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M > SEC Filings for M > Form 10-Q on 5-Sep-2013All Recent SEC Filings

Show all filings for MACY'S, INC.

Form 10-Q for MACY'S, INC.


5-Sep-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

For purposes of the following discussion, all references to "second quarter of 2013" and "second quarter of 2012" are to the Company's 13-week fiscal periods ended August 3, 2013 and July 28, 2012, respectively, and all references to "2013" and "2012" are to the Company's 26-week fiscal periods ended August 3, 2013 and July 28, 2012, respectively.
The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes included elsewhere in this report, as well as the financial and other information included in the 2012 10-K. The following discussion contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed below and elsewhere in this report (particularly in "Forward-Looking Statements") and in the 2012 10-K (particularly in "Risk Factors").
Overview
The Company is an omnichannel retail organization operating stores and websites under two brands (Macy's and Bloomingdale's) that sell a wide range of merchandise, including apparel and accessories (men's, women's and children's), cosmetics, home furnishings and other consumer goods. The Company's operations include approximately 840 stores, including thirteen Bloomingdale's Outlets, in 45 states, the District of Columbia, Guam and Puerto Rico, as well as macys.com and bloomingdales.com. In addition, Bloomingdale's in Dubai, United Arab Emirates is operated under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC.
The Company is focused on three key strategies for continued growth in sales, earnings and cash flow in the years ahead: (i) maximizing the My Macy's localization initiative; (ii) driving the omnichannel business; and
(iii) embracing customer centricity, including engaging customers on the selling floor through the MAGIC Selling program. Through the My Macy's localization initiative, the Company has invested in talent, technology and marketing which ensures that core customers surrounding each Macy's store find merchandise assortments, size ranges, marketing programs and shopping experiences that are custom-tailored to their needs. My Macy's has provided for more local decision-making in every Macy's community, and involves tailoring merchandise assortments, space allocations, service levels, visual merchandising and special events on a store-by-store basis. The Company's omnichannel strategy allows customers to shop seamlessly in stores, online and via mobile devices. A pivotal part of the omnichannel strategy is the Company's ability to allow associates in any store to sell a product that may be unavailable locally by selecting merchandise from other stores or online fulfillment centers for shipment to the customer's door. Likewise, the Company's online fulfillment centers can draw on store inventories nationwide to fill orders that originate on the Internet or via mobile devices. As of August 3, 2013, approximately 500 Macy's stores are fulfilling orders from other stores, the Internet and mobile devices, compared to 292 stores as of February 2, 2013. Macy's MAGIC Selling program is an approach to customer engagement that helps Macy's to better understand the needs of customers, as well as to provide options and advice. This comprehensive ongoing training and coaching program is designed to improve the in-store shopping experience. During 2012, the Company opened new Macy's stores in Milwaukee, Wisconsin and Salt Lake City, Utah and new Bloomingdale's Outlet stores in Dallas, Texas and Merrimack, New Hampshire. During 2013, the Company opened new Macy's stores in Gurnee, Illinois and Victorville, California, expanded into an additional Macy's location in an existing mall in Las Vegas, Nevada and opened a new Bloomingdale's Outlet store in Rosemont, Illinois. A Macy's store was closed in St. Louis, Missouri during 2013. The Company intends to open a Macy's replacement store in Bay Shore, New York and a new Bloomingdale's store in Glendale, California during the remainder of fiscal 2013. The Company's operations are impacted by competitive pressures from department stores, specialty stores, mass merchandisers, Internet websites and all other retail channels. The Company's operations are also impacted by general consumer spending levels, including the impact of general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, the costs of basic necessities and other goods and the effects of weather or natural disasters and other factors over which the Company has little or no control. In recent years, consumer spending levels have been affected to varying degrees by a number of factors, including modest economic growth, a slowly improving housing market, a rising stock market, uncertainty regarding governmental spending and tax policies, high unemployment levels and tightened consumer credit. These factors have affected to varying degrees


MACY'S, INC.

the amount of funds that consumers are willing and able to spend for discretionary purchases, including purchases of some of the merchandise offered by the Company.
The effects of economic conditions have been, and may continue to be, experienced differently, or at different times, in the various geographic regions in which the Company operates, in relation to the different types of merchandise that the Company offers for sale, or in relation to the Company's Macy's-branded and Bloomingdale's-branded operations. All economic conditions, however, ultimately affect the Company's overall operations.
Based on its assessment of current and anticipated market conditions and its recent performance, the Company is assuming that its comparable sales in fiscal 2013 will increase in the range of 2.0% to 2.9% from 2012 levels and that its diluted earnings per share in fiscal 2013 will be in the range of $3.80 to $3.90.

Results of Operations
Comparison of the Second Quarter of 2013 and the Second Quarter of 2012
                                                  Second Quarter of 2013             Second Quarter of 2012
                                                   Amount        % to Sales           Amount        % to Sales
                                                         (dollars in millions, except per share figures)
Net sales                                      $     6,066                        $     6,118
Increase (decrease) in sales                          (0.8 )  %                           3.0    %
Increase (decrease) in comparable sales               (0.8 )  %                           3.0    %
Cost of sales                                       (3,533 )         (58.2 ) %         (3,555 )         (58.1 ) %
Gross margin                                         2,533            41.8   %          2,563            41.9   %
Selling, general and administrative expenses        (1,999 )         (33.0 ) %         (2,009 )         (32.8 ) %
Operating income                                       534             8.8   %            554             9.1   %
Interest expense - net                                 (96 )                             (105 )
Income before income taxes                             438                                449
Federal, state and local income tax expense           (157 )                             (170 )
Net income                                     $       281             4.6   %    $       279             4.5   %

Diluted earnings per share                     $      0.72                        $      0.67

Net Income
Net income for the second quarter of 2013 increased $2 million compared to the second quarter of 2012, reflecting lower sales and gross margin, offset by lower selling, general and administrative expenses, net interest expense and income tax expense.
Net Sales
Net sales for the second quarter of 2013 decreased $52 million or 0.8% compared to the second quarter of 2012. On a comparable basis, net sales for the second quarter of 2013 were down 0.8% compared to the second quarter of 2012. Comparable sales for the second quarter of 2013 were negatively impacted by a calendar shift in a promotional event, the conversion of certain businesses to licensed departments and the introduction of new licensed brands. Sales in the second quarter of 2013 at Macy's were weaker across the country, although less so in the southern regions and Hawaii. Bloomingdale's had stronger sales during the second quarter of 2013 and sales from the Company's Internet businesses were strong relative to the second quarter of 2012. By family of business, sales in the second quarter of 2013 were stronger in handbags, active apparel and furniture and mattresses. Sales in the second quarter of 2013 were less strong in juniors and shoes. The Company calculates comparable sales as sales from stores in operation throughout 2012 and 2013 and all Internet sales. Comparable sales exclude licensed department income, shipping and handling fees, sales of private brand goods directly to third party retailers and sales of excess inventory to third parties. Stores undergoing remodeling, expansion or relocation remain in the comparable sales calculation unless the store is closed for a significant period of time. Definitions and calculations of comparable sales figures differ among companies in the retail industry.


MACY'S, INC.

Cost of Sales
Cost of sales for the second quarter of 2013 decreased $22 million from the second quarter of 2012. The cost of sales rate as a percent to net sales was 10 basis points higher, compared to the second quarter of 2012, reflecting additional markdowns to clear seasonal merchandise, as well as the growth in the omnichannel business and the resulting impact of free shipping. The application of the last-in, first-out (LIFO) retail inventory method did not result in the recognition of any LIFO charges or credits affecting cost of sales in either period.
Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses for the second quarter of 2013 decreased $10 million or 0.5% from the second quarter of 2012. The SG&A rate as a percent to net sales was 20 basis points higher in the second quarter of 2013, as compared to the second quarter of 2012, reflecting the decrease in net sales. SG&A expenses in the second quarter of 2013 were impacted by continued investments in the Company's omnichannel operations, partially offset by higher income from credit operations. Income from credit operations was $177 million in the second quarter of 2013, compared to $146 million in the second quarter of 2012, reflecting continued improvement in collection rates. The Company expects to continue to experience higher income from credit operations in the near term, however the increase over last year is expected to be significantly lower in the third and fourth quarters of 2013 as compared to the first and second quarters of 2013.
Net Interest Expense
Net interest expense for the second quarter of 2013 decreased $9 million from the second quarter of 2012. Net interest expense for the second quarter of 2013 benefited from lower levels of borrowings and lower rates on outstanding borrowings as compared to the second quarter of 2012.
Effective Tax Rate
The Company's effective tax rate of 35.9% for the second quarter of 2013 and 38.1% for the second quarter of 2012 differ from the federal income tax statutory rate of 35%, and on a comparative basis, principally because of the effect of state and local income taxes, including the settlement of various tax issues and tax examinations.
Comparison of the 26 Weeks Ended August 3, 2013 and July 28, 2012

                                                         2013                          2012
                                                                 % to
                                                  Amount         Sales         Amount      % to Sales
                                                     (dollars in millions, except per share figures)
Net sales                                      $   12,453                    $ 12,261
Increase in sales                                     1.6    %                    3.7   %
Increase in comparable sales                          1.5    %                    3.7   %
Cost of sales                                      (7,444 )     (59.8 ) %      (7,312 )        (59.6 ) %
Gross margin                                        5,009        40.2   %       4,949           40.4   %
Selling, general and administrative expenses       (4,040 )     (32.4 ) %      (4,004 )        (32.7 ) %
Operating income                                      969         7.8   %         945            7.7   %
Interest expense - net                               (193 )                      (217 )
Income before income taxes                            776                         728
Federal, state and local income tax expense          (278 )                      (268 )
Net income                                     $      498         4.0   %    $    460            3.7   %

Diluted earnings per share                     $     1.27                    $   1.09

Net Income
Net income for 2013 increased 8.3% compared to net income for 2012, reflecting the benefits of the key strategies at Macy's and lower net interest expense.


MACY'S, INC.

Net Sales
Net sales for 2013 increased $192 million or 1.6% compared to 2012. On a comparable basis, net sales for 2013 were up 1.5% compared to 2012. Comparable sales for 2013 were negatively impacted by the conversion of certain businesses to licensed departments and the introduction of new licensed brands. The Company benefited from the successful execution of the My Macy's localization, Omnichannel and MAGIC selling strategies. Geographically, sales in 2013 were strongest in the southern regions. By family of business, sales in 2013 were strongest in handbags, active apparel, men's, home textiles, luggage, furniture and mattresses. Sales in 2013 were less strong in juniors. The Company calculates comparable sales as sales from stores in operation throughout 2012 and 2013 and all Internet sales. Comparable sales exclude licensed department income, shipping and handling fees, sales of private brand goods directly to third party retailers and sales of excess inventory to third parties. Stores undergoing remodeling, expansion or relocation remain in the comparable sales calculation unless the store is closed for a significant period of time. Definitions and calculations of comparable sales figures differ among companies in the retail industry.
Cost of Sales
Cost of sales for 2013 increased $132 million from 2012. The cost of sales rate as a percent to net sales was 20 basis points higher, compared to 2012, reflecting the growth in the omnichannel business and the resulting impact of free shipping. The application of the last-in, first-out (LIFO) retail inventory method did not result in the recognition of any LIFO charges or credits affecting cost of sales in either period. Selling, General and Administrative Expenses SG&A expenses for 2013 increased $36 million or .9% from 2012. The SG&A rate as a percent to net sales was 30 basis points lower in 2013, as compared to 2012, reflecting increased net sales. SG&A expenses in 2013 were impacted by higher selling costs as a result of higher sales and continued investments in the Company's omnichannel operations, partially offset by higher income from credit operations. Income from credit operations was $343 million in 2013, compared to $289 million in 2012, reflecting continued improvement in collection rates. The Company expects to continue to experience higher income from credit operations in the near term, however the increase over last year is expected to be significantly lower in the third and fourth quarters of 2013 as compared to the first and second quarters of 2013.
Net Interest Expense
Net interest expense for 2013 decreased $24 million from 2012. Net interest expense for 2013 benefited from lower levels of borrowings and lower rates on outstanding borrowings as compared to 2012.
Effective Tax Rate
The Company's effective tax rate of 35.9% for 2013 and 36.9% for 2012 differ from the federal income tax statutory rate of 35%, and on a comparative basis, principally because of the effect of state and local income taxes, including the settlement of various tax issues and tax examinations.

Liquidity and Capital Resources
The Company's principal sources of liquidity are cash from operations, cash on hand and the credit facility described below. Operating Activities
Net cash provided by operating activities in 2013 was $664 million, compared to $638 million provided in 2012, reflecting higher net income in 2013. Investing Activities
Net cash used by investing activities was $316 million for 2013, compared to net cash used by investing activities of $393 million for 2012. Investing activities for 2013 include purchases of property and equipment totaling $206 million and capitalized software of $110 million, compared to purchases of property and equipment totaling $310 million and capitalized software of $109 million for 2012. Purchases of property and equipment during 2012 included the purchase of two parcels of the Macy's flagship Union Square location in San Francisco. Financing Activities
Net cash used by the Company for financing activities was $760 million for 2013, including $785 million for the acquisition of the Company's common stock, primarily under its share repurchase program, the payment of $173 million of cash dividends and the repayment of $7 million of debt, partially offset by $206 million from the issuance of common stock, primarily related to the exercise of stock options, and an increase in outstanding checks of $2 million.


MACY'S, INC.

During 2013, the Company repurchased approximately 17.5 million shares of its common stock pursuant to existing stock purchase authorizations for a total of approximately $806 million. As of August 3, 2013, the Company had $2,196 million of authorization remaining under its share repurchase program. The Company may continue or, from time to time, suspend repurchases of shares under its share repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors.

On August 15, 2013, the Company repaid $109 million of 7.625% senior debentures at maturity. On September 3, 2013, the Company announced the pricing of a public offering of $400 million aggregate principal amount of senior notes due 2023 by its wholly owned subsidiary, Macy's Retail Holdings, Inc. The notes are to be issued at a price of 99.314% of par and will bear interest at a rate of 4.375% per annum. The notes are to be fully and unconditionally guaranteed on a senior unsecured basis by Macy's, Inc. The transaction is expected to close on or about September 6, 2013. The proceeds will be used for general corporate purposes, which may include working capital, capital expenditures, retirement of indebtedness and repurchasing outstanding common stock.
Net cash used by the Company for financing activities was $1,468 million for 2012, and included the repayment of $797 million of debt, $615 million for the acquisition of the Company's common stock under its share repurchase program and to cover employee tax liabilities related to stock plan activity, the payment of $165 million of cash dividends, and a decrease in outstanding checks of $43 million, partially offset by the issuance of $152 million of common stock, primarily related to the exercise of stock options. The debt repaid during 2012 included $616 million of 5.35% senior notes due March 15, 2012 paid at maturity and the early redemption on March 29, 2012 of $173 million of 8.0% senior debentures due July 15, 2012.
The Company entered into a new credit agreement with certain financial institutions on May 10, 2013 providing for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing) outstanding at any particular time. This agreement is set to expire May 10, 2018 and replaces the prior agreement which was set to expire June 20, 2015. As of August 3, 2013 and throughout all of 2013, the Company had no borrowings outstanding under its then existing credit agreements, and as of the date of this report, the Company does not expect to borrow under its new credit agreement during fiscal 2013.
The credit agreement requires the Company to maintain a specified interest coverage ratio for the latest four quarters of no less than 3.25 and a specified leverage ratio as of and for the latest four quarters of no more than 3.75. The Company's interest coverage ratio for the second quarter of 2013 was 8.89 and its leverage ratio at August 3, 2013 was 1.80, in each case as calculated in accordance with the credit agreement.
On August 23, 2013, the Company's board of directors declared a quarterly dividend of 25 cents per share on its common stock, payable October 1, 2013 to Macy's shareholders of record at the close of business on September 13, 2013. Liquidity and Capital Resources Outlook
Management believes that, with respect to the Company's current operations, cash on hand and funds from operations, together with its credit facility and other capital resources, will be sufficient to cover the Company's reasonably foreseeable working capital, capital expenditure and debt service requirements and other cash requirements in both the near term and over the longer term. The Company's ability to generate funds from operations may be affected by numerous factors, including general economic conditions and levels of consumer confidence and demand; however, the Company expects to be able to manage its working capital levels and capital expenditure amounts so as to maintain sufficient levels of liquidity. To the extent that the Company's cash balances from time to time exceed amounts that are needed to fund its immediate liquidity requirements, the Company will consider alternative uses of some or all of such excess cash. Such alternative uses may include, among others, the redemption or repurchase of debt, equity or other securities through open market purchases, privately negotiated transactions or otherwise, and the funding of pension related obligations. Depending upon its actual and anticipated sources and uses of liquidity, conditions in the capital markets and other factors, the Company will from time to time consider the issuance of debt or other securities, or other possible capital markets transactions, for the purpose of raising capital which could be used to refinance current indebtedness or for other corporate purposes including the redemption or repurchase of debt, equity or other securities through open market purchases, privately negotiated transactions or otherwise, and the funding of pension related obligations.
The Company intends from time to time to consider additional acquisitions of, and investments in, retail businesses and other complementary assets and companies. Acquisition transactions, if any, are expected to be financed from one or more of the following sources: cash on hand, cash from operations, borrowings under existing or new credit facilities and the issuance of long-term debt or other securities, including common stock.


MACY'S, INC.

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