis points lower. Fiscal 2016 EPS attributable to Macy’s shareholders is expected to be $3.15 to $3.40, excluding approximately $135 million of non-cash pension settlement charges.
Management is pursuing approximately $400 million of SG&A reductions to fund investments in omnichannel capabilities and growth initiatives. Planned initiatives include Macy’s Backstage expansion, additional Bluemercury locations, mobile technology, new and exclusive merchandise, fine jewelry and watches, and focus on the company’s largest stores.
A January 2016 real estate transaction related to the Macy’s Brooklyn store is expected to generate an approximately $250 million gain; $4 million was recognized in the first quarter of 2016, with the remainder expected over the following two years.
Management believes cash on hand, operating cash flow, the credit facility and other capital resources will be sufficient for foreseeable working-capital, capital-expenditure, debt-service and other requirements. Retail performance remains exposed to competition, consumer spending, economic conditions, weather, tourism trends, foreign currency movements, supply-chain disruptions, import costs, cybersecurity and systems failures.
The company reported no material changes to the risk factors in its 2015 Form 10-K, and stated that ongoing legal proceedings are not expected to have a material adverse effect. The filing text does not provide a clear quantified maturity schedule for total debt.
Important facts for investors to verify
- Confirm the applicable period: the filing covers Q1 fiscal 2016, ending April 30, 2016, despite the request metadata identifying 2015 Q1.
- Assess whether the projected 3% to 4% comparable-sales decline and $3.15 to $3.40 EPS outlook were achieved.
- Monitor inventory levels, promotional activity and gross-margin performance amid declining sales.
- Evaluate whether the planned $400 million of expense reductions offset continued investments and pressured sales.
- Review the impact, timing and cash implications of the approximately $135 million of expected pension settlement charges.
- Verify liquidity, covenant compliance, debt maturities and availability under the new revolving credit facility.
- Assess capital allocation among dividends, share repurchases, real-estate monetization, technology investment and store expansion.