Macy’s, Inc. Form 10-Q Summary
Reporting period: The filing is a quarterly report for the 13 and 39 weeks ended October 30, 2021, compared primarily with October 31, 2020. The request metadata identifies “2020 Q3,” but the filing itself is for the third quarter of fiscal 2021 and was filed December 7, 2021.
Business context
Macy’s is an omnichannel retailer operating Macy’s, Bloomingdale’s and bluemercury stores, websites and mobile applications. The filing describes continued recovery from COVID-19-related disruption, execution of the Polaris strategy, stronger store traffic and consumer spending, and ongoing investment in digital, smaller-format stores, technology and supply-chain capabilities.
Key financial metrics
| Metric | 13 weeks ended October 30, 2021 | 13 weeks ended October 31, 2020 | 39 weeks ended October 30, 2021 | 39 weeks ended October 31, 2020 |
|---|---|---|---|---|
| Net sales | $5.440 billion | $3.990 billion | $15.794 billion | $10.566 billion |
| Net credit card revenues | $213 million | $195 million | $568 million | $494 million |
| Operating income (loss) | $523 million | $(127) million | $1.335 billion | $(4.876) billion |
| Net income (loss) | $239 million | $(91) million | $687 million | $(4.104) billion |
| Diluted EPS | $0.76 | $(0.29) | $2.17 | $(13.20) |
| Gross margin | 41.0% | 35.6% | 40.2% | 26.3% |
| Adjusted EBITDA | $765 million | $159 million | $2.073 billion | $(672) million |
Cash flow: Net cash provided by operating activities was $841 million for the first 39 weeks of 2021, compared with $244 million in 2020. Investing activities used $203 million, compared with $314 million in 2020. Financing activities used $2.071 billion, primarily reflecting debt repayments, share repurchases and dividends.
Liquidity and balance sheet: Cash and cash equivalents were $316 million at October 30, 2021, compared with $1.551 billion at October 31, 2020 and $1.679 billion at January 30, 2021. Merchandise inventories were $6.141 billion, up from $5.144 billion year over year. Short-term debt was $140 million and long-term debt was $3.295 billion. The $2.941 billion ABL revolving facility had $2.825 billion of borrowing capacity and $140 million of borrowings outstanding, with $116 million of standby letters of credit.
Capital allocation: Macy’s repaid approximately $1.6 billion of debt during the third quarter, reinstated its quarterly dividend and paid $46 million in dividends during the first 39 weeks. It repurchased 13.0 million shares for approximately $300 million at an average price of $23.02 per share; $200 million remained available under the $500 million authorization at quarter-end.
Material changes versus the prior comparable period
- Third-quarter net sales increased 36.3% year over year; first-nine-month sales increased 49.5%.
- Third-quarter comparable sales increased 37.2% on an owned basis and 35.6% on an owned-plus-licensed basis versus 2020. Compared with 2019, comparable sales increased 8.9% and 8.7%, respectively.
- Digital sales increased 19% year over year in the third quarter and represented approximately 33% of net sales, versus 38% in 2020. Digital sales increased 13% for the first 39 weeks and represented approximately 34% of net sales.
- Gross margin improved 540 basis points in the third quarter, reflecting store recovery, inventory productivity, pricing initiatives and fewer markdowns. Third-quarter SG&A increased in dollars but declined to 36.3% of sales from 43.3%.
- The company recorded $239 million of third-quarter net income versus a $91 million loss in 2020. Adjusted net income increased to $386 million from an adjusted loss of $60 million.
- Results benefited from the absence of the prior-year COVID-19-related charges, including $3.170 billion of impairment charges and $196 million of restructuring and other costs for the first 39 weeks of 2020. The 2021 period included $21 million of impairment, restructuring and other costs.
- Interest expense declined in the third quarter to $53 million from $80 million, primarily because of the redemption of secured notes. However, Macy’s recorded $185 million of losses on early retirement of debt during the quarter.
- Inventory was 19.4% higher than in the third quarter of 2020 but 15.4% below the third quarter of 2019, reflecting preparation for the 2021 holiday season.
Guidance, outlook and management commentary
- Management said third-quarter results exceeded expectations, driven by strong consumer behavior, disciplined cost and inventory management, and continued Polaris execution.
- Updated fiscal 2021 guidance calls for net sales of $24.115 billion to $24.275 billion, annual digital sales of $8.750 billion to $8.800 billion, adjusted diluted EPS of $4.57 to $4.76, and adjusted EBITDA exceeding 12.5% of net sales.
- Additional guidance includes net credit card revenues of approximately 3.3% of sales, gross-margin expansion of up to 950 basis points from 2020, real-estate sale gains of $70 million to $85 million, benefit-plan income of approximately $67 million, depreciation and amortization of approximately $890 million, and net interest expense of approximately $260 million.
- Citibank gave notice terminating the existing credit-card program after sales fell more than 34% versus the contractual benchmark. Macy’s was evaluating a transfer to another financial institution or a modified Citibank arrangement and expected no material change to the program’s financial structure based on current estimates.
- Macy’s expects an approximately $590 million CARES Act income-tax receivable to be received in the first half of 2022.
Risks, contingencies and unusual items
- COVID-19 remains a material uncertainty, including potential variants, government restrictions, changes in consumer traffic and spending, supply-chain interruptions, labor shortages and competition for talent.
- The business is seasonal, and the reported periods do not include the Christmas season; therefore, interim results are not necessarily indicative of full-year results.
- Downtown stores continued to underperform other locations because of slow recovery in international tourism and office-worker traffic.
- Supply-chain disruption, freight costs, port availability and product availability may affect holiday sales, margins and inventory levels.
- Future impairment of goodwill, intangible assets, stores or right-of-use assets remains possible, particularly if consumer behavior, operating conditions or work-environment changes adversely affect asset utilization.
- The company reported no material changes to previously disclosed market risks or risk factors and stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
- Unusual third-quarter items included $185 million of debt-retirement losses, $8 million of non-cash pension settlement charges and $50 million of real-estate sale gains, including approximately $33 million from the Baldwin Hills transaction.
Investor verification checklist
- Verify that fiscal 2021 sales, adjusted EPS and adjusted EBITDA guidance were achieved and reconcile the non-GAAP measures to GAAP results.
- Monitor holiday-season sales, gross margin, markdown activity and inventory aging following the 19.4% year-over-year inventory increase.
- Confirm the final structure, economics and timing of the replacement or transfer of the Citibank credit-card program.
- Assess liquidity after debt repayments, share repurchases, dividends and the expected tax receivable, including availability under the ABL facility.
- Evaluate whether post-pandemic recovery in downtown stores, international tourism and office-worker traffic is continuing.
- Track COVID-19 developments, supply-chain constraints, freight costs, labor availability and potential future impairment charges.