Macy’s, Inc. Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2015, comprising 52 weeks. The request metadata references “2013 Q4,” but the supplied filing is the fiscal 2014 Form 10-K, not a 2013 quarterly filing. Fiscal 2013 ended February 1, 2014; fiscal 2012 included 53 weeks.
Business Context
Macy’s is an omnichannel retailer operating Macy’s and Bloomingdale’s stores, websites and mobile applications. As of January 31, 2015, the Company operated 823 stores in 45 states, the District of Columbia, Guam and Puerto Rico, including 13 Bloomingdale’s Outlet stores. Merchandise categories were approximately 38% feminine accessories, intimate apparel, shoes and cosmetics; 23% feminine apparel; 23% men’s and children’s; and 16% home and miscellaneous.
The business is highly seasonal, with a disproportionate share of sales, operating income and operating cash flow generated in the second half of the fiscal year, particularly during November and December.
Financial Performance and Position
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $28.105 billion | $27.931 billion | 0.6% increase |
| Comparable sales, owned basis | 0.7% increase | 1.9% increase | Decelerated |
| Gross margin | $11.242 billion; 40.0% | $11.206 billion; 40.1% | 10-basis-point rate decline |
| Operating income | $2.800 billion; 10.0% | $2.678 billion; 9.6% | 4.6% increase |
| Net income | $1.526 billion | $1.486 billion | 2.7% increase |
| Diluted EPS | $4.22 | $3.86 | 9.3% increase |
| Adjusted diluted EPS | $4.40 | $4.00 | 10% increase |
| Adjusted EBITDA | $3.923 billion; 14.0% of sales | $3.786 billion; 13.6% of sales | 40-basis-point improvement |
| ROIC | 22.4% | 21.5% | 90-basis-point improvement |
| Net cash from operating activities | $2.709 billion | $2.549 billion | 6.3% increase |
| Capital expenditures | $1.068 billion | $863 million | 23.8% increase |
Cost of sales increased to 60.0% of sales from 59.9%, primarily reflecting continued omnichannel growth and the effect of free shipping. SG&A declined to 29.7% of sales from 30.2%, aided by lower retirement costs, higher credit-operations income and property-sale gains, partly offset by increased omnichannel investment and depreciation.
Income from credit operations increased to $776 million from $731 million. The effective tax rate was 36.2%, compared with 35.1% in fiscal 2013.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $2.246 billion at January 31, 2015, compared with $2.273 billion a year earlier.
- Investing cash outflow was $970 million, including $770 million for property and equipment and $298 million for capitalized software.
- Financing cash outflow was $1.766 billion, including $1.901 billion of share repurchases, $421 million of dividends and $870 million of debt repayments, partly offset by $1.044 billion of debt issuance.
- Short-term debt was $76 million and long-term debt was $7.265 billion at year-end, compared with $463 million and $6.714 billion, respectively, in the prior year.
- The Company had a $1.5 billion unsecured revolving credit facility, expandable to $1.75 billion subject to lender commitments, expiring May 10, 2018. No borrowings were outstanding under the facility during 2014.
- The interest coverage ratio was 9.68 versus a minimum covenant of 3.25, and the leverage ratio was 1.83 versus a maximum covenant of 3.75.
- Contractual obligations totaled $20.793 billion, including $7.165 billion of short- and long-term debt, $5.165 billion of debt interest and $3.567 billion of operating leases.
Material Changes Versus the Prior Comparable Period
- Sales growth slowed to 0.6% from 0.9%, while owned comparable-sales growth declined to 0.7% from 1.9%.
- Operating margin improved to 10.0% from 9.6%; adjusted operating margin increased to 10.3% from 9.9%.
- Net cash from operations increased by $160 million, supported by higher earnings and a decrease in merchandise inventories versus an inventory increase in 2013.
- SG&A declined by $85 million. Retirement expenses fell to $63 million from $235 million as the Company transitioned away from defined-benefit pension accruals for future service.
- Impairments, store-closing and other costs were $87 million, including $46 million of severance and $33 million of asset impairments, compared with $88 million in 2013.
- The Company issued $1.050 billion of debt, including $550 million of 4.5% senior notes due 2034 and $500 million of 3.625% senior notes due 2024. It redeemed $407 million of 7.875% senior notes due 2015 and recorded a $17 million early-retirement premium.
- The Company repurchased 31.9 million shares for approximately $1.9 billion, compared with 33.6 million shares for $1.57 billion in 2013. Repurchase authorization remaining at year-end was $1.032 billion.
- The quarterly dividend was increased to an annualized rate of $1.25 per share, a 25% increase.
- Store count declined from 840 to 823, reflecting five openings and 22 closures or consolidations.
Guidance, Outlook and Management Commentary
- For fiscal 2015, management assumed total sales growth of approximately 1%, owned and owned-plus-licensed comparable-sales growth of approximately 2%, diluted EPS of $4.70 to $4.80 and capital expenditures of approximately $1.2 billion.
- The Company expected to fund capital expenditures and other requirements with cash on hand and operating cash flow.
- Planned investments included new stores, remodels, technology, omnichannel capabilities, distribution improvements and a new direct-to-customer fulfillment center in Tulsa County, Oklahoma.
- The Company completed the approximately $210 million cash acquisition of Bluemercury, Inc. on March 9, 2015, after the fiscal year-end.
- Management’s principal strategies were My Macy’s localization, omnichannel retailing and customer centricity through the Magic Selling program. January 2015 restructuring initiatives targeted merchandising, marketing, field operations and store productivity.
- Inventory levels and anticipated fiscal 2015 results were affected by delayed receipts related to the West Coast port shutdown and labor dispute.
Risks, Contingencies and Unusual Items
- Key risks include intense competition, changing consumer preferences, discretionary-spending volatility, economic conditions, weather and natural disasters, supply-chain disruptions, foreign sourcing, import duties, cybersecurity and privacy breaches.
- Pension and other benefit obligations remain sensitive to interest rates, plan-asset returns and actuarial assumptions. The funded status of the Pension Plan deteriorated to a $330 million deficit from a $73 million surplus, principally because of lower discount rates and actuarial losses.
- Unrecognized actuarial losses were $1.397 billion for the Pension Plan and $341 million for the SERP. Management expected approximately $49 million of related amortization to affect 2015 pension and SERP costs.
- The Company had $155 million of long-term unrecognized tax benefits and $49 million of related interest and penalties excluded from the contractual-obligations table because settlement timing could not be reliably estimated.
- Debt agreements contain financial covenants, cross-default provisions and, under specified change-of-control and below-investment-grade conditions, potential offers to repurchase approximately $4.3 billion of senior notes at 101% of principal plus accrued interest.
- Legal proceedings were described as ordinary-course matters that management did not expect to have a material adverse effect on financial position or results of operations.
- Fiscal 2014 included $87 million of restructuring, store-closing and impairment costs and a $17 million debt-retirement premium. Management also reported $92 million of gains on sales of office buildings and surplus properties.
Investor Verification Checklist
- Verify the reporting period: the supplied document is the fiscal 2014 Form 10-K, not a 2013 Q4 filing.
- Reconcile GAAP EPS of $4.22 with adjusted EPS of $4.40 and review the excluded restructuring, impairment and debt-retirement items.
- Assess whether approximately 2% comparable-sales growth and $4.70–$4.80 diluted EPS guidance were achieved in subsequent filings.
- Evaluate the sustainability of earnings contributions from credit operations, property-sale gains and lower pension expense.
- Monitor inventory, gross-margin pressure from free shipping, omnichannel fulfillment costs and the effects of port-related receipt delays.
- Review debt maturities, covenant calculations, refinancing needs and the effect of share repurchases and dividends on liquidity.
- Assess pension funding exposure, actuarial assumptions and the impact of the $670 million combined unrecognized pension and SERP actuarial losses.
- Review the Bluemercury acquisition, integration costs and its contribution to subsequent sales and profitability.