Macy’s, Inc. Form 10-Q Summary
Reporting period: The provided filing is for the 13 and 26 weeks ended July 29, 2017, compared with July 30, 2016. Although the request metadata identifies “2016 Q2,” the filing text clearly covers the second quarter and first half of fiscal 2017.
Business Context
Macy’s is an omnichannel retailer operating approximately 850 Macy’s, Bloomingdale’s, Bloomingdale’s The Outlet, Macy’s Backstage and bluemercury locations, together with digital channels. The company is implementing its “North Star” strategy, emphasizing customer relevance, exclusive merchandise, digital and store experiences, cost efficiency, and monetization or redevelopment of real estate.
Results are seasonal and the reported periods exclude the holiday season. Macy’s had closed or announced the closure of approximately 70 of the approximately 100 Macy’s stores targeted for closure by the end of the second quarter of 2017.
Financial Performance and Liquidity
| Metric | 13 weeks ended July 29, 2017 | 13 weeks ended July 30, 2016 | 26 weeks ended July 29, 2017 | 26 weeks ended July 30, 2016 |
|---|---|---|---|---|
| Net sales | $5,552 million | $5,866 million | $10,890 million | $11,637 million |
| Comparable sales, owned basis | (2.8%) | (2.6%) | (4.0%) | (4.4%) |
| Gross margin | 40.3% | 40.9% | 39.2% | 40.0% |
| Operating income | $254 million | $117 million | $474 million | $393 million |
| Net income attributable to Macy’s shareholders | $116 million | $11 million | $187 million | $127 million |
| Diluted EPS | $0.38 | $0.03 | $0.61 | $0.41 |
| Adjusted diluted EPS, excluding specified items | $0.48 | $0.54 | $0.71 | $0.94 |
- Second-quarter sales declined 5.4%; first-half sales declined 6.4%. Management attributed the decreases to prior-year store closures and lower comparable sales.
- Digital sales continued to grow at a double-digit rate, but lower international tourism sales pressured results.
- Gross margin declined 60 basis points in the quarter and 80 basis points for the first half, reflecting promotional activity in beauty, price competition in housewares and small electrics, and pressure in tech watches.
- SG&A expense declined 3.4% in the quarter and 4.2% for the first half, but SG&A as a percentage of sales increased 70 basis points in both comparisons.
- Net cash provided by operating activities was $536 million for the first half, compared with $560 million in the prior-year period. Investing cash outflow was $213 million, including $247 million of capital expenditures and $125 million of capitalized software, partly offset by $150 million of property dispositions.
- Financing cash outflow was $837 million, including $550 million of debt repayments and $230 million of dividends. Cash declined to $783 million from $1,297 million at fiscal year-end and $1,000 million at July 30, 2016.
- At July 29, 2017, short-term debt was $16 million and long-term debt was $6,301 million. No borrowings or letters of credit were outstanding under the $1.5 billion revolving credit facility, and no commercial paper was outstanding.
- The company reported an interest coverage ratio of 7.46 versus a minimum requirement of 3.25 and a leverage ratio of 2.36 versus a maximum requirement of 3.75.
Material Changes Versus the Prior Comparable Period
- Reported profitability improved primarily because the second quarter and first half of 2016 included $249 million of impairment and other costs, primarily related to planned store closures. No comparable charge was recorded in 2017.
- Real estate gains increased to $43 million from $21 million in the quarter and to $111 million from $35 million for the first half.
- Retirement-plan settlement charges increased to $51 million from $6 million in the quarter and to $51 million from $19 million for the first half; these charges were non-cash.
- Net interest expense declined by $18 million in the quarter and $32 million for the first half as debt declined by approximately $1.3 billion year over year.
- Despite higher GAAP EPS, adjusted EPS decreased because of lower sales and gross margin. Adjusted second-quarter EPS declined 11.1%, and adjusted first-half EPS declined 24.5%.
- Macy’s repaid $300 million of senior debentures at maturity and repurchased $247 million face value of senior notes and debentures for approximately $257 million in cash during the first half.
Outlook, Commentary, Risks and Unusual Items
- Fiscal 2017 guidance was reaffirmed: owned comparable sales down 2.2% to 3.3%, owned-plus-licensed comparable sales down 2.0% to 3.0%, and total sales down 3.2% to 4.3%. Fiscal 2017 includes a 53rd week, while comparable sales are measured on a 52-week basis.
- Adjusted fiscal 2017 diluted EPS was expected at $3.37 to $3.62, excluding anticipated retirement-plan settlement charges and debt-repurchase premiums and fees. Excluding the anticipated Union Square Men’s building gain, the range was $2.90 to $3.15.
- Management expects continued gross-margin pressure and plans to offset it through faster inventory turnover and growth in private-brand and Last Act businesses.
- The company expects an approximately $235 million gain from the Union Square Men’s building transaction in January 2018. It also has a strategic real-estate alliance with Brookfield covering approximately 50 assets.
- Macy’s opened 12 Macy’s Backstage locations in the quarter and expected seven additional locations during the remainder of fiscal 2017. It also opened 16 freestanding bluemercury locations and expected 11 more during the year.
- A merchandising and consumer-insights restructuring announced in August 2017 was expected to generate $20 million to $25 million of restructuring charges, approximately $30 million of future annual savings, and an estimated headcount reduction of approximately 100.
- Key risks include intense retail and digital competition, changing consumer shopping behavior, discretionary-spending weakness, international tourism and currency trends, weather and supply-chain disruptions, real-estate transaction execution, employee benefit costs, cybersecurity and systems failures, and the seasonal nature of the business.
- The company stated that existing cash, operating cash flow, its credit facility and other resources should cover reasonably foreseeable working-capital, capital-expenditure and debt-service needs.
Important Facts for Investors to Verify
- Confirm that the relevant filing is the fiscal 2017 second-quarter Form 10-Q, not a 2016 second-quarter filing.
- Assess underlying operating performance separately from the benefit of absent 2016 impairment charges and higher real-estate gains.
- Monitor comparable-sales trends, digital growth, promotional intensity and gross-margin recovery.
- Verify the timing and amount of anticipated Union Square and other real-estate gains and the execution of the Brookfield alliance.
- Track debt maturities, further debt repurchases, dividend capacity and compliance with credit-agreement covenants.
- Evaluate the effect of store closures, restructuring costs, retirement-plan settlement charges and announced merchandising changes on future results.
- Review the expected impact of forthcoming revenue-recognition and lease-accounting standards; the filing states that the lease standard is expected to materially affect the financial statements.