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M > SEC Filings for M > Form 10-K on 2-Apr-2014All Recent SEC Filings

Show all filings for MACY'S, INC.

Form 10-K for MACY'S, INC.


2-Apr-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

The discussion in this Item 7 should be read in conjunction with our Consolidated Financial Statements and the related notes included elsewhere in this report. The discussion in this Item 7 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 "Risk Factors" and "Forward-Looking Statements." 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 in 45 states, the District of Columbia, Guam and Puerto Rico. As of February 1, 2014, the Company's operations were conducted through Macy's, macys.com, Bloomingdale's, bloomingdales.com and Bloomingdale's Outlet which are aggregated into one reporting segment in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 280, "Segment Reporting."
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, marketing and special events on a store-by-store basis. The Company's omnichannel strategy allows customers to shop seamlessly in stores and online, via computers or 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 online, via computers or mobile devices. As of February 1, 2014, 500 Macy's stores were fulfilling orders from other stores and/or online, as compared to 292 Macy's stores as of February 2, 2013. During fiscal 2014, nearly all Macy's stores are expected to be fulfilling orders from other stores and/or online. Also in 2014, nearly all stores are expected to be fulfilling orders for pick-up related to online purchases. 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 and all other customer interactions. In fiscal 2010, the Company piloted a new Bloomingdale's Outlet store concept. Bloomingdale's Outlet stores are each approximately 25,000 square feet and offer a range of apparel and accessories, including women's ready-to-wear, men's, children's, women's shoes, fashion accessories, jewelry, handbags and intimate apparel. Additionally, in February 2010, Bloomingdale's opened in Dubai, United Arab Emirates under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC, under which the Company is entitled to a license fee in accordance with the terms of the underlying agreement, generally based upon the greater of the contractually earned or guaranteed minimum amounts. During 2012, the Company opened two new Macy's stores in Salt Lake City, UT; and Greendale, WI; and five new Bloomingdale's Outlet stores in Livermore, CA; Merrimack, NH; Garden City, NY; Grand Prairie, TX; and Dallas, TX. Also during 2012 the Company opened its new 1.3 million square foot fulfillment center in Martinsburg, WV. During 2013, the Company opened three new Macy's stores in Victorville, CA; Gurnee, IL; and Las Vegas, NV; a Macy's replacement store in Bay Shore, NY; a new Bloomingdale's store in Glendale, CA; and a new Bloomingdale's Outlet store in Rosemont, IL. The Company has announced that in 2014 it intends to open three new Macy's stores and one Bloomingdale's replacement store. Additionally, the Company has announced that in 2015 it intends to open one new Macy's store and one new Bloomingdale's store, and in 2016 it intends to open one new Macy's store and one new Bloomingdale's store.


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The Company's operations are impacted by competitive pressures from department stores, specialty stores, mass merchandisers, online retailers 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. 2013 Highlights
The Company had its fifth consecutive year of improved financial performance in 2013 despite the continued challenging macroeconomic environment. These improvements have been driven by successful implementation of the Company's key strategies.
Selected highlights of 2013 include:
Comparable sales increased 1.9%, which represents the fourth consecutive year of comparable sales growth. Comparable sales growth including the impact of growth in comparable sales of departments licensed to third parties increased 2.8%. See pages 16 to 19 for a reconciliation of this non-GAAP financial measure to the most comparable GAAP financial measure and other important information.

Operating income for fiscal 2013 was $2.766 billion or 9.9% of sales, excluding impairments, store closing and other costs, an increase of 3.8% and 30 basis points as a percent of sales over 2012 on a comparable basis. See pages 16 to 19 for a reconciliation of this non-GAAP financial measure to the most comparable GAAP financial measure and other important information.

Diluted earnings per share, excluding certain items, grew 15.6% to $4.00 in 2013. See pages 16 to 19 for a reconciliation of this non-GAAP financial measure to the most comparable GAAP financial measure and other important information.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, impairments, store closing and other costs) as a percent to net sales reached 13.6% in 2013, reflecting steady improvement toward the Company's goal of a 14% Adjusted EBITDA rate. See pages 16 to 19 for a reconciliation of this non-GAAP financial measure to the most comparable GAAP financial measure and other important information.

Return on invested capital ("ROIC"), a key measure of operating productivity, reached 21.5%, continuing an improvement trend over the past five years. See pages 16 to 19 for a reconciliation of this non-GAAP financial measure to the most comparable GAAP financial measure and other important information.

The Company repurchased 33.6 million shares of its common stock for $1,570 million in 2013, and increased its annualized dividend rate to $1.00 per share.


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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 in evaluating operating performance. Management 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 GAAP 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). Management believes that excluding certain items that may vary substantially in frequency and magnitude from diluted earnings per share and from operating income and EBITDA as percentages to sales are useful supplemental measures that assist in evaluating the Company's ability to generate earnings and leverage sales, respectively, and to more readily compare these metrics between past and future periods. Management also believes that EBITDA and Adjusted EBITDA are frequently used by investors and securities analysts in their evaluations of companies, and that such supplemental measures facilitate comparisons between companies that have different capital and financing structures and/or tax rates. In addition, management believes that ROIC is a useful supplemental measure in evaluating how efficiently the Company employs its capital. The Company uses some of these non-GAAP financial measures as performance measures for components of executive compensation.
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 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. Additionally, the amounts received by the Company on account of sales licensed to third parties are limited to commissions received on such sales. 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.
Comparable Sales Growth Including the Impact of Growth in Comparable Sales of Departments Licensed to Third Parties
The following is a tabular reconciliation of the non-GAAP financial measure comparable sales growth including the impact of growth in comparable sales of departments licensed to third parties, to GAAP comparable sales, which the Company believes to be the most directly comparable GAAP financial measure.

                                                 2013       2012       2011       2010
Increase in comparable sales (note 1)            1.9%       3.7%       5.3%       4.6%
Impact of growth in comparable sales of
departments licensed
to third parties (note 2)                        0.9%       0.3%       0.4%      (0.2)%
Comparable sales growth including the impact
of growth in comparable sales of departments
licensed to third parties                        2.8%       4.0%       5.7%       4.4%

Notes:

(1) Represents the period-to-period percentage change in net sales from stores in operation throughout the year presented and the immediately preceding year and all net Internet sales, adjusting for the 53rd week in 2012, excluding commissions from departments licensed 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 differ among companies in the retail industry.

(2) Represents the impact on comparable sales of including the sales of departments licensed to third parties occurring in stores in operation throughout the year presented and the immediately preceding year 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.


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Operating Income, Excluding Certain Items, as a Percent to Net Sales The following is a tabular reconciliation of the non-GAAP financial measure operating income, excluding certain items, as a percent to net sales to GAAP operating income as a percent to net sales, which the Company believes to be the most directly comparable GAAP financial measure.

                                              2013         2012         2011         2010         2009
                                                           (millions, except percentages)
Net sales                                  $ 27,931     $ 27,686     $ 26,405     $ 25,003     $ 23,489

Operating income                           $  2,678     $  2,661     $  2,411     $  1,894     $  1,063

Operating income as a percent to net
sales                                           9.6 %        9.6 %        9.1 %        7.6 %        4.5 %

Operating income                           $  2,678     $  2,661     $  2,411     $  1,894     $  1,063
Add back (deduct) impairments, store
closing and
other costs, gain on sale of leases and
division consolidation costs                     88            5          (25 )         25          391
Operating income, excluding certain
items                                      $  2,766     $  2,666     $  2,386     $  1,919     $  1,454
Operating income, excluding certain
items, as a
percent to net sales                            9.9 %        9.6 %        9.0 %        7.7 %        6.2 %

Diluted Earnings Per Share, Excluding Certain Items The following is a tabular reconciliation of the non-GAAP financial measure diluted earnings per share, excluding certain items, to GAAP diluted earnings per share, which the Company believes to be the most directly comparable GAAP measure.

                                             2013        2012        2011        2010        2009
Diluted earnings per share                 $  3.86     $  3.24     $  2.92     $  1.98     $  0.78
Add back the impact of impairments,
store closing
and other costs                               0.14        0.01        0.04        0.04        0.18
Add back the impact of premium on early
retirement of debt                               -        0.21           -        0.09           -
Deduct the impact of gain on sale of
leases                                           -           -       (0.08 )         -           -
Add back the impact of division
consolidation costs                              -           -           -           -        0.40
Diluted earnings per share, excluding
the impact of
impairments, store closing and other
costs, premium
on early retirement of debt, gain on
sale of leases
and division consolidation costs           $  4.00     $  3.46     $  2.88     $  2.11     $  1.36


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Adjusted EBITDA as a Percent to Net Sales The following is a tabular reconciliation of the non-GAAP financial measure earnings before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted to exclude premium on early retirement of debt, impairments, store closing and other costs, gain on sales of leases and division consolidation costs ("Adjusted EBITDA"), as a percent to net sales to GAAP net income as a percent to net sales, which the Company believes to be the most directly comparable GAAP financial measure.

                                              2013         2012         2011         2010         2009
                                                           (millions, except percentages)
Net sales                                  $ 27,931     $ 27,686     $ 26,405     $ 25,003     $ 23,489

Net income                                 $  1,486     $  1,335     $  1,256     $    847     $    329

Net income as a percent to net sales            5.3 %        4.8 %        4.8 %        3.4 %        1.4 %

Net income                                 $  1,486     $  1,335     $  1,256     $    847     $    329
Add back interest expense - net                 388          422          443          508          556
Add back premium on early retirement of
debt                                              -          137            -           66            -
Add back federal, state and local income
tax expense                                     804          767          712          473          178
Add back (deduct) impairments, store
closing and
other costs, gain on sale of leases and
division
consolidation costs                              88            5          (25 )         25          391
Add back depreciation and amortization        1,020        1,049        1,085        1,150        1,210
Adjusted EBITDA                            $  3,786     $  3,715     $  3,471     $  3,069     $  2,664
Adjusted EBITDA as a percent to net
sales                                          13.6 %       13.4 %       13.1 %       12.3 %       11.3 %


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ROIC
The Company defines ROIC as adjusted operating income as a percent to average invested capital. Average invested capital is comprised of an annual two-point (i.e., end of the previous year and the immediately preceding year) average of gross property and equipment, a capitalized value of non-capitalized leases equal to periodic annual reported net rent expense multiplied by a factor of eight and a four-point (i.e., end of each quarter within the period presented) average of other selected assets and liabilities. The calculation of the capitalized value of non-capitalized leases is consistent with industry and credit rating agency practice and the specified assets are subject to a four-point average to compensate for seasonal fluctuations.
The following is a tabular reconciliation of the non-GAAP financial measure of ROIC to operating income as a percent to property and equipment - net, which the Company believes to be the most directly comparable GAAP financial measure.

                                              2013         2012         2011         2010         2009
                                                           (millions, except percentages)
Operating income                           $  2,678     $  2,661     $  2,411     $  1,894     $  1,063

Property and equipment - net               $  8,063     $  8,308     $  8,617     $  9,160     $  9,975

Operating income as a percent to
property and
equipment - net                                33.2 %       32.0 %       28.0 %       20.7 %       10.7 %

Operating income                           $  2,678     $  2,661     $  2,411     $  1,894     $  1,063
Add back (deduct) impairments, store
closing and
other costs, gain on sale of leases and
division
consolidation costs                              88            5          (25 )         25          391
Add back depreciation and amortization        1,020        1,049        1,085        1,150        1,210
Add back rent expense, net
Real estate                                     268          258          243          235          229
Personal property                                11           11           10           10           12
Deferred rent amortization                        8            7            8            7            7
Adjusted operating income                  $  4,073     $  3,991     $  3,732     $  3,321     $  2,912

Property and equipment - net               $  8,063     $  8,308     $  8,617     $  9,160     $  9,975
Add back accumulated depreciation and
amortization                                  6,007        5,967        6,018        5,916        5,620
Add capitalized value of non-capitalized
leases                                        2,296        2,208        2,088        2,016        1,984
Add (deduct) other selected assets and
liabilities:
Receivables                                     339          322          294          317          305
Merchandise inventories                       6,065        5,754        5,596        5,211        5,170
Prepaid expenses and other current
assets                                          398          390          409          283          231
Other assets                                    662          579          528          526          497
Merchandise accounts payable                 (2,520 )     (2,362 )     (2,314 )     (2,085 )     (1,978 )
Accounts payable and accrued liabilities     (2,328 )     (2,333 )     (2,309 )     (2,274 )     (2,320 )
Total average invested capital             $ 18,982     $ 18,833     $ 18,927     $ 19,070     $ 19,484

ROIC                                           21.5 %       21.2 %       19.7 %       17.4 %       14.9 %


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Results of Operations

                                                2013                            2012 *                          2011
                                                         % to
                                         Amount         Sales            Amount       % to Sales        Amount     % to Sales
                                                          (dollars in millions, except per share figures)
Net sales                            $    27,931                      $    27,686                     $ 26,405
Increase in sales                            0.9    %                         4.9   %
Increase in comparable sales                 1.9    %                         3.7   %
Cost of sales                            (16,725 )     (59.9 )  %         (16,538 )       (59.7 ) %    (15,738 )       (59.6 ) %
Gross margin                              11,206        40.1    %          11,148          40.3   %     10,667          40.4   %
Selling, general and
administrative expenses                   (8,440 )     (30.2 )  %          (8,482 )       (30.7 ) %     (8,281 )       (31.4 ) %
Impairments, store closing and
other costs
and gain on sale of leases                   (88 )      (0.3 )  %              (5 )           -   %         25           0.1   %
Operating income                           2,678         9.6    %           2,661           9.6   %      2,411           9.1   %
Interest expense - net                      (388 )                           (422 )                       (443 )
Premium on early retirement of
debt                                           -                             (137 )                          -
Income before income taxes                 2,290                            2,102                        1,968
Federal, state and local income
tax expense                                 (804 )                           (767 )                       (712 )
Net income                           $     1,486         5.3    %     $     1,335           4.8   %   $  1,256           4.8   %

Diluted earnings per share           $      3.86                      $      3.24                     $   2.92

Supplemental Non-GAAP Financial
Measures
Comparable sales growth including
the impact
of growth in comparable sales of
departments licensed to third
parties                                      2.8    %                         4.0   %                      5.7   %
Operating income, excluding
certain items                        $     2,766         9.9    %     $     2,666           9.6   %   $  2,386           9.0   %
Diluted earnings per share,
excluding certain items              $      4.00                      $      3.46                     $   2.88
Adjusted EBITDA as a percent to
net sales                                   13.6    %                        13.4   %                     13.1   %
ROIC                                        21.5    %                        21.2   %                     19.7   %

See pages 16 to 19 for a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measure and for other important information.

Store information (at year-end):
Stores operated                              840                              841                          842
Square footage (in millions)               150.1                            150.6                        151.9
 ___________________


* 53 weeks


Table of Contents

Comparison of 2013 and 2012
Net Income
Net income for 2013 increased compared to 2012, reflecting the benefits of the key strategies at Macy's, the continued strong performance at Bloomingdale's and good expense management, including higher income from credit operations, lower depreciation and amortization expense, and gains on the sale of certain office buildings and surplus properties, partially offset by greater investments in the Company's omnichannel operations.
Net Sales
Net sales for 2013, which had one fewer week than 2012, increased $245 million or 0.9% compared to 2012. On a comparable basis, net sales for 2013 were up 1.9% compared to 2012. Together with sales of departments licensed to third parties, 2013 sales on a comparable basis were up 2.8%. (See page 16 for information regarding the Company's calculation of comparable sales, a reconciliation of the non-GAAP measure which takes into account sales of departments licensed to third parties to the most comparable GAAP measure and other important information). . . .

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