Macy's, Inc. quarterly report, Q2 FY2015

Macy’s, Inc. Form 10-Q Summary

Reporting-period note: The request metadata identifies “2014 Q2,” but the supplied filing is Macy’s Form 10-Q for the 13 and 26 weeks ended August 1, 2015, compared with August 2, 2014. The filing was dated August 28, 2015. Macy’s operated approximately 885 stores across Macy’s, Bloomingdale’s and Bluemercury brands, together with related e-commerce and mobile platforms.

Financial performance

Metric	13 weeks ended August 1, 2015	13 weeks ended August 2, 2014	26 weeks ended August 1, 2015	26 weeks ended August 2, 2014
Net sales	$6,104 million	$6,267 million	$12,336 million	$12,546 million
Gross margin	$2,494 million; 40.9%	$2,595 million; 41.4%	$4,926 million; 39.9%	$5,038 million; 40.2%
Operating income	$436 million; 7.1%	$571 million; 9.1%	$845 million; 6.8%	$1,014 million; 8.1%
Net income	$217 million; 3.6%	$292 million; 4.7%	$410 million; 3.3%	$516 million; 4.1%
Diluted EPS	$0.64	$0.80	$1.19	$1.40

Second-quarter sales declined 2.6%; comparable sales declined 2.1% on an owned basis and 1.5% on an owned-plus-licensed basis.
First-half sales declined 1.7%; comparable sales declined 1.4% on an owned basis and 0.8% on an owned-plus-licensed basis.
Second-quarter SG&A increased 1.7% to $2,058 million, and the SG&A rate rose 150 basis points to 33.8%. First-half SG&A increased 1.4% to $4,081 million.
Second-quarter net interest expense decreased $7 million to $93 million; first-half net interest expense decreased $12 million to $188 million.
Effective tax rates were 36.6% in the second quarter and 37.5% for the first half, compared with 37.9% and 36.6%, respectively, in the prior-year periods.

Cash flow, liquidity and debt

First-half cash provided by operating activities was $398 million, down from $736 million in the prior-year period.
Cash used in investing activities was $615 million, including $367 million of property and equipment purchases, $144 million of capitalized software and $212 million for the Bluemercury acquisition.
Cash used in financing activities was $1,186 million, including $909 million for share repurchases and $227 million of dividends.
Cash and cash equivalents were $843 million at August 1, 2015, compared with $2,246 million at January 31, 2015 and $1,630 million at August 2, 2014.
Merchandise inventories were $5,622 million, up from $5,516 million at January 31, 2015 and $5,416 million a year earlier.
Short-term debt was $83 million and long-term debt was $7,181 million at August 1, 2015. The estimated fair value of long-term debt was $7,585 million versus a $7,153 million carrying amount.
The company reported an interest coverage ratio of 9.61 against a 3.25 minimum and a leverage ratio of 1.89 against a 3.75 maximum under its credit agreement.
During the first half, Macy’s repurchased approximately 13.9 million shares for approximately $937 million. Remaining authorization was $1,595 million at August 1, 2015.

Material changes versus the prior comparable period

Profitability weakened: second-quarter operating margin fell from 9.1% to 7.1%, while net margin fell from 4.7% to 3.6%; first-half operating margin fell from 8.1% to 6.8%.
Gross margin declined 50 basis points in the second quarter and 30 basis points for the first half, primarily because of additional markdowns associated with weaker sales and delayed inventory receipts caused by West Coast port disruptions.
Results reflected lower tourist spending in key markets, restructuring disruption, unseasonably cold weather early in the first quarter, and reduced private-label sales to third parties.
SG&A increased because of Macy’s Backstage start-up costs, Bluemercury expenses, omnichannel and other growth investments, higher medical costs and higher depreciation and amortization. These effects were partly offset by restructuring savings and higher credit-operations income.
Macy’s completed its acquisition of Bluemercury in March 2015 and launched or advanced initiatives including Plenti, Macy’s Backstage, expanded same-day delivery and a proposed China e-commerce joint venture.

Guidance, outlook, risks and unusual items

Management expected fiscal 2015 comparable sales to be approximately flat on an owned-plus-licensed basis and approximately 50 basis points lower on an owned basis.
Total fiscal 2015 sales were expected to decline approximately 1% from 2014, while diluted EPS guidance remained $4.70 to $4.80, including the expected gain from a Brooklyn real-estate transaction.
The Brooklyn transaction was expected to provide $170 million of cash in fiscal 2015 and another $100 million over three years, with an approximately $250 million gain expected in the fourth quarter.
Management stated that cash on hand, operating cash flow, the credit facility and other resources were expected to cover reasonably foreseeable working-capital, capital-expenditure, debt-service and other cash requirements.
Key risks include competitive and online retail pressure, consumer spending and confidence, weather, tourism, foreign exchange, supply-chain and port disruptions, reliance on foreign sourcing, import duties, systems failures and cybersecurity breaches.
The annual impairment test completed during the second quarter found no impairment of goodwill or indefinite-lived intangible assets as of May 30, 2015. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect, and no material changes to previously disclosed risk factors were reported.
On August 17, 2015, after the quarter ended, Macy’s redeemed $76 million of 8.125% senior debentures at par. On August 28, 2015, the board declared a quarterly dividend of $0.36 per share.

Investor verification points

Verify the intended period: the supplied filing is second quarter and first half of fiscal 2015, not fiscal 2014.
Assess whether sales trends, markdown activity and inventory levels support the company’s fiscal 2015 guidance.
Reconcile cash generation with substantial share repurchases, dividends, Bluemercury acquisition spending and planned capital expenditures.
Review debt maturities, covenant calculations and the effect of subsequent debt redemption on interest expense.
Evaluate the timing and accounting treatment of the Brooklyn real-estate transaction and its projected $250 million gain.
Monitor execution and costs of Bluemercury, Macy’s Backstage, omnichannel investments and the China joint venture.