Macy’s, Inc. Form 10-K Summary
Reporting period: Fiscal year 2011 ended January 28, 2012. The supplied filing is not a 2010 Q4 filing; it includes unaudited fourth-quarter comparisons for fiscal 2011 and 2010.
Business Context
Macy’s operated approximately 842 Macy’s, Bloomingdale’s and Bloomingdale’s Outlet stores, plus macys.com and bloomingdales.com, across 45 states, the District of Columbia, Guam and Puerto Rico. The company reported one operating segment. Key strategies were My Macy’s localization, omnichannel growth and customer-centric selling.
- Approximately 171,000 employees at year-end; approximately 10% were represented by unions.
- Fiscal retail sales were seasonal, with a disproportionate share of revenue and operating income generated in November and December.
- Online sales increased 39.6% in 2011 and contributed 1.5 percentage points to comparable-store sales growth.
Financial Performance
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $26,405 million | $25,003 million | +5.6% |
| Comparable-store sales | +5.3% | +4.6% | +0.7 percentage points |
| Gross margin | $10,667 million; 40.4% | $10,179 million; 40.7% | Margin down approximately 30 bps |
| Operating income | $2,411 million; 9.1% | $1,894 million; 7.6% | +27.3% |
| Net income | $1,256 million | $847 million | +48.3% |
| Diluted EPS | $2.92 | $1.98 | +47.5% |
| Net interest expense | $443 million | $574 million | Down $131 million |
| Income from credit operations | $582 million | $332 million | +75.3% |
Cost of sales increased to $15,738 million, or 59.6% of sales, from 59.3% in 2010, primarily reflecting expanded free shipping. SG&A increased slightly to $8,281 million but declined to 31.4% of sales from 33.0%. Advertising expense increased to $1,136 million, or 4.3% of sales.
Fourth-Quarter Comparison
| Metric | Fiscal Q4 2011 | Fiscal Q4 2010 |
|---|---|---|
| Net sales | $8,724 million | $8,269 million |
| Gross margin | $3,573 million | $3,414 million |
| Net income | $745 million | $667 million |
| Diluted EPS | $1.74 | $1.55 |
Cash Flow, Liquidity and Capital Structure
- Operating cash flow was $2,093 million, up from $1,506 million in 2010.
- Investing cash flow was negative $617 million, including $555 million of property and equipment purchases and $209 million of capitalized software.
- Year-end cash and equivalents increased to $2,827 million from $1,464 million.
- Short-term debt was $1,103 million and long-term debt was $6,655 million, compared with $454 million and $6,971 million, respectively, in 2010.
- The company had no borrowings under its $1,500 million revolving credit facility, which expires June 20, 2015. The facility may be increased to $1,750 million subject to lender commitments.
- 2011 credit agreement ratios were 7.44 times interest coverage and 2.17 times leverage, versus required minimum coverage of 3.25 times and maximum leverage of 3.75 times.
- Capital expenditures were $764 million in 2011. Management budgeted approximately $850 million for 2012, including stores, remodeling, technology, omnichannel operations and a new fulfillment center.
- The company repurchased approximately 16.4 million shares for approximately $500 million and had $1,352 million of remaining repurchase authorization at year-end.
- Quarterly dividends increased from $0.05 per share to $0.10 during 2011, and the board declared a $0.20-per-share dividend payable in April 2012.
Material Changes Versus the Prior Period
- Sales growth and strategic execution increased operating income by $517 million and net income by $409 million.
- Credit operations income increased by $250 million, including higher amounts received under the Citibank credit-card program.
- Net interest expense declined due to lower borrowings following 2010 debt retirement and subsequent maturities. The $66 million early-debt-retirement expense recorded in 2010 did not recur.
- 2011 included a $54 million gain from the sale of store leases related to the Lord & Taylor divestiture, offset by $22 million of asset impairments and $7 million of store-closing costs.
- The company closed 12 stores in 2011, opened four and ended the year with 842 stores, compared with 850 at the end of 2010.
- Pension and SERP obligations increased materially. The funded pension plan liability was $389 million, and the unfunded SERP obligation was $771 million at year-end.
Guidance, Outlook and Unusual Items
- Management assumed fiscal 2012 comparable-store sales would increase approximately 3.5% from 2011 levels.
- Management expected to fund planned capital expenditures and debt repayments with cash on hand and operating cash flow.
- The company planned approximately $150 million of pension funding in 2012 and expected pension and SERP expense to increase by approximately $65 million.
- The company issued $800 million of debt in January 2012, consisting of $550 million of 3.875% notes due 2022 and $250 million of 5.125% notes due 2042, to refinance near-term maturities.
- The company repaid $616 million of 5.35% notes at maturity and intended to redeem $173 million of 8.0% debentures in March 2012, with approximately $4 million of additional interest expense and an expected $4 million interest saving during 2012.
- Goodwill was carried at $3,743 million after a prior $5,382 million impairment. Management reported no goodwill impairment in the most recent annual test but identified substantial estimation sensitivity to sales, margins, cash flows and discount rates.
Risks and Contingencies
- Key risks include intense retail and online competition, changing consumer preferences, discretionary spending, economic conditions, weather, natural disasters and seasonality.
- Foreign sourcing exposes the company to supply-chain disruption, tariffs, quotas, political conditions, currency movements and transportation constraints.
- Debt covenants, cross-default provisions and access to capital markets could affect liquidity if operating performance deteriorates.
- Pension funding needs and significant actuarial losses could increase future cash requirements and expense.
- Cybersecurity incidents, privacy breaches and systems failures could disrupt operations, damage reputation and cause litigation or regulatory costs.
- The company faced an ERISA class-action lawsuit related to its 401(k) plans and May integration disclosures. Management considered the claims without merit and did not expect ordinary-course proceedings to materially affect financial position or results.
- Contractual obligations totaled approximately $19.4 billion, including debt, interest, leases and other obligations. The filing excluded certain tax liabilities and the $389 million pension liability from the contractual-obligations table.
Investor Verification Checklist
- Confirm that the intended period is fiscal 2011 rather than 2010 Q4; verify fourth-quarter figures separately if a quarter-specific analysis is required.
- Reconcile reported earnings improvement with the $250 million increase in credit-operation income and the nonrecurring property-sale gain.
- Review debt maturities, refinancing actions and covenant calculations, particularly the 2012 and 2013 maturities.
- Assess whether the planned $850 million of capital spending, share repurchases and dividends are consistent with projected operating cash flow.
- Monitor pension funding, actuarial losses and the expected increase in 2012 benefit expense.
- Evaluate the sensitivity of inventory markdowns, goodwill valuation, store impairments and vendor allowances to changes in consumer demand and margins.
- Review the full financial statements, notes, legal proceedings and incorporated proxy materials for matters not detailed in this summary.