Macy’s, Inc. Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended April 29, 2023, compared with the 13 weeks ended April 30, 2022. Although the request identifies “2022 Q1,” the filing is for the first quarter of fiscal 2023 and was filed June 6, 2023.
Business Context
Macy’s, Inc. operates the Macy’s, Bloomingdale’s and bluemercury brands through stores, websites and mobile applications. The company operates in a highly seasonal retail business; first-quarter results exclude the holiday period and are not necessarily indicative of full-year performance. Macy’s, Bloomingdale’s and bluemercury represented the principal operating businesses, with digital sales accounting for 32% of net sales.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $5.173 billion | $5.565 billion | Down 7.0% |
| Net sales | $4.982 billion | $5.348 billion | Down 6.8% |
| Gross margin | 40.0% | 39.6% | Up 40 basis points |
| Operating income | $244 million | $463 million | Down $219 million |
| Net income | $155 million | $286 million | Down $131 million |
| Diluted EPS | $0.56 | $0.98 | Down $0.42 |
| Adjusted EBITDA | $468 million | $684 million | Down $216 million |
| Net cash from operations | $105 million | $248 million | Down $143 million |
SG&A expense increased to $1.950 billion from $1.905 billion, and SG&A rose to 37.7% of total revenue from 34.2%. The increase reflected higher minimum wages, investments in employees, and greater depreciation and amortization. Other revenue declined to $191 million from $217 million, primarily because credit card revenue decreased $29 million due to higher portfolio bad debt. The effective tax rate was 26.5%, compared with 27.0%.
Liquidity, Capital Allocation and Debt
- Cash and cash equivalents were $603 million at April 29, 2023, versus $672 million at April 30, 2022.
- Operating cash flow was $105 million; investing cash flow was negative $270 million, including $296 million of capital expenditures and capitalized software; financing cash flow was negative $94 million.
- Long-term debt was $2.996 billion, with approximately $3.007 billion of senior unsecured notes and debentures outstanding. No debt was borrowed or repaid during the quarter, other than capital lease activity.
- The $3.0 billion ABL Credit Facility had no borrowings outstanding. Standby letters of credit reduced available capacity to $2.862 billion.
- The company paid $45 million in dividends and repurchased approximately 1.4 million shares for $25 million. Share repurchase authorization remaining at quarter-end was $1.375 billion.
- Inventory was $4.607 billion, down 7% year over year. Supplier finance obligations included in merchandise accounts payable were $102 million.
Material Changes Versus the Prior Comparable Period
- Company comparable sales declined 7.9% on an owned basis and 7.2% on an owned-plus-licensed basis, compared with increases of 12.8% and 12.4%, respectively, in Q1 2022.
- Macy’s comparable sales declined 8.7% on an owned basis; Bloomingdale’s declined 3.9%; bluemercury increased 4.3%.
- Digital sales decreased 8% and digital penetration declined to 32% from 33%.
- Gross margin improved modestly because of lower delivery expense, lower clearance markdowns and leaner beginning-of-year inventories, partially offset by promotional markdowns and category mix.
- Operating income and net income declined substantially because of lower sales, higher SG&A and lower real estate gains. Q1 2022 included $31 million of losses on early debt retirement and $42 million of real estate gains, compared with $11 million of real estate gains in Q1 2023.
- Capital expenditures increased to $296 million from $261 million, focused on digital and technology, data and analytics, supply chain modernization and omnichannel capabilities.
Guidance, Outlook and Management Commentary
On June 1, 2023, management updated fiscal 2023 guidance:
- Net sales of $22.8 billion to $23.2 billion.
- Comparable owned-plus-licensed sales down approximately 6% to 7.5% versus 2022.
- Digital sales expected to represent approximately one-third of net sales.
- Gross margin of 38.0% to 38.5%.
- Adjusted diluted EPS of $2.70 to $3.20.
- Adjusted EBITDA of approximately 8.8% to 9.4% of total revenue.
- Capital expenditures of approximately $950 million.
Management attributed weaker sales to pressure on discretionary consumer spending, with strength in beauty, women’s career sportswear, men’s tailored merchandise, off-price and selected home categories. Strategic priorities include private-brand development, small-format stores, digital marketplaces, luxury brands and personalized customer offers. Management expects to launch a Bloomingdale’s marketplace in early fall 2023 and may accelerate small-format store openings in 2024 if performance remains favorable.
Risks, Contingencies and Unusual Items
- Key risks include weaker consumer spending, inflation and wage pressure, changing shopping behavior, intense retail competition, supply chain disruption, labor shortages, cybersecurity incidents and reliance on foreign sourcing.
- The company’s business is seasonal, and first-quarter results may not predict full-year results.
- Credit card revenue is exposed to higher consumer delinquencies and bad debt.
- The company remains exposed to its debt and lease obligations, interest rates, real estate outcomes and the timing of dividends and share repurchases.
- Real estate gains were $11 million in Q1 2023, compared with $42 million in Q1 2022. Impairment, restructuring and other costs were $2 million versus $8 million.
- Management reported no material changes to market risk, contractual obligations outside the ordinary course, legal proceedings or previously disclosed risk factors. No material adverse effect from ongoing legal proceedings is expected.
- Disclosure controls and procedures were assessed as effective as of April 29, 2023.
Important Facts for Investors to Verify
- Whether sales trends and comparable sales improve relative to the updated full-year guidance.
- Whether gross margin remains within the 38.0%–38.5% guidance range despite promotional activity and category mix.
- The trajectory of SG&A, wage costs, credit card bad debt and cash generation.
- Inventory levels, markdown requirements and working-capital needs during the remainder of the year.
- Progress and returns from digital, marketplace, small-format store, luxury and private-brand initiatives.
- Future share repurchases, dividends and capital expenditures relative to liquidity and debt obligations.
- The comparability and reconciliation of adjusted EBITDA, adjusted EPS and owned-plus-licensed sales with GAAP results.