Macy’s, Inc. Form 10-Q Summary
Business context and reporting period
Macy’s operates approximately 850 Macy’s and Bloomingdale’s stores and related websites, selling apparel, accessories, cosmetics, home furnishings and other consumer goods. The filing covers the 13 weeks ended April 30, 2011, compared with the 13 weeks ended May 1, 2010. The request metadata identifies “2010 Q1,” but the filing is for first-quarter 2011.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $5,889 million | $5,574 million |
| Gross margin | $2,303 million; 39.1% | $2,196 million; 39.4% |
| Operating income | $330 million; 5.6% | $203 million; 3.6% |
| Net income | $131 million | $23 million |
| Diluted EPS | $0.30 | $0.05 |
| Cash flow from operations | $67 million | $(149) million |
| Capital expenditures and software | $94 million | $60 million |
| Cash and equivalents at period-end | $1,152 million | $981 million |
At April 30, 2011, total debt was approximately $7,084 million, consisting of $741 million of short-term debt and $6,343 million of long-term debt. Total debt was approximately $8,188 million at May 1, 2010. Total assets were $20,417 million and shareholders’ equity was $5,688 million. Current assets were $6,914 million versus current liabilities of $5,479 million.
Material changes versus the prior comparable period
- Sales increased 5.7% to $5.889 billion; comparable-store sales increased 5.4%.
- Internet sales increased 38.3% and contributed 1.3 percentage points to comparable-store sales.
- Operating income increased $127 million, while SG&A declined $20 million and decreased to 33.5% of sales from 35.8%.
- Net income increased $108 million, reflecting stronger sales, expense leverage, lower interest expense and continued performance at Bloomingdale’s.
- Gross margin percentage declined modestly because of the expansion of free shipping on macys.com and in stores.
- Net interest expense declined to $116 million from $162 million. The prior-year period included approximately $27 million of costs associated with early debt retirement.
- Operating cash flow improved by $216 million, helped by higher net income and a lower pension contribution of $225 million versus $325 million.
- The company repaid $335 million of debt, including $330 million of 6.625% senior notes due April 1, 2011. It repaid $505 million in the prior-year period.
Guidance, outlook, risks and unusual items
- Management assumed approximately 4.5% growth in 2011 comparable-store sales from 2010 levels.
- Key strategies include My Macy’s localization, private and exclusive brands, customer centricity and omnichannel retailing. Three Bloomingdale’s Outlet stores were expected to open during the remainder of fiscal 2011.
- Management expected cash on hand, operating cash flow, the credit facility and other resources to cover foreseeable working capital, capital expenditures and debt-service needs.
- The company had no borrowings under its $2.0 billion revolving credit facility, which could be increased to $2.5 billion subject to lender commitments. The facility expires August 30, 2012. Reported covenant ratios were within requirements: interest coverage of 6.11 versus a minimum of 3.25, and leverage of 2.16 versus a maximum of 4.50.
- The interest rate on $612 million of senior notes declined by 0.25 percentage point to 8.125% effective May 2011 following a ratings upgrade; future ratings changes could adjust the rate.
- The board declared a quarterly dividend of $0.10 per share payable July 1, 2011, double the prior $0.05 rate.
- SG&A benefited from a gain on the sale of the company’s investment in The Knot, Inc., lower stock-based compensation and lower depreciation and amortization, partly offset by higher selling and omnichannel costs.
- Retail results are seasonal, and the first quarter excludes the Christmas season and is not necessarily indicative of full-year results.
- Principal risks include competition, consumer spending and confidence, economic conditions, weather and natural disasters, vendor and import disruption, foreign sourcing, cybersecurity, regulatory matters and execution of strategic initiatives.
- A conditionally certified ERISA class action alleges fiduciary-duty violations relating to Macy’s and May Plan investments in company stock. The company considers the lawsuit without merit and does not expect it, or other ordinary-course proceedings, to have a material adverse effect.
Investor verification points
- Verify that comparable-store sales growth and the 4.5% full-year assumption remain consistent with subsequent results.
- Assess whether sales growth can offset gross-margin pressure from free shipping and continued omnichannel investment.
- Monitor debt maturities, ratings-sensitive interest costs, covenant compliance and the availability of the revolving credit facility.
- Separate recurring operating performance from the gain on the Knot investment and prior-year debt-retirement costs.
- Review inventory growth to $5,159 million and its effect on future markdowns and cash flow.
- Track the sustainability of the increased dividend and management’s capital-allocation priorities.