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M > SEC Filings for M > Form 10-Q on 9-Jun-2014All Recent SEC Filings

Show all filings for MACY'S, INC.

Form 10-Q for MACY'S, INC.


9-Jun-2014

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 "first quarter of 2014" and "first quarter of 2013" are to the Company's 13-week fiscal periods ended May 3, 2014 and May 4, 2013, 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 2013 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 2013 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 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 May 2014, nearly all Macy's stores are fulfilling orders from other stores and/or online, compared to 500 Macy's stores as of February 1, 2014. Also, by August of 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. The Company did not open any new stores during the first quarter of 2014, but intends to open three new Macy's stores and one Bloomingdale's replacement store in the remainder of fiscal 2014. During the first quarter of 2013, the Company opened one new Macy's store and also expanded into an additional Macy's location in an existing mall. 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.


MACY'S, INC.

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 2014 will increase in the range of 2.5% to 3.0% from 2013 levels and that its diluted earnings per share in fiscal 2014 will be in the range of $4.40 to $4.50.

Results of Operations
Comparison of the First Quarter of 2014 and the First Quarter of 2013
                                                   First Quarter of 2014              First Quarter of 2013
                                                   Amount        % to Sales           Amount        % to Sales
                                                         (dollars in millions, except per share figures)
Net sales                                      $     6,279                        $     6,387
Increase (decrease) in sales                          (1.7 )  %                           4.0    %
Increase (decrease) in comparable sales               (1.6 )  %                           3.8    %
Cost of sales                                       (3,836 )         (61.1 ) %         (3,911 )         (61.2 ) %
Gross margin                                         2,443            38.9   %          2,476            38.8   %
Selling, general and administrative expenses        (2,000 )         (31.8 ) %         (2,041 )         (32.0 ) %
Operating income                                       443             7.1   %            435             6.8   %
Interest expense - net                                (100 )                              (97 )
Income before income taxes                             343                                338
Federal, state and local income tax expense           (119 )                             (121 )
Net income                                     $       224             3.6   %    $       217             3.4   %

Diluted earnings per share                     $       .60                        $       .55

Net Income
Net income for the first quarter of 2014 increased $7 million or 3.2% compared to the first quarter of 2013, reflecting a higher gross margin rate and lower selling, general and administrative expenses in dollars and rate, partially offset by the impact of lower net sales in the first quarter of 2014. Net Sales
Net sales for the first quarter of 2014 decreased $108 million or 1.7% compared to the first quarter of 2013. On a comparable basis, net sales for the first quarter of 2014 were down 1.6% compared to the first quarter of 2013. Together with sales of departments licensed to third parties, first quarter of 2014 sales on a comparable basis were down 0.8%. (See page 20 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.) Sales in the first quarter of 2014 were negatively impacted by a shift in the timing of a promotional event such that a portion of the resultant sales occurred after the end of the first quarter of 2014, as well as the weather. Geographically, sales in the first quarter of 2014 were stronger in the southern regions, which were impacted to a lesser degree by the weather. By family of business, sales in the first quarter of 2014 were stronger in handbags, impulse apparel for the millennial customer, active, kids and intimate apparel. There was positive momentum in juniors sales in the first quarter of 2014, and also sales of departments licensed to third parties performed well. Sales in the first quarter of 2014 were weakest in the home categories, including big ticket.


MACY'S, INC.

Cost of Sales
Cost of sales for the first quarter of 2014 decreased $75 million and the cost of sales rate as a percent to net sales of 61.1% was 10 basis points lower, compared to the first quarter of 2013. 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 first quarter of 2014 decreased $41 million or 2.0% from the first quarter of 2013. The SG&A rate as a percent to net sales of 31.8% was 20 basis points lower in the first quarter of 2014, as compared to the first quarter of 2013. SG&A expenses in the first quarter of 2014 benefited from lower retirement expenses (including Pension Plan, SERP and 401(k) expenses), the impact of the cost reduction initiatives implemented at fiscal 2013 year-end, higher income from credit operations, lower expense in sales variable areas, and lower advertising expenses due to a timing shift of advertising spend which will impact the remainder of fiscal 2014, partially offset by the continued investments in the Company's omnichannel operations. Retirement expenses were $19 million in the first quarter of 2014, compared to $58 million in the first quarter of 2013. Income from credit operations was $171 million in the first quarter of 2014, compared to $166 million in the first quarter of 2013, reflecting continued profitability of the portfolio.
Net Interest Expense
Net interest expense for the first quarter of 2014 increased $3 million from the first quarter of 2013. The increase in net interest expense for the first quarter of 2014 was due to higher levels of outstanding borrowings as compared to the first quarter of 2013.
Effective Tax Rate
The Company's effective tax rate of 34.7% for the first quarter of 2014 and 35.8% for the first quarter of 2013 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.


MACY'S, INC.

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 changes in comparable sales 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).
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. 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.

                                                               First Quarter of    First Quarter
                                                                     2014             of 2013

Increase (decrease) in comparable sales (note 1)                   (1.6 )%             3.8 %
Impact of growth in comparable sales of departments licensed
to third parties (note 2)                                           0.8  %             0.6 %
Increase (decrease) in comparable sales including impact of
growth in comparable
sales of departments licensed to third parties                     (0.8 )%             4.4 %

Notes:
(1) Represents the period-to-period percentage change in net sales from stores in operation throughout 2014 and 2013 and all net Internet sales, 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 2014 and 2013 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 (or any commissions earned on such 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 the first quarter of 2014 was $86 million, compared to $298 million provided in the first quarter of 2013, due to lower merchandise payables relating to the timing of inventory receipts and the payout of costs associated with the cost reduction initiatives implemented at fiscal 2013 year-end.
Investing Activities
Net cash used by investing activities was $96 million for the first quarter of 2014, compared to net cash used by investing activities of $107 million for the first quarter 2013. Investing activities for the first quarter of 2014 include purchases of property and equipment totaling $63 million and capitalized software of $49 million, compared to purchases of property and equipment totaling $65 million and capitalized software of $50 million for the first quarter of 2013.
Financing Activities
On May 23, 2014, the Company issued $500 million aggregate principal amount of 3.625% senior unsecured notes due 2024. The Company intends to use the proceeds of this debt to retire $453 million of 5.75% senior unsecured notes maturing July 15, 2014 and for general corporate purposes, which may include working capital, capital expenditures and the repurchase of common stock under its share repurchase program. As a result, this short-term debt was reclassified to long-term debt as of May 3, 2014.
On May 14, 2014, the Company's board of directors declared a quarterly dividend of 31.25 cents per share on its common stock, payable July 1, 2014 to Macy's shareholders of record at the close of business on June 13, 2014. This dividend is an increase from the previous quarterly dividend rate of 25 cents per share and represents the fourth increase in the dividend in the past three years. Over that period, the quarterly dividend has increased more than six-fold from 5 cents per share to 31.25 cents per share.
Net cash used by the Company for financing activities was $385 million for the first quarter 2014, including $403 million for the acquisition of the Company's common stock, primarily under its share repurchase program, the payment of $92 million of cash dividends, a decrease in outstanding checks of $11 million, and the repayment of $5 million of debt, partially offset by $126 million from the issuance of common stock, primarily related to the exercise of stock options. During the first quarter of 2014, the Company repurchased approximately 7.4 million shares of its common stock pursuant to existing stock purchase authorizations for a total of approximately $432 million. As of May 3, 2014, the Company had $1,000 million of authorization remaining under its share repurchase program. On May 14, 2014, the Company's board of directors approved an additional $1,500 million in authorization to purchase common stock, bringing the Company's remaining authorization under its share repurchase program including this increase to $2,500 million. 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 $275 million for the first quarter of 2013, including $336 million for the acquisition of the Company's common stock, primarily under its share repurchase program, the payment of $78 million of cash dividends and the repayment of $5 million of debt, partially offset by $100 million from the issuance of common stock, primarily related to the exercise of stock options, and an increase in outstanding checks of $44 million.
The Company is a party to a credit agreement with certain financial institutions that 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 first quarter of 2014 was 9.37 and its leverage ratio at May 3, 2014 was 1.85, in each case as calculated in accordance with the credit agreement.


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 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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