Macy’s, Inc. Form 10-K Summary
Filing and period: Annual report for the fiscal year ended February 1, 2014, filed April 2, 2014. The request metadata identifies “2012 Q4,” but the supplied filing is the fiscal 2013 Form 10-K; fiscal 2013 had 52 weeks and fiscal 2012 had 53 weeks. Macy’s operated approximately 840 stores and related websites under the Macy’s and Bloomingdale’s brands in 45 states, the District of Columbia, Guam and Puerto Rico.
Financial performance and position
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Net sales | $27.931 billion | $27.686 billion | Up 0.9% |
| Comparable sales | Up 1.9% | Up 3.7% | Decelerated |
| Gross margin | $11.206 billion; 40.1% | $11.148 billion; 40.3% | Rate down 20 bps |
| Operating income | $2.678 billion; 9.6% | $2.661 billion; 9.6% | Up $17 million |
| Net income | $1.486 billion; 5.3% | $1.335 billion; 4.8% | Up 11.3% |
| Diluted EPS | $3.86 | $3.24 | Up 19.1% |
| Operating cash flow | $2.549 billion | $2.179 billion | Up $370 million |
| Capital expenditures | $863 million | $942 million | Down $79 million |
| Cash and equivalents | $2.273 billion | $1.836 billion | Up $437 million |
| Total debt | $7.191 billion | $6.930 billion | Up $261 million |
| Shareholders’ equity | $6.249 billion | $6.051 billion | Up $198 million |
Fiscal 2013 adjusted operating income, excluding specified items, was $2.766 billion, or 9.9% of sales; adjusted diluted EPS was $4.00; adjusted EBITDA was $3.786 billion, or 13.6% of sales; and ROIC was 21.5%. These are non-GAAP measures and should be evaluated with the related reconciliations.
Fourth-quarter fiscal 2013 net sales were $9.202 billion, compared with $9.350 billion in the prior-year quarter. Fourth-quarter net income was $811 million versus $730 million, and diluted EPS was $2.16 versus $1.83. The fourth quarter included $88 million of impairments, store-closing and other costs.
Material changes versus the prior comparable period
- Sales growth slowed partly because fiscal 2013 had one fewer week than fiscal 2012. Comparable sales increased 1.9%, while comparable sales including licensed departments increased 2.8%.
- Net income and EPS improved through higher income from credit operations, lower depreciation and amortization, lower interest expense, property-sale gains and expense management. These benefits were partly offset by increased omnichannel investment and free-shipping costs.
- Cost of sales increased as a percentage of sales from 59.7% to 59.9%, primarily due to omnichannel growth and free shipping. SG&A declined to 30.2% of sales from 30.7%.
- Credit-operation income increased to $731 million from $663 million. Advertising expense, net of vendor allowances, increased to $1.166 billion from $1.123 billion.
- The Company recorded $88 million of impairments, severance and related costs in fiscal 2013, compared with $5 million in fiscal 2012. The 2013 amount included $43 million of severance, $39 million of asset impairments and $6 million of other costs.
- Operating cash flow increased to $2.549 billion, aided by higher net income and the absence of the $150 million pension contribution made in fiscal 2012.
- The Company repurchased 33.6 million shares for approximately $1.570 billion and paid $359 million of dividends in fiscal 2013. Approximately $1.432 billion remained under the repurchase authorization at year-end.
Debt, liquidity and commitments
- Year-end cash was $2.273 billion. 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 revolving borrowings were outstanding during fiscal 2013.
- The credit agreement required an interest-coverage ratio of at least 3.25 and a leverage ratio of no more than 3.75. Reported ratios were 9.40 and 1.85, respectively, providing substantial covenant headroom at year-end.
- Fiscal 2013 included issuance of $400 million of 4.375% senior notes due 2023 and repayment of $124 million of debt, including $109 million of debentures at maturity.
- Contractual obligations totaled $19.456 billion, including $6.983 billion of debt principal, $4.909 billion of debt interest, $2.982 billion of lease payments and $4.548 billion of other obligations. The filing separately identifies $147 million of unrecognized tax benefits and $51 million of related interest and penalties not included in the contractual-obligations table because settlement timing could not be reliably estimated.
- Management stated that cash on hand, operating cash flow, the credit facility and other capital resources should cover reasonably foreseeable working capital, capital expenditures, debt service and other requirements.
Guidance, outlook and management commentary
- For fiscal 2014, management projected comparable-sales growth of approximately 2.5% to 3.0%, diluted EPS of $4.40 to $4.50 and capital expenditures of approximately $1.050 billion.
- Planned capital spending was focused on store remodels and maintenance, the Herald Square renovation, technology and omnichannel initiatives, and distribution improvements, including a new direct-to-customer fulfillment center in Tulsa County, Oklahoma.
- The Company expected nearly all Macy’s stores to fulfill orders from stores or online during fiscal 2014, compared with 500 stores at fiscal 2013 year-end and 292 stores at fiscal 2012 year-end. Nearly all stores were also expected to support online order pickup.
- Management’s principal strategies were My Macy’s localization, omnichannel expansion and customer centricity through the Magic Selling program.
- Management did not anticipate a pension contribution in fiscal 2014. However, defined benefit plans remained sensitive to interest rates, asset returns and actuarial assumptions; unrecognized pension and SERP losses totaled $1.107 billion at year-end.
Risks, contingencies and unusual items
- Key risks include intense competition from department stores, specialty and discount retailers, mass merchants and online channels; changes in consumer spending and preferences; weather and natural disasters; supply-chain disruption; foreign sourcing, tariffs and trade restrictions; labor and benefit costs; and capital-market access.
- Cybersecurity, privacy breaches and computer-system failures could disrupt operations, result in litigation or regulatory costs, and damage customer relationships and reputation.
- Debt agreements contain financial covenants and cross-default provisions. A covenant breach could permit acceleration of borrowings and, in specified circumstances, other debt.
- Goodwill remained $3.743 billion after cumulative impairment charges of $5.382 billion recorded in fiscal 2008. Future adverse changes in consumer spending, market value or operating assumptions could result in additional impairment.
- The Company announced five store closures and cost-reduction initiatives in January 2014. It also reported $39 million of asset impairment charges and $43 million of severance in fiscal 2013.
- The Company was involved in ordinary-course litigation and stated that it did not expect current proceedings to have a material adverse effect. Tax audits and unrecognized tax benefits remained subject to uncertainty, although management believed adequate reserves had been recorded.
- KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective.
Investor verification checklist
- Confirm the applicable period: the supplied filing is fiscal 2013, not a 2012 fourth-quarter filing.
- Reconcile GAAP EPS of $3.86 with adjusted EPS of $4.00 and assess the recurring nature of the excluded items.
- Evaluate whether the projected fiscal 2014 sales and EPS guidance was achieved and whether omnichannel investment improved sales without further compressing gross margin.
- Review debt maturities, covenant calculations, refinancing needs and the distinction between reported debt and contractual obligations.
- Assess the sustainability of cash returns, including $1.570 billion of share repurchases and the increased dividend, against capital expenditures, pension obligations and seasonal working-capital needs.
- Monitor goodwill, store-impairment assumptions, pension sensitivity, tax exposures and the Company’s cybersecurity and supply-chain controls.