Macy’s, Inc. Form 10-Q Summary
Reporting period: The supplied filing is for the 13 and 26 weeks ended August 2, 2014, compared with August 3, 2013. Although the request metadata identifies “2013 Q2,” the filing text clearly relates to fiscal 2014 second quarter.
Business context and reporting period
Macy’s is an omnichannel retailer operating approximately 840 Macy’s and Bloomingdale’s stores, websites and mobile applications. The company sells apparel, accessories, cosmetics, home furnishings and other consumer products across 45 states, the District of Columbia, Guam and Puerto Rico, with a licensed Bloomingdale’s operation in Dubai.
Management’s stated growth strategies were localization through My Macy’s, expansion of omnichannel capabilities and customer engagement through the Magic Selling program. The company continued expanding store-based fulfillment and online pickup capabilities.
Key financial metrics
| Metric | 13 weeks ended Aug. 2, 2014 | 13 weeks ended Aug. 3, 2013 | 26 weeks ended Aug. 2, 2014 | 26 weeks ended Aug. 3, 2013 |
|---|---|---|---|---|
| Net sales | $6,267 million | $6,066 million | $12,546 million | $12,453 million |
| Gross margin | $2,595 million; 41.4% | $2,533 million; 41.8% | $5,038 million; 40.2% | $5,009 million; 40.2% |
| Operating income | $571 million; 9.1% | $534 million; 8.8% | $1,014 million; 8.1% | $969 million; 7.8% |
| Net income | $292 million; 4.7% | $281 million; 4.6% | $516 million; 4.1% | $498 million; 4.0% |
| Diluted EPS | $0.80 | $0.72 | $1.40 | $1.27 |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $646 million | $664 million |
Second-quarter comparable sales increased 3.4%, while comparable sales including licensed departments increased 4.0%. Six-month comparable sales increased 0.8%, or 1.5% including licensed departments.
At August 2, 2014, cash and cash equivalents were $1.630 billion and merchandise inventories were $5.416 billion. Short-term debt was $483 million and long-term debt was $6.742 billion. Total assets were $20.619 billion and shareholders’ equity was $5.807 billion.
For the first 26 weeks, investing cash uses were $288 million, including $245 million for property and equipment and $116 million for capitalized software. Financing cash uses were $1.001 billion, including $922 million for share repurchases and $204 million for dividends. Ending cash declined to $1.630 billion from $2.273 billion at fiscal year-end and increased from $1.424 billion at the prior-year comparable date.
The company reported an interest coverage ratio of 9.38 and a leverage ratio of 1.84 under its credit agreement, compared with required minimum interest coverage of 3.25 and maximum leverage of 3.75.
Material changes versus the prior comparable period
- Second-quarter sales increased 3.3% and comparable sales increased 3.4%; six-month sales increased 0.7% and comparable sales increased 0.8%.
- Second-quarter net income rose 3.9% to $292 million, and diluted EPS rose 11.1% to $0.80, aided by lower average diluted shares.
- Six-month net income increased 3.6% to $516 million, and diluted EPS increased 10.2% to $1.40.
- Second-quarter gross margin rate declined 40 basis points to 41.4%, primarily because of higher markdowns and free-shipping costs associated with omnichannel growth.
- Second-quarter SG&A increased 1.3% in dollars but declined 70 basis points as a percentage of sales to 32.3%. Six-month SG&A declined 0.4% and the rate declined 30 basis points.
- Retirement expenses declined to $18 million in the second quarter from $58 million and to $37 million for six months from $116 million, reflecting changes to the company’s retirement plans.
- Net interest expense increased by $4 million for the quarter and $7 million for six months because of higher borrowings.
- The company issued $500 million of 3.625% senior unsecured notes due 2024 and repaid $453 million of 5.75% senior notes at maturity.
- The company repurchased approximately 16.3 million shares for approximately $949 million during the first six months and had $1.983 billion remaining under its authorization at August 2, 2014.
Guidance, outlook, risks and unusual items
Management projected fiscal 2014 comparable-sales growth of 1.5% to 2.0% and diluted EPS of $4.40 to $4.50. Management stated that cash on hand, operating cash flow, the credit facility and other capital resources should be sufficient for foreseeable working capital, capital expenditures, debt service and other requirements.
The company opened one Macy’s store in August 2014 and expected to open two additional Macy’s stores and one Bloomingdale’s replacement store during the remainder of fiscal 2014. It also closed two Macy’s locations in August 2014.
The retail business is seasonal, and the reported periods exclude the Christmas season; therefore, interim results are not necessarily indicative of full-year performance. Principal risks include competitive and online retail pressure, consumer spending and credit conditions, weather and natural disasters, vendor and supply-chain disruptions, foreign sourcing, import duties, interest rates, regulatory developments, systems failures and cybersecurity breaches.
Goodwill and indefinite-lived intangible assets passed the annual impairment test as of May 31, 2014. The filing states that various changes in assumptions could materially affect future impairment conclusions. The company reported no material adverse effect expected from ordinary-course legal proceedings, no material changes to previously disclosed risk factors and effective disclosure controls.
Important facts for investors to verify
- Confirm that the applicable reporting period is fiscal 2014 second quarter, not 2013 second quarter, as indicated in the request metadata.
- Assess whether the projected 1.5%–2.0% comparable-sales growth and $4.40–$4.50 diluted EPS guidance remained achievable after the filing date.
- Monitor gross-margin pressure from markdowns, promotional timing and free shipping as omnichannel sales expand.
- Evaluate the effect of substantial share repurchases on EPS, cash balances, leverage and future capital allocation.
- Review debt maturities, interest costs and compliance with the credit agreement’s coverage and leverage covenants.
- Consider retail seasonality and the concentration of significant sales and cash generation in the holiday period.
- Verify subsequent developments involving store openings and closures, consumer demand, inventory levels, cybersecurity and supply-chain conditions.