Macy’s, Inc. Form 10-Q Summary
Filing-period note: The request identifies “2009 Q3,” but the supplied filing is Macy’s Form 10-Q for the 13 and 39 weeks ended October 30, 2010, compared with October 31, 2009. The filing was dated December 6, 2010.
Business Context and Reporting Period
Macy’s operates approximately 850 Macy’s and Bloomingdale’s stores in 45 states, the District of Columbia, Guam and Puerto Rico, along with macys.com and bloomingdales.com. The company sells apparel, accessories, cosmetics, home furnishings and other consumer goods. Management’s principal initiatives included localized merchandising through “My Macy’s,” improved customer value and shopping experience, stronger marketing and omni-channel operations.
The reported periods cover the third quarter and first 39 weeks of fiscal 2010. Retail results are seasonal and exclude the Christmas period; therefore, interim results are not necessarily indicative of full-year performance.
Financial Performance and Key Metrics
| Metric | 13 Weeks Ended October 30, 2010 | 13 Weeks Ended October 31, 2009 | 39 Weeks Ended October 30, 2010 | 39 Weeks Ended October 31, 2009 |
|---|---|---|---|---|
| Net sales | $5,623 million | $5,277 million | $16,734 million | $15,640 million |
| Comparable-store sales growth | 3.9% | Not clearly provided | 4.7% | Not clearly provided |
| Gross margin | 40.0% | 40.2% | 40.4% | 39.9% |
| Operating income | $177 million | $55 million | $750 million | $189 million |
| Operating margin | 3.2% | 1.0% | 4.5% | 1.2% |
| Net income (loss) | $10 million | $(35) million | $180 million | $(116) million |
| Diluted EPS | $0.02 | $(0.08) | $0.42 | $(0.27) |
| Net cash from operating activities | Not separately provided | Not separately provided | $346 million | $406 million |
Internet sales increased 24.0% in the quarter and 28.5% for the first 39 weeks. Sales were strongest in fashion watches, contemporary women’s sportswear, cosmetics and fragrances, men’s merchandise and luggage; cold-weather goods and traditional women’s sportswear were weaker.
Third-quarter cost of sales rose to $3,377 million, or 60.0% of sales, while SG&A increased to $2,069 million but declined to 36.9% of sales from 38.5%. Year-to-date SG&A was $6,015 million, or 35.9% of sales, versus 37.4% in the prior year.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $715 million at October 30, 2010, compared with $581 million at October 31, 2009 and $1,686 million at January 30, 2010.
- Merchandise inventories were $6,530 million, up from $6,406 million year over year and $4,615 million at fiscal year-end.
- Total current assets were $7,837 million and current liabilities were $6,482 million, implying a current ratio of approximately 1.21.
- Short-term debt was $605 million and long-term debt was $6,982 million, for total reported debt of approximately $7,587 million. This compares with approximately $8,710 million at October 31, 2009.
- Operating cash flow was $346 million, down from $406 million, principally reflecting working-capital effects and accelerated pension contributions. Inventory increases used $1,915 million of cash, partly offset by a $1,719 million increase in merchandise accounts payable.
- Investing cash outflows were $285 million, including $203 million of property and equipment purchases and $105 million of capitalized software.
- Financing cash outflows were $1,032 million, including $1,090 million of debt repayment and $63 million of dividends.
- The company had no borrowings under its $2.0 billion revolving credit facility, which can be increased to $2.5 billion subject to lender commitments. The facility expires August 30, 2012.
- At October 30, 2010, the company’s interest-coverage ratio was 5.27 versus a required minimum of 3.25 after that date, and its leverage ratio was 2.46 versus a maximum of 4.50.
Material Changes Versus the Prior Comparable Period
- Sales increased 6.6% in the quarter and 7.0% year to date; comparable-store sales rose 3.9% and 4.7%, respectively.
- The company returned to profitability: quarterly net income was $10 million versus a $35 million loss, and year-to-date net income was $180 million versus a $116 million loss.
- Operating income improved by $122 million in the quarter and $561 million year to date. The comparison benefited from the absence of division consolidation costs recorded in 2009: $33 million in the quarter and $205 million year to date.
- Gross margin improved year to date to 40.4% from 39.9%, supported by stronger sales and inventory management, although quarterly gross margin declined modestly.
- Net interest expense increased by $27 million in the quarter and $39 million year to date, primarily because of $39 million and $66 million, respectively, of expenses associated with early debt retirements.
- The company used approximately $1.067 billion of cash to repurchase approximately $1.0 billion of debt before maturity during the first 39 weeks. It repaid an additional $150 million of senior debentures at maturity on November 1, 2010.
- The company made a $325 million pension contribution during the first 39 weeks, compared with approximately $146 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
Based on current conditions and recent performance, management assumed fourth-quarter 2010 comparable-store sales growth of 3.5% to 4.5% versus the prior year. Management expected cash on hand, operating cash flow, the credit facility and other capital resources to cover foreseeable working-capital, capital-expenditure, debt-service and other cash requirements.
Management was considering a voluntary pension contribution of up to $500 million before January 29, 2011; the timing and amount were not yet determined. No additional share repurchases were expected for the remainder of fiscal 2010, and the company declared a quarterly dividend of $0.05 per share payable January 3, 2011.
Key risks include weak consumer spending and confidence, unemployment, consumer credit conditions, competitive pressure across retail channels, weather and natural disasters, supplier and import disruptions, foreign-exchange and geopolitical conditions, legal and regulatory changes, and information-security incidents. The company disclosed no material changes to the risk factors in its 2009 Form 10-K.
A purported ERISA class-action lawsuit relating to the Macy’s and May retirement plans remained pending. The company considered the lawsuit without merit and did not expect it, or other ordinary-course proceedings, to materially affect financial position or results of operations.
Other unusual items included a $4 million deferred tax expense related to healthcare reform changes affecting Medicare Part D subsidies and $66 million of year-to-date early-debt-retirement expenses.
Investor Verification Checklist
- Verify that the intended filing period is fiscal 2010 third quarter, not 2009 third quarter.
- Assess whether sales growth and improved margins are sustainable after excluding the prior-year consolidation costs and including higher pension, omni-channel and debt-retirement expenses.
- Monitor inventory of $6.530 billion and the related reliance on merchandise accounts payable, particularly ahead of the holiday season.
- Evaluate liquidity after the $1.0 billion debt repurchase, the November 1 maturity payment and any potential pension contribution of up to $500 million.
- Confirm compliance with credit-facility interest-coverage and leverage covenants as their thresholds changed after October 30, 2010.
- Review the company’s fourth-quarter comparable-store sales assumption of 3.5% to 4.5% and the sensitivity of results to consumer spending, weather and holiday demand.