Macy’s, Inc. Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended April 29, 2017, compared with the 13 weeks ended April 30, 2016. Although the request metadata identifies “2016 Q1,” the filing is for the first quarter of fiscal 2017 and was filed June 2, 2017.
Business Context
Macy’s is an omnichannel retailer operating approximately 840 Macy’s, Bloomingdale’s and bluemercury stores, together with related websites and mobile applications. The company is implementing its “North Star” strategy, emphasizing customer relevance, omnichannel capabilities, cost reduction, store portfolio optimization, off-price Macy’s Backstage, bluemercury expansion and real estate monetization.
Financial Performance and Liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $5,338 million | $5,771 million |
| Gross margin | $2,032 million; 38.1% | $2,255 million; 39.1% |
| Operating income | $220 million; 4.1% | $276 million; 4.8% |
| Net income attributable to Macy’s shareholders | $71 million | $116 million |
| Diluted EPS | $0.23 | $0.37 |
| Cash flow from operating activities | $234 million | $8 million |
| Capital expenditures and capitalized software | $177 million | $228 million |
| Cash and cash equivalents at period-end | $1,201 million | $734 million |
- Comparable sales declined 5.2% on an owned basis and 4.6% on an owned-plus-licensed basis. Total sales declined 7.5%.
- Cost of sales declined in dollars but increased to 61.9% of sales from 60.9%, reflecting promotional activity in beauty, price competition in housewares and growth in lower-margin tech watches.
- SG&A declined 7.8% to $1,812 million and represented 34.0% of sales, compared with 34.1% in the prior year.
- Net interest expense declined $14 million, primarily because debt decreased from approximately $7.6 billion at the end of Q1 2016 to approximately $6.7 billion at the end of Q1 2017.
- Total debt at April 29, 2017 consisted of $313 million of short-term debt and $6,412 million of long-term debt. The company repurchased $146 million face value of debt for $149 million, including expenses.
- Cash used in financing activities was $270 million, including $149 million of debt repurchases and $115 million of dividends. Cash used in investing activities was $60 million, partly offset by $96 million of property dispositions.
- The company had no commercial paper borrowings outstanding. Its interest coverage ratio was 7.43 versus a required minimum of 3.25, and its leverage ratio was 2.40 versus a maximum of 3.75.
Material Changes Versus the Prior Comparable Period
- Sales decreased $433 million, or 7.5%, and comparable sales declined less severely than in the prior year on an owned basis, but remained negative.
- Gross margin rate declined 100 basis points, while operating margin declined 70 basis points.
- Shareholder net income fell $45 million, or 38.8%, and diluted EPS declined $0.14, or 37.8%.
- SG&A benefited from store closures, restructuring and higher real estate gains, partially offset by investments in digital growth and bluemercury.
- Q1 2016 included $13 million of non-cash pension settlement charges; no such charges were recorded in Q1 2017.
- Q1 2017 included $3 million of premiums and fees from early debt retirement.
- Operating cash flow improved substantially, primarily because certain estimated income tax payments occurred in May 2017 rather than during the quarter, unlike the prior year.
- Real estate gains included $47 million from the sale of the downtown Minneapolis property and $9 million related to the Macy’s Brooklyn transaction. The company expects to recognize approximately $235 million from the Union Square Men’s building sale in January 2018.
Guidance, Outlook, Risks and Unusual Items
- Management affirmed fiscal 2017 guidance: owned comparable sales down 2.2% to 3.3%; owned-plus-licensed comparable sales down 2.0% to 3.0%; total sales down 3.2% to 4.3%, including a 53rd week; and adjusted diluted EPS of $3.37 to $3.62.
- Excluding the anticipated Union Square gain, pension settlement charges, and debt repurchase premiums and fees, adjusted diluted EPS guidance is $2.90 to $3.15.
- The company expects cash on hand, operating cash flow, its credit facility and other capital resources to fund foreseeable working capital, capital expenditures, debt service and other requirements.
- Management expects continued gross margin pressure but plans to offset it through faster inventory turnover and growth in private-brand and Last Act businesses.
- The company closed 66 of approximately 100 announced Macy’s stores by the end of the quarter, with two additional closures expected by mid-2017. It opened 11 Macy’s Backstage locations and 10 freestanding bluemercury locations during the quarter.
- Key risks include weak discretionary consumer spending, competitive pressure from online and off-price retailers, changing shopping behavior, promotional intensity, weather, foreign sourcing and supply-chain disruptions, real estate transaction execution, employee benefit costs, cybersecurity and general economic and capital-market conditions.
- The company adopted ASU 2016-09, resulting in approximately $11 million of additional income tax expense from net share-based compensation tax deficiencies.
- Pending revenue and lease accounting standards are expected to materially affect certain presentations, including sales returns, credit operations, real estate gains, licensing and consignment arrangements, and recognition of operating lease assets and liabilities.
- The filing states that there were no material changes to previously reported market risks or risk factors and that pending legal proceedings are not expected to have a material adverse effect.
Investor Verification Checklist
- Verify the filing period and fiscal-year labeling: the document is for Q1 fiscal 2017, not Q1 fiscal 2016.
- Assess whether comparable-sales trends, digital growth and store closures support the full-year sales guidance.
- Monitor gross margin, promotional activity, inventory levels and the effect of lower-margin merchandise.
- Review debt maturities, additional debt repurchases, covenant compliance and cash available after dividends and capital spending.
- Separate recurring operating performance from real estate gains, pension settlement charges, debt retirement premiums and tax-accounting effects.
- Track the timing and amount of the anticipated Union Square gain and other real estate transactions.
- Evaluate the eventual impact of the new revenue and lease accounting standards, particularly on reported sales, real estate gains and balance-sheet leverage.