Macy’s, Inc. Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 2, 2015, compared with the 13 weeks ended May 3, 2014. Although the request metadata states “2014 Q1,” the filing is for the first quarter of fiscal 2015. Macy’s operated approximately 885 stores across its Macy’s, Bloomingdale’s and Bluemercury brands, together with related digital channels.
Financial performance and condition
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $6,232 million | $6,279 million | Down 0.7% |
| Gross margin | $2,432 million; 39.0% | $2,443 million; 38.9% | Down $11 million; rate up 10 basis points |
| SG&A expense | $2,023 million; 32.4% of sales | $2,000 million; 31.8% | Up $23 million; rate up 60 basis points |
| Operating income | $409 million; 6.6% of sales | $443 million; 7.1% | Down $34 million |
| Net income | $193 million; 3.1% of sales | $224 million; 3.6% | Down $31 million, or 13.8% |
| Diluted EPS | $0.56 | $0.60 | Down $0.04, or 6.7% |
| Operating cash flow | $53 million | $174 million | Down $121 million |
Cash and cash equivalents were $1,509 million at May 2, 2015, versus $2,246 million at January 31, 2015 and $1,878 million at May 3, 2014. Merchandise inventories were $6,055 million, up from $5,516 million at fiscal year-end and $5,897 million a year earlier.
Total debt comprised $76 million of short-term debt and $7,260 million of long-term debt at May 2, 2015. The company reported an interest coverage ratio of 9.75 and a leverage ratio of 1.84, compared with credit agreement requirements of at least 3.25 and no more than 3.75, respectively.
Investing cash outflows were $381 million, including $180 million of property and equipment purchases, $63 million of capitalized software and $212 million for the acquisition of Bluemercury, net of cash acquired. Financing cash outflows were $409 million, including $359 million for share repurchases and $106 million of dividends. The company repurchased approximately 5.9 million shares for approximately $385 million during the quarter.
Material changes versus the prior comparable period
- Sales declined 0.7%, while owned comparable sales declined 0.7%; owned-plus-licensed comparable sales declined 0.1%.
- Gross margin rate improved modestly to 39.0%, but lower sales reduced gross profit dollars.
- SG&A increased due to higher depreciation and amortization, retirement costs and investments in omnichannel and other growth initiatives. These increases were partly offset by restructuring-related savings and higher credit-operation income.
- Net interest expense declined by $5 million to $95 million, primarily because of lower borrowing rates.
- Operating cash flow declined substantially, reflecting lower earnings, a larger increase in inventories net of merchandise accounts payable and a higher 401(k) matching contribution.
- The company completed the $212 million Bluemercury acquisition in March 2015, materially increasing investing cash usage.
- Shareholders’ equity declined to $5,207 million from $6,100 million a year earlier, primarily in the context of share repurchases, dividends and other equity activity.
Guidance, outlook, risks and unusual items
Management continued to expect fiscal 2015 owned-plus-licensed comparable sales growth of approximately 2%, total sales growth of approximately 1% and diluted EPS of $4.70 to $4.80. Owned comparable sales were expected to be slightly lower than the owned-plus-licensed measure.
Management cited unseasonably cold weather, West Coast port delays, disruption from merchandising and marketing restructuring, and lower spending by international tourists as factors affecting first-quarter sales. Growth initiatives include omnichannel fulfillment, the Plenti loyalty program, Macy’s Backstage off-price stores, additional Bluemercury stores and continued localization and customer-engagement programs.
The company stated that cash on hand, operating cash flow, its credit facility and other capital resources should be sufficient for foreseeable working capital, capital expenditure, debt service and other requirements. On May 13, 2015, the board authorized an additional $1.5 billion of share repurchases, increasing remaining authorization to $2.147 billion. The quarterly dividend was increased from $0.3125 to $0.36 per share.
Key risks include competitive pressure, consumer spending and economic conditions, weather, supply-chain and import disruptions, vendor relationships, interest and currency movements, acquisitions, cybersecurity and systems failures. The filing reported no material changes to the risk factors in the 2014 Form 10-K and no pending legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Confirm that fiscal 2015 guidance of approximately 2% comparable sales growth and $4.70–$4.80 diluted EPS remains achievable amid first-quarter sales declines.
- Monitor inventory growth, particularly relative to sales, and its effect on markdowns, gross margin and future operating cash flow.
- Assess Bluemercury acquisition performance, integration costs and the planned expansion of Bluemercury locations and products.
- Evaluate the sustainability of substantial share repurchases and the higher dividend alongside approximately $7.3 billion of long-term debt.
- Track restructuring savings and whether continued omnichannel, technology and growth investments improve sales and operating margins.
- Consider the seasonal nature of the retail business: first-quarter results exclude the Christmas period and are not necessarily indicative of full-year performance.