Macy's, Inc. quarterly report, Q2 FY2020

Macy’s, Inc. Form 10-Q Summary

Reporting period: The supplied filing is for the 13 and 26 weeks ended August 1, 2020, compared with August 3, 2019. Although the request metadata states “2019 Q2,” the filing itself is Macy’s fiscal second quarter of 2020, filed September 3, 2020.

Business context

Macy’s operates an omnichannel retail business through Macy’s, Bloomingdale’s and bluemercury, including stores, websites and mobile applications. The period was materially affected by COVID-19: all stores closed on March 18, 2020, began reopening May 4, and substantially all were reopened by August 1. Digital sales remained strong while physical-store traffic and apparel demand were pressured.

Key financial metrics

Metric	13 weeks ended Aug. 1, 2020	13 weeks ended Aug. 3, 2019	26 weeks ended Aug. 1, 2020	26 weeks ended Aug. 3, 2019
Net sales	$3,559 million	$5,546 million	$6,576 million	$11,050 million
Credit card revenues, net	$168 million	$176 million	$299 million	$348 million
Gross margin	23.6%	38.8%	20.6%	38.5%
Operating income (loss)	$(631) million	$155 million	$(4,749) million	$359 million
Net income (loss)	$(431) million	$86 million	$(4,012) million	$223 million
Diluted EPS	$(1.39)	$0.28	$(12.91)	$0.71
Net cash provided by operating activities	Not separately presented for the quarter	$(7) million	$350 million

Second-quarter net sales declined 35.8%; comparable sales declined 34.7% on an owned basis and 35.1% on an owned-plus-licensed basis.
Digital sales increased 53% year over year in the second quarter and represented 54% of owned comparable sales.
SG&A expense declined to $1.398 billion from $2.177 billion, while the SG&A rate was approximately unchanged at 39.2% versus 39.3%.
Inventory was $3.582 billion at August 1, 2020, down 29% from the prior-year balance and down from $5.188 billion at February 1, 2020.
Cash and cash equivalents were $1.395 billion, compared with $685 million at February 1, 2020 and $674 million at August 3, 2019.
Total assets were $17.614 billion and shareholders’ equity was $2.324 billion at August 1, 2020.
Short-term debt was $539 million and long-term debt was $4.851 billion. Long-term lease liabilities were $3.269 billion.
Net cash used in investing activities was $272 million, including $228 million of property and equipment purchases and $61 million of capitalized software.
Financing activities provided $950 million, including $2.780 billion of debt issued, $1.504 billion of debt repaid and $117 million of dividends paid.

Material changes versus the prior comparable period

Sales, gross margin and profitability deteriorated sharply because of store closures, lower store traffic, increased markdowns and higher delivery costs associated with digital sales.
The company recorded $3.426 billion of impairment, restructuring and other costs during the first 26 weeks, compared with $3 million in the prior-year period.
The impairment charges included $3.080 billion of goodwill impairment, consisting of $2.982 billion for the Macy’s reporting unit and $98 million for bluemercury, plus $80 million of long-lived and right-of-use asset impairments.
The company recognized $154 million of severance expense related to a workforce reduction, including approximately 3,900 corporate and management positions.
Interest expense increased to $120 million from $106 million year to date, primarily because of new secured debt issued in June 2020.
Operating cash flow declined from $350 million provided to $7 million used, although inventory reductions generated substantial working-capital inflows.
The quarterly cash dividend was suspended beginning in the second quarter, and the remaining share-repurchase authorization was rescinded.

Debt, liquidity and financing

On June 8, 2020, Macy’s issued $1.3 billion of 8.375% senior secured notes due 2025. Proceeds and cash on hand were used to repay the $1.5 billion draw on the prior unsecured revolving credit facility.
The company entered into a $2.926 billion revolving asset-based credit facility, plus a $300 million bridge facility. The company had no ABL borrowings outstanding at August 1, 2020 and had approximately $3 billion of untapped ABL capacity, subject to borrowing-base limitations and $98 million of standby letters of credit.
The ABL revolving facility matures May 9, 2024; the bridge facility matures December 30, 2020. The former $1.5 billion unsecured facility was reduced to $25 million.
The company completed exchange offers covering $465 million of previously issued notes. The exchanged notes became secured by second-priority liens on collateral supporting the new secured notes.

Guidance, outlook and management commentary

Management stated that second-quarter performance was stronger than anticipated, supported by faster store recovery and continued digital growth, but expected continued turbulence and a more moderate store recovery in the back half of the year.
Fall comparable sales on an owned-plus-licensed basis were expected to decline in the low- to mid-20% range, with annual digital sales penetration in the mid-40% range.
Fall gross margin was expected to be several percentage points below the prior-year period, while gross margin was expected to improve sequentially in the third and fourth quarters.
Fiscal 2020 expectations included approximately $50 million of real-estate sale gains, approximately $300 million of net interest expense, a 35% to 38% adjusted effective tax rate and approximately $450 million of capital expenditures.
COVID-19-related restructuring actions were expected to generate approximately $365 million of fiscal 2020 expense savings and approximately $630 million of annualized savings, in addition to the previously announced $1.5 billion annual expense-savings target expected by year-end 2022.

Risks, contingencies and unusual items

The duration and severity of COVID-19 remained uncertain and could result in renewed store closures, weaker consumer demand, supply-chain disruptions, increased operating costs and additional liquidity needs.
Management warned that additional actions could be required to improve liquidity, including asset monetization, renewed furloughs, reduced capital expenditures and further discretionary spending reductions.
Future declines in market capitalization, projected cash flows or broader economic conditions could result in additional goodwill, intangible-asset or store-asset impairments.
Rent payments were deferred for a significant number of stores, but rent expense continued to be recognized under contractual lease terms.
The company recognized a $38 million non-cash pension settlement charge related to increased lump-sum distributions and restructuring activity.
The CARES Act generated tax benefits, including a $599 million income-tax receivable recognized in other assets at August 1, 2020.
The business is seasonal, and results for the first half of the fiscal year do not include the holiday season and are not necessarily indicative of full-year results.

Most important facts for investors to verify

Confirm that the applicable filing period is fiscal 2020 second quarter, not 2019 second quarter.
Assess whether store and digital sales trends support management’s Fall 2020 comparable-sales and margin expectations.
Review available borrowing capacity, borrowing-base calculations, standby letters of credit, covenant thresholds and the December 2020 bridge-facility maturity.
Evaluate cash burn, deferred rent and other accrued obligations in light of the company’s continuing operating losses.
Analyze the sustainability of inventory reductions and whether lower inventory levels can support expected holiday demand without increasing markdown or fulfillment risk.
Consider the sensitivity of remaining goodwill and store assets to additional declines in market capitalization, sales, margins and projected cash flows.
Distinguish GAAP results from adjusted measures, particularly adjusted diluted loss per share of $0.81 for the quarter and $2.83 for the first half.