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M > SEC Filings for M > Form 10-Q on 9-Dec-2013All Recent SEC Filings

Show all filings for MACY'S, INC.

Form 10-Q for MACY'S, INC.


9-Dec-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 "third quarter of 2013" and "third quarter of 2012" are to the Company's 13-week fiscal periods ended November 2, 2013 and October 27, 2012, respectively, and all references to "2013" and "2012" are to the Company's 39-week fiscal periods ended November 2, 2013 and October 27, 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 November 2, 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 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, opened a Macy's replacement store in Bay Shore, New York and opened a new Bloomingdale's Outlet store in Rosemont, Illinois. In addition, a new Bloomingdale's store in Glendale, California opened in early November 2013. A Macy's store was closed in St. Louis, Missouri and the Macy's men's and furniture store in Sacramento, California was consolidated into a nearby full-line store during 2013. During 2012 and including November 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; Garden City, New York; Grand Prairie, Texas; Livermore, California; and Merrimack, New Hampshire.


MACY'S, INC.

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 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 Third Quarter of 2013 and the Third Quarter of 2012
                                                   Third Quarter of 2013              Third Quarter of 2012
                                                   Amount        % to Sales           Amount        % to Sales
                                                         (dollars in millions, except per share figures)
Net sales                                      $     6,276                        $     6,075
Increase in sales                                      3.3    %                           3.8    %
Increase in comparable sales                           3.5    %                           3.7    %
Cost of sales                                       (3,817 )         (60.8 ) %         (3,672 )         (60.4 ) %
Gross margin                                         2,459            39.2   %          2,403            39.6   %
Selling, general and administrative expenses        (2,099 )         (33.5 ) %         (2,078 )         (34.2 ) %
Operating income                                       360             5.7   %            325             5.4   %
Interest expense - net                                 (96 )                             (103 )
Income before income taxes                             264                                222
Federal, state and local income tax expense            (87 )                              (77 )
Net income                                     $       177             2.8   %    $       145             2.4   %

Diluted earnings per share                     $      0.47                        $      0.36

Net Income
Net income for the third quarter of 2013 increased $32 million or 22.1% compared to the third quarter of 2012, reflecting the benefits of the key strategies at Macy's and lower net interest expense.
Net Sales
Net sales for the third quarter of 2013 increased $201 million or 3.3% compared to the third quarter of 2012. The Company benefited from the successful execution of the My Macy's localization, Omnichannel and MAGIC selling strategies. Geographically, sales in the third quarter of 2013 were strongest in the southern regions and the northeast. Bloomingdale's also had strong sales during the third quarter of 2013. By family of business, sales in the third quarter of 2013 were stronger in women's apparel and center core, including handbags, cosmetics, fine jewelry, intimate apparel and boots. Men's active, tailored clothing and cold weather merchandise also had strong sales in the third quarter of 2013, as did furniture, mattresses, textiles and housewares. Sales in the third quarter of 2013 were less strong in juniors, watches and luggage.


MACY'S, INC.

On a comparable basis, net sales for the third quarter of 2013 were up 3.5% compared to the third quarter of 2012. Together with sales from departments licensed to third parties, third quarter of 2013 sales on a comparable basis were up 4.6%. (See page 24 for a reconciliation of this non-GAAP measure to the most comparable GAAP measure and other important information.) The Company calculates comparable sales as sales from stores in operation throughout 2012 and 2013 and all Internet sales. The Company licenses third parties to operate certain departments in its stores and receives commissions from these third parties based on a percentage of their net sales. Neither the licensed department sales nor the commissions received are included in the calculation of comparable sales. 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 the third quarter of 2013 increased $145 million from the third quarter of 2012. The cost of sales rate as a percent to net sales was 40 basis points higher, compared to the third quarter of 2012, reflecting higher markdowns as a percent to net sales, 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 third quarter of 2013 increased $21 million or 1.0% from the third quarter of 2012. The SG&A rate as a percent to net sales was 70 basis points lower in the third quarter of 2013, as compared to the third quarter of 2012, reflecting increased net sales. SG&A expenses in the third quarter of 2013 were impacted by continued investments in the Company's omnichannel operations and additional marketing expense, partially offset by lower depreciation and amortization expense and higher income from credit operations. Income from credit operations was $170 million in the third quarter of 2013, compared to $162 million in the third 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 for the fourth quarter of 2013 compared to the fourth quarter of 2012 is expected to be more comparable to the period-over-period increase experienced for the third quarter of 2013, as opposed to the greater period-over-period increases experienced for the first and second quarters of 2013.
Net Interest Expense
Net interest expense for the third quarter of 2013 decreased $7 million from the third quarter of 2012. Net interest expense for the third quarter of 2013 benefited from lower rates on outstanding borrowings as compared to the third quarter of 2012.
Effective Tax Rate
The Company's effective tax rate of 33.0% for the third quarter of 2013 and 34.5% for the third 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, and also from the benefit of tax credits.


                                  MACY'S, INC.

Comparison of the 39 Weeks Ended November 2, 2013 and October 27, 2012
                                                         2013                          2012
                                                                 % to
                                                  Amount         Sales         Amount      % to Sales
                                                     (dollars in millions, except per share figures)
Net sales                                      $   18,729                    $ 18,336
Increase in sales                                     2.1    %                    3.7   %
Increase in comparable sales                          2.2    %                    3.7   %
Cost of sales                                     (11,261 )     (60.1 ) %     (10,984 )        (59.9 ) %
Gross margin                                        7,468        39.9   %       7,352           40.1   %
Selling, general and administrative expenses       (6,139 )     (32.8 ) %      (6,082 )        (33.2 ) %
Operating income                                    1,329         7.1   %       1,270            6.9   %
Interest expense - net                               (289 )                      (320 )
Income before income taxes                          1,040                         950
Federal, state and local income tax expense          (365 )                      (345 )
Net income                                     $      675         3.6   %    $    605            3.3   %

Diluted earnings per share                     $     1.74                    $   1.45

Net Income
Net income for 2013 increased $70 million or 11.6% compared to net income for 2012, reflecting the benefits of the key strategies at Macy's and lower net interest expense.
Net Sales
Net sales for 2013 increased $393 million or 2.1% compared to 2012. 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, furniture and mattresses. Sales in 2013 were less strong in juniors.
On a comparable basis, net sales for 2013 were up 2.2% compared to 2012. Together with sales from departments licensed to third parties, 2013 sales on a comparable basis were up 3.1%. (See page 24 for a reconciliation of this non-GAAP measure to the most comparable GAAP measure and other important information.) The Company calculates comparable sales as sales from stores in operation throughout 2012 and 2013 and all Internet sales. The Company licenses third parties to operate certain departments in its stores and receives commissions from these third parties based on a percentage of their net sales. Neither the licensed department sales nor the commissions received are included in the calculation of comparable sales. 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 $277 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.


MACY'S, INC.

Selling, General and Administrative Expenses SG&A expenses for 2013 increased $57 million or 0.9% from 2012. The SG&A rate as a percent to net sales was 40 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 $513 million in 2013, compared to $451 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 for the fourth quarter of 2013 compared to the fourth quarter of 2012 is expected to be more comparable to the period-over-period increase experienced for the third quarter of 2013, as opposed to the greater period-over-period increases experienced for the first and second quarters of 2013.
Net Interest Expense
Net interest expense for 2013 decreased $31 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 35.1% for 2013 and 36.3% 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, and also from the benefit of tax credits.

Important Information Regarding Non-GAAP Financial Measures The Company reports its financial results in accordance with generally accepted accounting principles (GAAP). However, management believes that certain non-GAAP financial measures provide users of the Company's financial information with additional useful information. See the table below for supplemental financial data and a corresponding reconciliation to the most directly comparable GAAP financial measure. The Company's non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, the Company's financial results prepared in accordance with GAAP. Certain of the items that may be excluded or included in these non-GAAP financial measures may be significant items that could impact the Company's financial position, results of operations and cash flows and should therefore be considered in assessing the Company's actual financial condition and performance. The methods used by the Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies.
The Company believes that providing comparable sales growth including the impact of growth in comparable sales of departments licensed to third parties supplementally to its results of operations calculated in accordance with generally accepted accounting principles provides useful information to investors. In particular, the Company believes that this supplemental information assists in evaluating the Company's ability to generate sales growth, whether through owned businesses or departments licensed to third parties, on a comparable basis, and in evaluating the impact of changes in the manner in which certain departments are operated (e.g. the conversion in 2013 of most of the Company's previously owned athletic footwear business to licensed Finish Line shops).

                                                                  Third Quarter of
                                                                        2013             2013

Increase in comparable sales (Note 1)                                  3.5 %             2.2 %
Impact of growth in comparable sales of departments licensed
to third parties (Note 2)                                              1.1               0.9
Comparable sales growth including impact of growth in
comparable sales of departments
licensed to third parties                                              4.6 %             3.1 %

Notes:
(1) Represents the period-to-period change in net sales from stores in operation throughout 2013 and 2012 and all net Internet sales, excluding commissions from departments licensed to third parties.

(2) Represents the impact on comparable sales of including the sales of departments licensed to third parties occurring in stores in operation throughout 2013 and 2012 and via the Internet in the calculation. The Company licenses third parties to operate certain departments in its stores and online and receives commissions from these third parties based on a percentage of their net sales. In its financial statements prepared in conformity with GAAP, the Company includes these commissions (rather than sales of the departments licensed to third parties) in its net sales. The Company does not, however, include any amounts in respect of licensed department sales in its comparable sales in accordance with GAAP.


MACY'S, INC.

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 $819 million, compared to $889 million provided in 2012, reflecting a higher increase in merchandise inventories, partially offset by a higher increase in merchandise accounts payable and higher net income in 2013. The increase in inventory, net of payables, was caused by a calendar shift resulting from the 53rd week in fiscal 2012. The Company aims to have inventory in the stores on the same calendar date regardless of when it falls in the fiscal calendar to coincide with when customers shop.
Investing Activities
Net cash used by investing activities was $541 million for 2013, compared to net cash used by investing activities of $615 million for 2012. Investing activities for 2013 include purchases of property and equipment totaling $381 million and capitalized software of $180 million, compared to purchases of property and equipment totaling $464 million and capitalized software of $169 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 $943 million for 2013, including $1,228 million for the acquisition of the Company's common stock, primarily under its share repurchase program, the payment of $267 million of cash dividends and the repayment of $121 million of debt, partially offset by the issuance of $400 million of debt, $210 million from the issuance of common stock, primarily related to the exercise of stock options, and an increase in outstanding checks of $73 million. The debt repaid during 2013 included $109 million of 7.625% senior debentures due August 15, 2013 paid at maturity. On September 6, 2013, the Company issued $400 million aggregate principal amount of 4.375% senior notes due 2023. The proceeds will be used for general corporate purposes, which may include working capital, capital expenditures, retirement of indebtedness and repurchasing outstanding common stock.
During 2013, the Company repurchased approximately 27.6 million shares of its common stock pursuant to existing stock purchase authorizations for a total of approximately $1,254 million. As of November 2, 2013, the Company had $1,748 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.
Net cash used by the Company for financing activities was $1,837 million for 2012, and included the repayment of $803 million of debt, $1,018 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 and the payment of $246 million of cash dividends, partially offset by the issuance of $192 million of common stock, primarily related to the exercise of stock options, and an increase in outstanding checks of $38 million. 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 November 2, 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 third quarter of 2013 was 9.13 and its leverage ratio at November 2, 2013 was 1.87, in each case as calculated in accordance with the credit agreement.
On October 25, 2013, the Company's board of directors declared a quarterly dividend of 25 cents per share on its common stock, payable January 2, 2014 to Macy's shareholders of record at the close of business on December 13, 2013.


MACY'S, INC.

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 . . .

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