Macy’s, Inc. Form 10-Q Summary
Reporting period: The supplied filing is for the 13 weeks ended May 3, 2014, compared with the 13 weeks ended May 4, 2013. Although the request identifies “2013 Q1,” the filing text clearly covers the first quarter of fiscal 2014. The financial statements are unaudited.
Business Context
Macy’s is an omnichannel retailer operating approximately 840 Macy’s and Bloomingdale’s stores, including outlets, in 45 states, the District of Columbia, Guam and Puerto Rico, together with macys.com and bloomingdales.com. Key strategies include localized merchandising through My Macy’s, omnichannel fulfillment and customer engagement through the Magic Selling program.
Retail results are seasonal; the reported quarter excludes the Christmas selling period and is not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $6,279 million | $6,387 million | Down 1.7% |
| Comparable sales | Down 1.6% | Up 3.8% | Declined |
| Gross margin | $2,443 million; 38.9% | $2,476 million; 38.8% | Rate up 10 basis points |
| SG&A expense | $2,000 million; 31.8% of sales | $2,041 million; 32.0% | Down $41 million; rate down 20 basis points |
| Operating income | $443 million; 7.1% of sales | $435 million; 6.8% | Up $8 million |
| Net income | $224 million; 3.6% of sales | $217 million; 3.4% | Up 3.2% |
| Diluted EPS | $0.60 | $0.55 | Up $0.05 |
| Cash flow from operations | $86 million | $298 million | Down $212 million |
| Capital expenditures and capitalized software | $112 million | $115 million | Down $3 million |
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $1,878 million at May 3, 2014, compared with $1,752 million a year earlier and $2,273 million at February 1, 2014.
- Merchandise inventories were $5,897 million, up from $5,631 million a year earlier and $5,557 million at fiscal year-end.
- Short-term debt was $8 million and long-term debt was $7,175 million, for total reported debt of approximately $7,183 million, compared with approximately $6,921 million at May 4, 2013.
- Cash decreased by $395 million during the quarter. Financing uses included $403 million for share repurchases, $92 million of dividends and $5 million of debt repayment.
- The company reported an interest coverage ratio of 9.37 against a minimum requirement of 3.25, and a leverage ratio of 1.85 against a maximum requirement of 3.75.
- Management stated that cash on hand, operating funds, its credit facility and other capital resources should be sufficient for foreseeable working capital, capital expenditure, debt service and other requirements.
Material Changes Versus the Prior Comparable Period
- Sales declined despite reported strength in handbags, millennial impulse apparel, active, kids, intimate apparel, juniors and licensed departments. Home categories, including big-ticket items, were weakest.
- Management attributed sales pressure partly to weather and the timing of a promotional event, with some related sales occurring after quarter-end.
- Gross margin improved modestly, while SG&A declined due to lower retirement expenses, year-end cost-reduction initiatives, higher credit-operation income, lower variable selling expenses and advertising-timing effects. These benefits were partly offset by continued omnichannel investments.
- Retirement expenses declined to $19 million from $58 million. Income from credit operations increased to $171 million from $166 million.
- Operating cash flow declined substantially, primarily because of the timing of inventory receipts and payment of costs associated with year-end cost-reduction initiatives.
- The company repurchased approximately 7.4 million shares for approximately $432 million. The board subsequently increased remaining repurchase authorization from $1.0 billion to $2.5 billion.
- On May 23, 2014, after quarter-end, the company issued $500 million of 3.625% senior unsecured notes due 2024. Proceeds were intended principally to retire $453 million of 5.75% notes maturing July 15, 2014 and for general corporate purposes.
- The quarterly dividend was increased to $0.3125 per share from $0.25 per share, payable July 1, 2014.
Guidance, Outlook, Risks and Unusual Items
- Management projected fiscal 2014 comparable-sales growth of 2.5% to 3.0% and diluted EPS of $4.40 to $4.50.
- The company planned to open three Macy’s stores and one Bloomingdale’s replacement store during the remainder of fiscal 2014. No new stores opened during the quarter.
- Nearly all Macy’s stores were fulfilling orders from other stores or online fulfillment centers by May 2014, compared with 500 stores at February 1, 2014. Nearly all stores were expected to support pickup of online purchases by August 2014.
- Principal risks include competitive pressure, consumer spending and credit conditions, weather and natural disasters, supplier and import disruptions, foreign sourcing, duties and quotas, interest and capital-market conditions, systems failures and cybersecurity breaches.
- The company reported no material changes to the risk factors in its most recent Form 10-K. Routine legal proceedings were not expected to have a material adverse effect.
- The filing states that no LIFO charges or credits affected cost of sales in either comparable period.
- The company’s disclosure controls and procedures were deemed effective, with no material changes to internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the filing period, because the supplied metadata says “2013 Q1,” while the filing covers the quarter ended May 3, 2014.
- Assess whether the sales decline was temporary by monitoring subsequent promotional timing, weather normalization and comparable sales trends.
- Review inventory levels and merchandise payables for potential impacts on markdowns, working capital and future operating cash flow.
- Confirm the refinancing of the $453 million July 2014 maturity and evaluate the effect of increased debt and share repurchases on leverage and liquidity.
- Test whether the $4.40–$4.50 EPS and 2.5%–3.0% comparable-sales outlook remained achievable as the fiscal year progressed.
- Evaluate the sustainability of SG&A savings, unusually lower retirement costs and advertising-timing benefits.
- Review the expanded share-repurchase authorization and higher dividend against capital expenditure, debt-service and omnichannel investment needs.