UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 

ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended October 29, 2016

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from    to

Commission file number: 1-13536
 
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Incorporated in Delaware
 
I.R.S. Employer Identification No.
 
 
13-3324058

7 West Seventh Street
Cincinnati, Ohio 45202
(513) 579-7000
and
151 West 34th Street
New York, New York 10001
(212) 494-1602

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 29, 2016
Common Stock, $0.01 par value per share
 
305,670,055 shares
 



PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MACY’S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

(millions, except per share figures)
 
 
 
 
 
 
 
 
 
 
13 Weeks Ended
 
39 Weeks Ended
 
October 29, 2016
 
October 31, 2015
 
October 29, 2016
 
October 31, 2015
Net sales
$
5,626

 
$
5,874

 
$
17,263

 
$
18,210

Cost of sales
(3,386
)
 
(3,537
)
 
(10,370
)
 
(10,947
)
Gross margin
2,240

 
2,337

 
6,893

 
7,263

Selling, general and administrative expenses
(2,071
)
 
(1,968
)
 
(6,063
)
 
(6,049
)
Impairments and other costs

 
(111
)
 
(249
)
 
(111
)
Settlement charges
(62
)
 

 
(81
)
 

Operating income
107

 
258

 
500

 
1,103

Interest expense
(82
)
 
(80
)
 
(279
)
 
(269
)
Interest income
1

 

 
3

 
1

Income before income taxes
26

 
178

 
224

 
835

Federal, state and local income tax expense
(11
)
 
(61
)
 
(85
)
 
(308
)
Net income
15

 
117

 
139

 
527

Net loss attributable to noncontrolling interest
2

 
1

 
5

 
1

Net income attributable to Macy's, Inc. shareholders
$
17

 
$
118

 
$
144

 
$
528

Basic earnings per share attributable to Macy's, Inc. shareholders
$
.05

 
$
.36

 
$
.46

 
$
1.58

Diluted earnings per share attributable to Macy's, Inc. shareholders
$
.05

 
$
.36

 
$
.46

 
$
1.56


The accompanying notes are an integral part of these Consolidated Financial Statements.

2


MACY’S, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

(millions)

 
 
 
 
 
 
 
 
 
13 Weeks Ended
 
39 Weeks Ended
 
October 29, 2016
 
October 31, 2015
 
October 29, 2016
 
October 31, 2015
Net income
$
15

 
$
117

 
$
139

 
$
527

Other comprehensive income:
 
 
 
 
 
 
 
Actuarial gain (loss) on postretirement benefit plans, before tax
3

 

 
(74
)
 

Settlement charges, before tax
62

 

 
81

 

Amortization of net actuarial loss on post employment
and postretirement benefit plans included in net
income, before tax
9

 
12

 
26

 
36

Tax effect related to items of other comprehensive
income
(29
)
 
(5
)
 
(13
)
 
(14
)
Total other comprehensive income, net of tax effect
45

 
7

 
20

 
22

Comprehensive income
60

 
124

 
159

 
549

Comprehensive loss attributable to noncontrolling interest
2

 
1

 
5

 
1

Comprehensive income attributable to
Macy's, Inc. shareholders
$
62

 
$
125

 
$
164

 
$
550


The accompanying notes are an integral part of these Consolidated Financial Statements.


3


MACY’S, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(millions)
 
 
 
 
 
 
 
 
October 29, 2016
 
January 30, 2016
 
October 31, 2015
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and cash equivalents
$
457

 
$
1,109

 
$
474

Receivables
262

 
558

 
200

Merchandise inventories
7,587

 
5,506

 
7,971

Income tax receivable
60

 

 

Prepaid expenses and other current assets
454

 
479

 
426

Total Current Assets
8,820

 
7,652

 
9,071

Property and Equipment - net of accumulated depreciation and
amortization of $5,625, $5,319 and $5,974
7,149

 
7,616

 
7,629

Goodwill
3,897

 
3,897

 
3,897

Other Intangible Assets – net
499

 
514

 
518

Other Assets
909

 
897

 
768

Total Assets
$
21,274

 
$
20,576

 
$
21,883

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
Short-term debt
$
938

 
$
642

 
$
857

Merchandise accounts payable
3,375

 
1,526

 
3,608

Accounts payable and accrued liabilities
2,930

 
3,333

 
2,687

Income taxes

 
227

 
102

Total Current Liabilities
7,243

 
5,728

 
7,254

Long-Term Debt
6,563

 
6,995

 
7,076

Deferred Income Taxes
1,548

 
1,477

 
1,453

Other Liabilities
2,129

 
2,123

 
2,125

Shareholders' Equity:
 
 
 
 
 
Macy's, Inc.
3,789

 
4,250

 
3,971

Noncontrolling interest
2

 
3

 
4

Total Shareholders’ Equity
3,791

 
4,253

 
3,975

Total Liabilities and Shareholders’ Equity
$
21,274

 
$
20,576

 
$
21,883


The accompanying notes are an integral part of these Consolidated Financial Statements.


4


MACY’S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(millions)
 
 
 
 
 
39 Weeks Ended
 
October 29, 2016
 
October 31, 2015
Cash flows from operating activities:
 
 
 
Net income
$
139

 
$
527

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Impairments and other costs
249

 
111

Settlement charges
81

 

Depreciation and amortization
787

 
791

Stock-based compensation expense
56

 
65

Amortization of financing costs and premium on acquired debt
(14
)
 
(14
)
Changes in assets and liabilities:
 
 
 
Decrease in receivables
237

 
226

Increase in merchandise inventories
(2,081
)
 
(2,525
)
Increase in prepaid expenses and other current assets
(37
)
 
(36
)
Increase in other assets not separately identified
(1
)
 
(1
)
Increase in merchandise accounts payable
1,665

 
1,773

Decrease in accounts payable, accrued liabilities
and other items not separately identified
(482
)
 
(385
)
Decrease in current income taxes
(287
)
 
(194
)
Increase (decrease) in deferred income taxes
45

 
(21
)
Decrease in other liabilities not separately identified
(49
)
 
(39
)
Net cash provided by operating activities
308

 
278

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(451
)
 
(591
)
Capitalized software
(230
)
 
(249
)
Acquisition of Bluemercury, Inc., net of cash acquired

 
(212
)
Disposition of property and equipment
138

 
94

Other, net
52

 
97

Net cash used by investing activities
(491
)
 
(861
)
Cash flows from financing activities:
 
 
 
Debt issued
54

 
791

Debt repaid
(174
)
 
(152
)
Financing costs
(3
)
 

Dividends paid
(344
)
 
(344
)
Increase in outstanding checks
193

 
136

Acquisition of treasury stock
(230
)
 
(1,785
)
Issuance of common stock
31

 
160

Proceeds from noncontrolling interest
4

 
5

Net cash used by financing activities
(469
)
 
(1,189
)
 
 
 
 
Net decrease in cash and cash equivalents
(652
)
 
(1,772
)
Cash and cash equivalents beginning of period
1,109

 
2,246

Cash and cash equivalents end of period
$
457

 
$
474

Supplemental cash flow information:
 
 
 
Interest paid
$
279

 
$
274

Interest received
3

 
2

Income taxes paid (net of refunds received)
308

 
474

The accompanying notes are an integral part of these Consolidated Financial Statements.

5


MACY’S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

1.    Summary of Significant Accounting Policies
Nature of Operations
Macy's, Inc. and subsidiaries (the "Company") is an omnichannel retail organization operating stores, websites and mobile applications under three brands (Macy's, Bloomingdale's and Bluemercury) 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 880 Macy's, Macy's Backstage, Bloomingdale's, Bloomingdales Outlet and Bluemercury stores in 45 states, the District of Columbia, Guam and Puerto Rico, as well as macys.com, bloomingdales.com and bluemercury.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.
A description of the Company's significant accounting policies is included in the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 2016 (the "2015 10-K"). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 2015 10-K.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions are subject to inherent uncertainties, which may result in actual amounts differing from reported amounts.
The Consolidated Financial Statements for the 13 and 39 weeks ended October 29, 2016 and October 31, 2015, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly, in all material respects, the consolidated financial position and results of operations of the Company.
Seasonality
Because of the seasonal nature of the retail business, the results of operations for the 13 and 39 weeks ended October 29, 2016 and October 31, 2015 (which do not include the Christmas season) are not necessarily indicative of such results for the full fiscal year.
Reclassifications
Certain reclassifications were made to prior years’ amounts to conform with the classifications of such amounts for the most recent fiscal period.
Comprehensive Income
Total comprehensive income represents the change in equity during a period from sources other than transactions with shareholders and, as such, includes net income. For the Company, the only other components of total comprehensive income for the 13 and 39 weeks ended October 29, 2016 and October 31, 2015 relate to post employment and postretirement plan items. The settlement charges incurred are included as a separate component of operating expenses in the Consolidated Statements of Income. The amortization reclassifications out of accumulated other comprehensive loss are included in the computation of net periodic benefit cost (income) and are included in selling, general and administrative expenses on the Consolidated Statements of Income. See Note 4, "Benefit Plans," for further information.


6

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


2.    Earnings Per Share Attributable to Macy's, Inc. Shareholders
The following tables set forth the computation of basic and diluted earnings per share attributable to Macy's, Inc. shareholders:

 
13 Weeks Ended
 
October 29, 2016
 
October 31, 2015
 
Net
Income
 
 
 
Shares
 
Net
Income
 
 
 
Shares
 
(millions, except per share data)
Net income attributable to Macy's, Inc. shareholders and
average number of shares outstanding
$
17

 
 
 
307.5

 
$
118

 
 
 
324.5

Shares to be issued under deferred
compensation and other plans
 
 
 
 
0.9

 
 
 
 
 
0.8

 
$
17

 
 
 
308.4

 
$
118

 
 
 
325.3

Basic earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
.05

 
 
 
 
 
$
.36

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock and restricted stock units
 
 
 
 
2.2

 
 
 
 
 
4.4

 
$
17

 
 
 
310.6

 
$
118

 
 
 
329.7

Diluted earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
.05

 
 
 
 
 
$
.36

 
 

 
39 Weeks Ended
 
October 29, 2016
 
October 31, 2015
 
Net
Income
 
 
 
Shares
 
Net
Income
 
 
 
Shares
 
(millions, except per share data)
Net income attributable to Macy's, Inc. shareholders and
average number of shares outstanding
$
144

 
 
 
308.6

 
$
528

 
 
 
333.0

Shares to be issued under deferred
compensation and other plans
 
 
 
 
0.9

 
 
 
 
 
0.9

 
$
144

 
 
 
309.5

 
$
528

 
 
 
333.9

Basic earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
.46

 
 
 
 
 
$
1.58

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock and restricted stock units
 
 
 
 
2.3

 
 
 
 
 
5.1

 
$
144

 
 
 
311.8

 
$
528

 
 
 
339.0

Diluted earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
.46

 
 
 
 
 
$
1.56

 
 

In addition to the stock options, restricted stock and restricted stock units reflected in the foregoing tables, stock options to purchase 15.7 million shares of common stock and restricted stock units relating to 0.7 million shares of common stock were outstanding at October 29, 2016, but were not included in the computation of diluted earnings per share for the 13 and 39 weeks ended October 29, 2016 because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.
In addition to the stock options, restricted stock and restricted stock units reflected in the foregoing tables, stock options to purchase 6.2 million shares of common stock and restricted stock units relating to 0.7 million shares of common stock were outstanding at October 31, 2015, but were not included in the computation of diluted earnings per share for the 13 and 39 weeks ended October 31, 2015 because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.


7

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


3.    Financing Activities
The following table shows the detail of debt repayments:
 
 
39 Weeks Ended
 
October 29, 2016
 
October 31, 2015
 
(millions)
7.875% Senior debentures due 2036
$
108

 
$

7.45% Senior debentures due 2016
59

 

8.125% Senior debentures due 2035

 
76

7.5% Senior debentures due 2015

 
69

9.5% amortizing debentures due 2021
4

 
4

9.75% amortizing debentures due 2021
2

 
2

Capital leases and other obligations
1

 
1

 
$
174

 
$
152

On October 14, 2016, the Company repaid $59 million of 7.45% senior debentures at maturity. On August 15, 2016, the Company redeemed at par the principal amount of $108 million of 7.875% senior debentures due 2036, pursuant to the terms of the debentures. Interest expense in the third quarter of 2016 benefited from the recognition of unamortized debt premium associated with this debt.
The Company is party to a $1,500 million unsecured commercial paper program. The Company may issue and sell commercial paper in an aggregate amount outstanding at any particular time not to exceed its then-current combined borrowing availability under the bank credit agreement with certain financial institutions. As of October 29, 2016, the Company had $52 million of seasonal borrowings outstanding under this commercial paper program at a weighted average interest rate of 0.7% and with a weighted average maturity of three days.
During the 39 weeks ended October 29, 2016, the Company repurchased approximately 6.0 million shares of its common stock pursuant to existing stock purchase authorizations for a total of approximately $238 million. As of October 29, 2016, the Company had $1,794 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.

4.    Benefit Plans
The Company has defined contribution plans which cover substantially all employees who work 1,000 hours or more in a year. In addition, the Company has a funded defined benefit plan ("Pension Plan") and an unfunded defined benefit supplementary retirement plan ("SERP"), which provides benefits, for certain employees, in excess of qualified plan limitations. Effective January 1, 2012, the Pension Plan was closed to new participants, with limited exceptions, and effective January 2, 2012, the SERP was closed to new participants.
In February 2013, the Company announced changes to the Pension Plan and SERP whereby eligible employees no longer earn future pension service credits after December 31, 2013, with limited exceptions. All retirement benefits attributable to service in subsequent periods are provided through defined contribution plans.
In addition, certain retired employees currently are provided with specified health care and life insurance benefits ("Postretirement Obligations"). Eligibility requirements for such benefits vary, but generally state that benefits are available to eligible employees who were hired prior to a certain date and retire after a certain age with specified years of service. Certain employees are subject to having such benefits modified or terminated.

8

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


The defined contribution plan expense and actuarially determined components of the net periodic benefit cost (income) associated with the defined benefit plans are as follows:
 
13 Weeks Ended
 
39 Weeks Ended
 
October 29, 2016
 
October 31, 2015
 
October 29, 2016
 
October 31, 2015
 
(millions)
 
 
 
 
401(k) Qualified Defined Contribution Plan
$
22

 
$
22

 
$
71

 
$
69

 
 
 
 
 
 
 
 
Non-Qualified Defined Contribution Plan
$

 
$
1

 
$
1

 
$
1

 
 
 
 
 
 
 
 
Pension Plan
 
 
 
 
 
 
 
Service cost
$
1

 
$
2

 
$
3

 
$
5

Interest cost
27

 
35

 
83

 
103

Expected return on assets
(56
)
 
(59
)
 
(170
)
 
(176
)
Recognition of net actuarial loss
7

 
9

 
22

 
28

Amortization of prior service credit

 

 

 

 
$
(21
)
 
$
(13
)
 
$
(62
)
 
$
(40
)
Supplementary Retirement Plan
 
 
 
 
 
 
 
Service cost
$

 
$

 
$

 
$

Interest cost
5

 
7

 
17

 
23

Recognition of net actuarial loss
3

 
3

 
7

 
8

Amortization of prior service cost

 

 

 

 
$
8

 
$
10

 
$
24

 
$
31

 
 
 
 
 
 
 
 
Total Retirement Expense
$
9

 
$
20

 
$
34

 
$
61

 
 
 
 
 
 
 
 
Postretirement Obligations
 
 
 
 
 
 
 
Service cost
$

 
$

 
$

 
$

Interest cost
1

 
2

 
4

 
6

Recognition of net actuarial gain
(1
)
 

 
(3
)
 

Amortization of prior service cost

 

 

 

 
$

 
$
2

 
$
1

 
$
6


During the 13 and 39 weeks ended October 29, 2016, the Company also incurred $62 million and $81 million, respectively, of non-cash settlement charges relating to the Company's defined benefit plans. These charges relate to the pro-rata recognition of net actuarial losses associated with the Company's defined benefit plans and are a result of an increase in lump sum distributions associated with store closings, a voluntary separation program and organizational restructuring, in addition to periodic distribution activity.


9

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


5.    Fair Value Measurements
The following table shows the Company's financial assets that are required to be measured at fair value on a recurring basis, by level within the hierarchy as defined by applicable accounting standards:
 
 
October 29, 2016
 
October 31, 2015
 
 
 
Fair Value Measurements
 
 
 
Fair Value Measurements
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(millions)
Marketable equity and debt securities
$
127

 
$

 
$
127

 
$

 
$
98

 
$

 
$
98

 
$


Other financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, receivables, short-term debt, merchandise accounts payable, accounts payable and accrued liabilities and long-term debt. With the exception of long-term debt, the carrying amount of these financial instruments approximates fair value because of the short maturity of these instruments. The fair values of long-term debt, excluding capitalized leases, are generally estimated based on quoted market prices for identical or similar instruments, and are classified as Level 2 measurements within the hierarchy as defined by applicable accounting standards.
The following table shows the estimated fair value of the Company's long-term debt:
 
 
October 29, 2016
 
October 31, 2015
 
Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
(millions)
Long-term debt
$
6,459

 
$
6,536

 
$
6,749

 
$
6,950

 
$
7,048

 
$
7,268


The carrying value of long-lived assets is periodically reviewed by the Company whenever events or changes in circumstances indicate that a potential impairment has occurred. For long-lived assets held for use, a potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of those assets in operations. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long-lived asset exceeds its fair value.
The Company has announced a plan to dispose of approximately 100 Macy’s stores before the end of their previously estimated useful lives as the Company works to optimize its omnichannel approach to customers. As a result, an impairment review of the Company’s long-lived assets was required and estimated cash flows have been revised accordingly. As part of this impairment review during the 13 weeks ended July 30, 2016, long-lived assets held and used with a carrying value of $326 million were written down to their fair value of $106 million, resulting in asset impairment charges of $220 million. The fair values of these locations were calculated based on the projected cash flows and an estimated risk-adjusted rate of return that would be used by market participants in valuing these assets or prices of similar assets and are classified as Level 3 measurements within the hierarchy as defined by applicable accounting standards. Additionally, related liabilities will arise such as severance, contractual obligations and other accruals associated with store closings when the final determination is made regarding which Macy’s stores will be closed. The Company estimates these liabilities based on the facts and circumstances in existence for each restructuring decision. The amounts the Company will ultimately realize or disburse could differ from the amounts assumed in arriving at the asset impairment charges recorded and any restructuring charge recorded in the future.
The Company believes its estimated cash flows are sufficient to support the carrying value of its long-lived assets. If estimated cash flows significantly differ in the future, the Company may be required to record additional asset impairment write-downs.


10

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


6.    Condensed Consolidating Financial Information
Certain debt obligations of the Company, which constitute debt obligations of Macy's Retail Holdings, Inc. ("Subsidiary Issuer"), a 100%-owned subsidiary of Macy's, Inc. ("Parent"), are fully and unconditionally guaranteed by Parent. In the following condensed consolidating financial statements, "Other Subsidiaries" includes all other direct subsidiaries of Parent, including Bluemercury, Inc., FDS Bank, West 34th Street Insurance Company New York, Macy's Merchandising Corporation, Macy's Merchandising Group, Inc. and its subsidiaries Macy's Merchandising Group (Hong Kong) Limited, Macy's Merchandising Group Procurement, LLC, Macy's Merchandising Group International, LLC, Macy's Merchandising Group International (Hong Kong) Limited, and its majority-owned subsidiary Macy's China Limited. "Subsidiary Issuer" includes operating divisions and non-guarantor subsidiaries of the Subsidiary Issuer on an equity basis. The assets and liabilities and results of operations of the non-guarantor subsidiaries of the Subsidiary Issuer are also reflected in "Other Subsidiaries."
Condensed Consolidating Statements of Comprehensive Income for the 13 and 39 weeks ended October 29, 2016 and October 31, 2015, Condensed Consolidating Balance Sheets as of October 29, 2016, October 31, 2015 and January 30, 2016, and the related Condensed Consolidating Statements of Cash Flows for the 39 weeks ended October 29, 2016 and October 31, 2015 are presented on the following pages.

11

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Statement of Comprehensive Income
For the 13 Weeks Ended October 29, 2016
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
2,376

 
$
6,183

 
$
(2,933
)
 
$
5,626

Cost of sales

 
(1,577
)
 
(4,742
)
 
2,933

 
(3,386
)
Gross margin

 
799

 
1,441

 

 
2,240

Selling, general and administrative expenses
(1
)
 
(909
)
 
(1,161
)
 

 
(2,071
)
Settlement charges

 
(24
)
 
(38
)
 

 
(62
)
Operating income (loss)
(1
)
 
(134
)
 
242

 

 
107

Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External
1

 
(82
)
 

 

 
(81
)
Intercompany

 
(51
)
 
51

 

 

Equity in earnings (loss) of subsidiaries
17

 
(101
)
 

 
84

 

Income (loss) before income taxes
17

 
(368
)
 
293

 
84

 
26

Federal, state and local income
tax benefit (expense)

 
68

 
(79
)
 

 
(11
)
Net income (loss)
17

 
(300
)
 
214

 
84

 
15

Net loss attributable to noncontrolling interest

 

 
2

 

 
2

Net income (loss) attributable to
Macy's, Inc. shareholders
$
17

 
$
(300
)
 
$
216

 
$
84

 
$
17

Comprehensive income (loss)
$
62

 
$
(255
)
 
$
241

 
$
12

 
$
60

Comprehensive loss attributable to
noncontrolling interest

 

 
2

 

 
2

Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$
62

 
$
(255
)
 
$
243

 
$
12

 
$
62


12

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Statement of Comprehensive Income
For the 13 Weeks Ended October 31, 2015
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
2,654

 
$
6,366

 
$
(3,146
)
 
$
5,874

Cost of sales

 
(1,761
)
 
(4,922
)
 
3,146

 
(3,537
)
Gross margin

 
893

 
1,444

 

 
2,337

Selling, general and administrative expenses

 
(957
)
 
(1,011
)
 

 
(1,968
)
Impairments and other costs

 
(102
)
 
(9
)
 


(111
)
Operating income (loss)

 
(166
)
 
424

 

 
258

Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External

 
(79
)
 
(1
)
 

 
(80
)
Intercompany

 
(58
)
 
58

 

 

Equity in earnings (loss) of subsidiaries
117

 
(9
)
 

 
(108
)
 

Income (loss) before income taxes
117

 
(312
)
 
481

 
(108
)
 
178

Federal, state and local income
tax benefit (expense)
1

 
84

 
(146
)
 

 
(61
)
Net income (loss)
118

 
(228
)
 
335

 
(108
)
 
117

Net loss attributable to noncontrolling interest

 

 
1

 

 
1

Net income (loss) attributable to
Macy's, Inc. shareholders
$
118

 
$
(228
)
 
$
336

 
$
(108
)
 
$
118

Comprehensive income (loss)
$
125

 
$
(221
)
 
$
339

 
$
(119
)
 
$
124

Comprehensive loss attributable to
noncontrolling interest

 

 
1

 

 
1

Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$
125

 
$
(221
)
 
$
340

 
$
(119
)
 
$
125



13

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Statement of Comprehensive Income
For the 39 Weeks Ended October 29, 2016
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
7,324

 
$
16,546

 
$
(6,607
)
 
$
17,263

Cost of sales

 
(4,704
)
 
(12,273
)
 
6,607

 
(10,370
)
Gross margin

 
2,620

 
4,273

 

 
6,893

Selling, general and administrative expenses
(2
)
 
(2,732
)
 
(3,329
)
 

 
(6,063
)
Impairments and other costs

 
(184
)
 
(65
)
 

 
(249
)
Settlement charges

 
(29
)
 
(52
)
 

 
(81
)
Operating income (loss)
(2
)
 
(325
)
 
827

 

 
500

Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External
2

 
(278
)
 

 

 
(276
)
Intercompany

 
(166
)
 
166

 

 

Equity in earnings (loss) of subsidiaries
144

 
(69
)
 

 
(75
)
 

Income (loss) before income taxes
144

 
(838
)
 
993

 
(75
)
 
224

Federal, state and local income
tax benefit (expense)

 
243

 
(328
)
 

 
(85
)
Net income (loss)
144

 
(595
)
 
665

 
(75
)
 
139

Net loss attributable to noncontrolling interest


 

 
5

 

 
5

Net income (loss) attributable to
Macy's, Inc. shareholders
$
144

 
$
(595
)
 
$
670

 
$
(75
)
 
$
144

Comprehensive income (loss)
$
164

 
$
(575
)
 
$
677

 
$
(107
)
 
$
159

Comprehensive loss attributable to
noncontrolling interest

 

 
5

 

 
5

Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$
164

 
$
(575
)
 
$
682

 
$
(107
)
 
$
164


14

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Statement of Comprehensive Income
For the 39 Weeks Ended October 31, 2015
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
8,191

 
$
17,106

 
$
(7,087
)
 
$
18,210

Cost of sales

 
(5,258
)
 
(12,776
)
 
7,087

 
(10,947
)
Gross margin

 
2,933

 
4,330

 

 
7,263

Selling, general and administrative expenses
(1
)
 
(2,962
)
 
(3,086
)
 

 
(6,049
)
Impairments and other costs

 
(102
)
 
(9
)
 

 
(111
)
Operating income (loss)
(1
)
 
(131
)
 
1,235

 

 
1,103

Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External

 
(267
)
 
(1
)
 

 
(268
)
Intercompany

 
(173
)
 
173

 

 

Equity in earnings of subsidiaries
528

 
137

 

 
(665
)
 

Income (loss) before income taxes
527

 
(434
)
 
1,407

 
(665
)
 
835

Federal, state and local income
tax benefit (expense)
1

 
163

 
(472
)
 

 
(308
)
Net income (loss)
528

 
(271
)
 
935

 
(665
)
 
527

Net loss attributable to noncontrolling interest

 

 
1

 

 
1

Net income (loss) attributable to
Macy's, Inc. shareholders
$
528

 
$
(271
)
 
$
936

 
$
(665
)
 
$
528

Comprehensive income (loss)
$
550

 
$
(249
)
 
$
948

 
$
(700
)
 
$
549

Comprehensive loss attributable to
noncontrolling interest

 

 
1

 

 
1

Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$
550

 
$
(249
)
 
$
949

 
$
(700
)
 
$
550


15

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Balance Sheet
As of October 29, 2016
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
60

 
$
99

 
$
298

 
$

 
$
457

Receivables

 
74

 
188

 

 
262

Merchandise inventories

 
3,621

 
3,966

 

 
7,587

Income tax receivable
99

 

 

 
(39
)
 
60

Prepaid expenses and other current assets

 
89

 
365

 

 
454

Total Current Assets
159

 
3,883

 
4,817

 
(39
)
 
8,820

Property and Equipment – net

 
3,534

 
3,615

 

 
7,149

Goodwill

 
3,315

 
582

 

 
3,897

Other Intangible Assets – net

 
47

 
452

 

 
499

Other Assets
1

 
153

 
755

 

 
909

Deferred Income Taxes
24

 

 

 
(24
)
 

Intercompany Receivable
878

 

 
1,876

 
(2,754
)
 

Investment in Subsidiaries
2,954

 
3,173

 

 
(6,127
)
 

Total Assets
$
4,016

 
$
14,105

 
$
12,097

 
$
(8,944
)
 
$
21,274

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Short-term debt
$

 
$
935

 
$
3

 
$

 
$
938

Merchandise accounts payable

 
1,481

 
1,894

 

 
3,375

Accounts payable and accrued liabilities
164

 
910

 
1,856

 

 
2,930

Income taxes

 
3

 
36

 
(39
)
 

Total Current Liabilities
164

 
3,329

 
3,789

 
(39
)
 
7,243

Long-Term Debt

 
6,545

 
18

 

 
6,563

Intercompany Payable

 
2,754

 

 
(2,754
)
 

Deferred Income Taxes

 
694

 
878

 
(24
)
 
1,548

Other Liabilities
63

 
565

 
1,501

 

 
2,129

Shareholders' Equity:
 
 
 
 
 
 
 
 
 
Macy's, Inc.
3,789

 
218

 
5,909

 
(6,127
)
 
3,789

Noncontrolling Interest

 

 
2

 

 
2

Total Shareholders' Equity
3,789

 
218

 
5,911

 
(6,127
)
 
3,791

Total Liabilities and Shareholders' Equity
$
4,016

 
$
14,105

 
$
12,097

 
$
(8,944
)
 
$
21,274








16

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Balance Sheet
As of October 31, 2015
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
11

 
$
94

 
$
369

 
$

 
$
474

Receivables

 
38

 
162

 

 
200

Merchandise inventories

 
3,959

 
4,012

 

 
7,971

Income tax receivable
32

 

 

 
(32
)
 

Prepaid expenses and other current assets

 
93

 
333

 

 
426

Total Current Assets
43

 
4,184

 
4,876

 
(32
)
 
9,071

Property and Equipment – net

 
4,112

 
3,517

 

 
7,629

Goodwill

 
3,315

 
582

 

 
3,897

Other Intangible Assets – net

 
59

 
459

 

 
518

Other Assets
2

 
44

 
722

 

 
768

Deferred Income Taxes
17

 

 

 
(17
)
 

Intercompany Receivable

 

 
3,413

 
(3,413
)
 

Investment in Subsidiaries
4,644

 
3,621

 

 
(8,265
)
 

Total Assets
$
4,706

 
$
15,335

 
$
13,569

 
$
(11,727
)
 
$
21,883

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Short-term debt
$

 
$
856

 
$
1

 
$

 
$
857

Merchandise accounts payable

 
1,734

 
1,874

 

 
3,608

Accounts payable and accrued liabilities
103

 
1,116

 
1,468

 

 
2,687

Income taxes

 
4

 
130

 
(32
)
 
102

Total Current Liabilities
103

 
3,710

 
3,473

 
(32
)
 
7,254

Long-Term Debt

 
7,057

 
19

 

 
7,076

Intercompany Payable
601

 
2,812

 

 
(3,413
)
 

Deferred Income Taxes

 
700

 
770

 
(17
)
 
1,453

Other Liabilities
31

 
580

 
1,514

 

 
2,125

Shareholders' Equity:
 
 
 
 
 
 
 
 
 
Macy's, Inc.
3,971

 
476

 
7,789

 
(8,265
)
 
3,971

Noncontrolling Interest

 

 
4

 

 
4

Total Shareholders' Equity
3,971

 
476

 
7,793

 
(8,265
)
 
3,975

Total Liabilities and Shareholders' Equity
$
4,706

 
$
15,335

 
$
13,569

 
$
(11,727
)
 
$
21,883







17

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


Condensed Consolidating Balance Sheet
As of January 30, 2016
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
741

 
$
91

 
$
277

 
$

 
$
1,109

Receivables

 
217

 
341

 

 
558

Merchandise inventories

 
2,702

 
2,804

 

 
5,506

Income tax receivable
44

 

 

 
(44
)
 

Prepaid expenses and other current assets

 
135

 
344

 

 
479

Total Current Assets
785

 
3,145

 
3,766

 
(44
)
 
7,652

Property and Equipment – net

 
3,925

 
3,691

 

 
7,616

Goodwill

 
3,315

 
582

 

 
3,897

Other Intangible Assets – net

 
52

 
462

 

 
514

Other Assets

 
154

 
743

 

 
897

Deferred Income Taxes
14

 

 

 
(14
)
 

Intercompany Receivable

 

 
3,800

 
(3,800
)
 

Investment in Subsidiaries
4,725

 
3,804

 

 
(8,529
)
 

Total Assets
$
5,524

 
$
14,395

 
$
13,044

 
$
(12,387
)
 
$
20,576

LIABILITIES AND SHAREHOLDERS’ EQUITY: