Macy’s, Inc. Form 10-Q Summary
Reporting period: 13 weeks ended May 1, 2021. The request metadata identifies “2020 Q1,” but the filing is for the first quarter of fiscal 2021 and compares results with the 13 weeks ended May 2, 2020. Macy’s operates Macy’s, Bloomingdale’s and bluemercury stores, websites and mobile applications.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $4,706 million | $3,017 million | Up 56.0% |
| Credit card revenues, net | $159 million | $131 million | Up 21.0% |
| Gross margin | 38.6% | 17.1% | Up 21.5 percentage points |
| SG&A expense | $1,748 million | $1,598 million | Up $150 million |
| Operating income (loss) | $215 million | $(4,119) million | Improved |
| Net income (loss) | $103 million | $(3,581) million | Improved |
| Diluted EPS | $0.32 | $(11.53) | Improved |
| Operating cash flow | $494 million | $(164) million | Improved by $658 million |
Gross profit was $1,817 million, or 38.6% of net sales. The prior-year quarter included an approximately $300 million inventory markdown write-down related to COVID-19 store closures. Adjusted EBITDA was $473 million, or 10.1% of sales, versus $(689) million, or (22.8%), in Q1 2020. Adjusted net income was $126 million, or $0.39 per diluted share, versus an adjusted loss of $630 million, or $(2.03) per share, in the prior-year quarter.
- Comparable sales increased 62.5% on an owned basis and 63.9% on an owned-plus-licensed basis versus Q1 2020, but remained 10.5% and 10.0% below Q1 2019, respectively.
- Digital sales increased 34% year over year and 32% versus Q1 2019; digital sales represented approximately 37% of net sales, compared with 43% in Q1 2020.
- Inventory was down 14.1% from May 2, 2020.
- Cash and cash equivalents were $1,798 million at May 1, 2021. Cash, cash equivalents and restricted cash totaled $1,874 million.
- Capital expenditures and capitalized software totaled $99 million, compared with $160 million in the prior-year quarter.
Balance sheet, debt and liquidity
At May 1, 2021, total assets were $18,082 million and shareholders’ equity was $2,675 million. Short-term debt was $294 million, long-term debt was $4,558 million, and long-term lease liabilities were $3,166 million. Long-term debt had a $4,610 million notional amount and an estimated fair value of $4,643 million.
On March 17, 2021, Macy’s Retail Holdings issued $500 million of 5.875% senior notes due 2029. Proceeds, together with cash on hand, funded the repurchase of $500 million of existing notes and debentures. The transaction generated an $11 million loss on early retirement of debt and total tender-offer cash costs of $17 million.
The company had no borrowings outstanding under its $2,941 million asset-based revolving credit facility. Borrowing capacity was $2,444 million after $158 million of standby letters of credit. Management stated that cash on hand, operating cash flow, the ABL facility and other resources should cover reasonably foreseeable working capital, capital expenditures, debt service and other cash requirements.
Material changes versus the prior comparable period
- Results recovered sharply from the COVID-19-affected Q1 2020 period, when stores were broadly closed and the company recorded $3,150 million of non-cash impairment charges, including $3,070 million of goodwill impairment.
- Q1 2021 impairment, restructuring and other costs declined to $19 million, primarily related to capitalized software assets.
- Operating cash flow turned positive, although inventory increased $457 million during the quarter and prepaid and other current assets increased $56 million.
- SG&A increased in dollars with higher sales but declined to 37.1% of sales from 52.9% in Q1 2020 and was approximately 17% below Q1 2019 in absolute dollars.
- The quarterly dividend remained suspended; no dividends were paid in Q1 2021 compared with $117 million in Q1 2020.
Guidance, outlook and risks
For fiscal 2021, management expected net sales of $21,725 million to $22,225 million, annual digital sales of approximately $8 billion, gross margin expansion of up to 8 percentage points from fiscal 2020, adjusted EBITDA of approximately 9% to 9.5% of sales, net interest expense of approximately $320 million, an adjusted effective tax rate of approximately 25%, and adjusted diluted EPS of $1.71 to $2.12.
Management attributed the recovery to stimulus payments, rising consumer confidence, vaccine rollout, store reopening, inventory discipline and execution of the Polaris strategy. The company highlighted investments in digital platforms, pricing and merchandising analytics, supply-chain modernization and store experience.
On June 4, 2021, Citibank notified Macy’s that it was terminating the credit-card program after sales over the relevant 12-month period fell more than 34% below the contractual benchmark. The parties must continue performing under the agreement during the transition. Macy’s has six months to exercise an option to purchase the program assets or nominate a third-party purchaser, followed by a subsequent six-month transfer period, subject to possible extensions. Management confirmed fiscal 2021 net credit-card revenue guidance of approximately 3% of net sales but could not estimate impacts after fiscal 2021.
- COVID-19 remains a material uncertainty affecting customer traffic, spending, store operations, supply chains and liquidity.
- Key risks include consumer demand, digital competition, execution of the Polaris strategy, inventory and supply-chain disruptions, cybersecurity, substantial indebtedness, real estate transactions and potential impairment charges.
- A replacement or amended credit-card arrangement could be less favorable, reducing an important revenue and cash-flow stream.
- The business is seasonal, and first-quarter results are not necessarily indicative of full-year performance.
Facts investors should verify
- Whether the Citibank credit-card program is transferred, purchased or replaced, and the resulting effect on credit-card revenue and cash flow after fiscal 2021.
- Progress toward the fiscal 2021 sales, margin, adjusted EBITDA and EPS guidance ranges.
- Whether comparable sales recover to or exceed fiscal 2019 levels as COVID-19 effects diminish.
- Inventory levels, markdown activity and gross-margin sustainability amid supply-chain constraints.
- Debt maturities, refinancing needs, ABL availability and the company’s ability to maintain liquidity if operating cash flow weakens.
- The continued suspension or potential resumption of dividends and other uses of excess cash.