Macy’s, Inc. Form 10-K Summary
Filing period: Fiscal year 2018 ended February 2, 2019. Fiscal 2017 ended February 3, 2018 and included 53 weeks; fiscal 2018 included 52 weeks. The request references “2017 Q4,” but the supplied filing is the fiscal 2018 Form 10-K and includes quarterly data for fiscal 2018 and 2017.
Business Context
- Macy’s is an omnichannel retailer operating Macy’s, Bloomingdale’s, Bloomingdale’s The Outlet, Macy’s Backstage and bluemercury.
- The Company operated 867 stores in 43 states, the District of Columbia, Puerto Rico and Guam, with approximately 126 million square feet.
- Operations are reported as one segment. Merchandise includes apparel, accessories, cosmetics, home furnishings and other consumer goods.
- Approximately 130,000 employees were employed at year-end, excluding seasonal employees. About 7% were represented by unions.
Key Financial Metrics
| Fiscal year ended | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $24,971 million | $24,939 million | Up 0.1% |
| Credit card revenue, net | $768 million | $702 million | Up $66 million |
| Gross margin | $9,756 million; 39.1% | $9,758 million; 39.1% | Rate unchanged |
| Operating income | $1,738 million; 7.0% | $1,864 million; 7.5% | Down $126 million |
| Net income attributable to Macy’s shareholders | $1,108 million | $1,566 million | Down $458 million |
| Diluted EPS | $3.56 | $5.10 | Down $1.54 |
| Adjusted diluted EPS | $4.18 | $3.79 | Up $0.39 |
| Adjusted EBITDA | $2,877 million; 11.5% | $3,109 million; 12.5% | Down $232 million |
| Operating cash flow | $1,735 million | $1,976 million | Down $241 million |
| Capital expenditures | $932 million | $760 million | Up $172 million |
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $1,162 million at February 2, 2019, compared with $1,455 million a year earlier.
- Merchandise inventories increased to $5,263 million from $5,178 million.
- Short-term debt was $43 million and long-term debt was $4,708 million, compared with $22 million and $5,861 million, respectively, in 2017.
- The Company repaid or repurchased approximately $1,149 million of debt during 2018, including a $750 million tender offer and $344 million of open-market repurchases.
- The $1,500 million revolving credit facility had no borrowings or standby letters of credit outstanding at year-end. The facility expires May 6, 2021.
- Credit agreement covenant ratios were well within limits: interest coverage was 11.22 versus a minimum of 3.25, and leverage was 1.74 versus a maximum of 3.75.
- Cash dividends paid were $463 million. The Company had $1,716 million remaining under its share repurchase authorization, although no program purchases occurred during the fourth quarter of 2018.
Material Changes Versus the Prior Comparable Period
- Reported sales were essentially flat despite the comparison with a 53-week fiscal 2017. Comparable sales increased 1.7% on an owned basis and 2.0% on an owned-plus-licensed basis.
- Digital sales grew at a double-digit rate, while sales were strongest in active apparel, fine jewelry, fragrances, men’s tailored clothing, kids’, women’s shoes, dresses and furniture.
- Credit card penetration increased to 46.9% from 46.2%, supported by the Macy’s Star Rewards program and higher consumer credit balances.
- SG&A expense increased $85 million, and the SG&A rate rose to 36.2% from 35.9%, reflecting investments in strategic initiatives, technology and employee incentives.
- Real estate gains declined to $389 million from $544 million, reducing a significant source of reported earnings.
- Net income declined substantially because of lower operating results and a $322 million income tax expense, compared with a $39 million tax benefit in 2017. The prior-year benefit included a $584 million deferred-tax benefit from U.S. federal tax reform.
- Adjusted EPS excluding real estate gains increased to $3.26 from $2.69, indicating improved underlying earnings after excluding significant real estate transactions and other unusual items.
- Store count increased to 867 from 852, primarily due to 26 additional bluemercury locations and other openings, partially offset by Macy’s closures.
Management Commentary, Outlook and Unusual Items
- Management continued its “North Star” strategy, emphasizing omnichannel capabilities, customer loyalty, Backstage, vendor direct, Growth stores, destination categories and real estate monetization.
- Backstage locations increased to 172, with at least 45 additional in-store locations planned for 2019. The Growth50 program was to expand to Growth150.
- A multi-year productivity program was launched, targeting margin improvement through inventory planning, supply-chain efficiencies, pricing optimization, private-brand sourcing and customer acquisition. Announced restructuring actions were expected to produce approximately $100 million of annual expense savings beginning in 2019.
- The Company recorded approximately $80 million of 2018 severance and other human-resource restructuring costs and $64 million of asset impairment charges.
- Real estate transactions generated $389 million of gains and $474 million of cash proceeds in 2018.
- Fiscal 2019 guidance called for approximately flat net sales, comparable sales from flat to up 1.0%, credit revenue of $740 million to $765 million, adjusted diluted EPS of $3.05 to $3.25, approximately $1 billion of capital expenditures and approximately $100 million of asset-sale gains.
- Principal risks include changing consumer preferences, online competition, discretionary spending, inventory markdowns, store and real estate performance, cybersecurity, foreign sourcing and tariffs, labor costs, pension obligations, litigation, weather and access to capital markets.
- The Company expected the adoption of the new lease accounting standard in fiscal 2019 to increase reported assets and liabilities by approximately $2.4 billion to $3.0 billion, without a material effect on consolidated net income.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Investor Verification Checklist
- Verify that fiscal 2018 results are not confused with the requested 2017 fourth quarter; the filing covers the year ended February 2, 2019.
- Reconcile reported EPS with adjusted EPS and identify the effects of real estate gains, restructuring costs, pension settlement charges, debt retirement costs and the prior-year tax reform benefit.
- Assess whether the planned productivity savings and Growth150, Backstage and vendor-direct initiatives offset expected margin pressure and investment spending.
- Monitor inventory growth, gross-margin trends, digital sales, comparable sales and credit-card revenue quality.
- Review debt maturities, lease obligations, covenant calculations and the effect of lease capitalization on leverage metrics.
- Evaluate exposure to tariffs and overseas sourcing, cybersecurity incidents, consumer spending weakness, store closures, real estate monetization and pension or tax contingencies.