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 April 29, 2017

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
 
g129830g60l10.jpg
 
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth 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
 
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  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 May 27, 2017
Common Stock, $0.01 par value per share
 
304,506,714 shares
 



PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

2

Table of Contents

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

(millions, except per share figures)
 
 
 
 
 
 
13 Weeks Ended
 
April 29, 2017
 
April 30, 2016
Net sales
$
5,338

 
$
5,771

Cost of sales
(3,306
)
 
(3,516
)
Gross margin
2,032

 
2,255

Selling, general and administrative expenses
(1,812
)
 
(1,966
)
Settlement charges

 
(13
)
Operating income
220

 
276

Interest expense
(86
)
 
(99
)
Premiums on early retirement of debt
(3
)
 

Interest income
2

 
1

Income before income taxes
133

 
178

Federal, state and local income tax expense
(63
)
 
(63
)
Net income
70

 
115

Net loss attributable to noncontrolling interest
1

 
1

Net income attributable to Macy's, Inc. shareholders
$
71

 
$
116

Basic earnings per share attributable to Macy's, Inc. shareholders
$
.23

 
$
.37

Diluted earnings per share attributable to Macy's, Inc. shareholders
$
.23

 
$
.37


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

3


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

(millions)

 
 
 
 
 
13 Weeks Ended
 
April 29, 2017
 
April 30, 2016
Net income
$
70

 
$
115

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

 
(36
)
Settlement charges, before tax

 
13

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

 
9

Tax effect related to items of other comprehensive income
(3
)
 
6

Total other comprehensive income (loss), net of tax effect
6

 
(8
)
Comprehensive income
76

 
107

Comprehensive loss attributable to noncontrolling interest
1

 
1

Comprehensive income attributable to
Macy's, Inc. shareholders
$
77

 
$
108


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


4


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

(millions)
 
 
 
 
 
 
 
 
April 29, 2017
 
January 28, 2017
 
April 30, 2016
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and cash equivalents
$
1,201

 
$
1,297

 
$
734

Receivables
345

 
522

 
399

Merchandise inventories
5,626

 
5,399

 
5,738

Income tax receivable

 

 
19

Prepaid expenses and other current assets
397

 
408

 
490

Total Current Assets
7,569

 
7,626

 
7,380

Property and Equipment - net of accumulated depreciation and
amortization of $5,013, $4,856 and $5,500
6,886

 
7,017

 
7,475

Goodwill
3,897

 
3,897

 
3,897

Other Intangible Assets – net
496

 
498

 
511

Other Assets
793

 
813

 
898

Total Assets
$
19,641

 
$
19,851

 
$
20,161

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
Short-term debt
$
313

 
$
309

 
$
642

Merchandise accounts payable
2,028

 
1,423

 
2,015

Accounts payable and accrued liabilities
2,905

 
3,563

 
2,690

Income taxes
355

 
352

 

Total Current Liabilities
5,601

 
5,647

 
5,347

Long-Term Debt
6,412

 
6,562

 
6,990

Deferred Income Taxes
1,482

 
1,443

 
1,536

Other Liabilities
1,846

 
1,877

 
2,134

Shareholders' Equity:
 
 
 
 
 
Macy's, Inc.
4,302

 
4,323

 
4,148

Noncontrolling interest
(2
)
 
(1
)
 
6

Total Shareholders’ Equity
4,300

 
4,322

 
4,154

Total Liabilities and Shareholders’ Equity
$
19,641

 
$
19,851

 
$
20,161


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


5


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

(millions)
 
 
 
 
 
13 Weeks Ended
 
April 29, 2017
 
April 30, 2016
Cash flows from operating activities:
 
 
 
Net income
$
70

 
$
115

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Settlement charges

 
13

Depreciation and amortization
243

 
260

Stock-based compensation expense
13

 
16

Gains on sale of real estate
(68
)
 
(14
)
Amortization of financing costs and premium on acquired debt

 
(1
)
Changes in assets and liabilities:
 
 
 
Decrease in receivables
170

 
158

Increase in merchandise inventories
(227
)
 
(232
)
Increase in prepaid expenses and other current assets
(11
)
 
(22
)
Increase in merchandise accounts payable
573

 
425

Decrease in accounts payable, accrued liabilities
and other items not separately identified
(551
)
 
(499
)
Increase (decrease) in current income taxes
3

 
(246
)
Increase in deferred income taxes
36

 
53

Decrease in other liabilities not separately identified
(17
)
 
(18
)
Net cash provided by operating activities
234

 
8

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(117
)
 
(153
)
Capitalized software
(60
)
 
(75
)
Disposition of property and equipment
96

 
16

Other, net
21

 
1

Net cash used by investing activities
(60
)
 
(211
)
Cash flows from financing activities:
 
 
 
Debt issued
3

 

Debt repaid
(149
)
 
(3
)
Dividends paid
(115
)
 
(112
)
Increase (decrease) in outstanding checks
(10
)
 
43

Acquisition of treasury stock
(1
)
 
(130
)
Issuance of common stock
2

 
26

Proceeds from noncontrolling interest

 
4

Net cash used by financing activities
(270
)
 
(172
)
 
 
 
 
Net decrease in cash and cash equivalents
(96
)
 
(375
)
Cash and cash equivalents beginning of period
1,297

 
1,109

Cash and cash equivalents end of period
$
1,201

 
$
734

Supplemental cash flow information:
 
 
 
Interest paid
$
76

 
$
80

Interest received
2

 
1

Income taxes paid (net of refunds received)
16

 
257

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

6


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 are conducted through approximately 840 Macy's, Macy's Backstage, Bloomingdale's, Bloomingdale's The 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 and Al Zahra, Kuwait are 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 28, 2017 (the "2016 10-K"). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 2016 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 weeks ended April 29, 2017 and April 30, 2016, 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 weeks ended April 29, 2017 and April 30, 2016 (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 to 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 weeks ended April 29, 2017 and April 30, 2016 relate to post employment and postretirement plan items. Settlement charges incurred are included as a separate component of operating expenses in the Consolidated Statements of Income. 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.
Newly Adopted Accounting Pronouncements
The Company adopted Accounting Standards Update ("ASU") No. 2016-09, Improvements to Employee Share-Based Payment Accounting, effective January 29, 2017. This standard was issued to simplify several aspects of the accounting for share-based payment awards, including the income tax consequences, financial statement classification and forfeiture considerations of such awards. Upon adoption, the Company began to recognize, on a prospective basis, all excess tax benefits and tax deficiencies as income tax benefit or expense, respectively, in its Consolidated Statements of Income. This resulted in the recognition of approximately $11 million of additional income tax expense associated with net tax deficiencies for awards that were exercised, vested or expired in the 13 weeks ended April 29, 2017. Additionally, excess tax benefits have been classified as an operating activity along with other income tax cash flows in the Consolidated Statements of Cash Flows. The Company has elected to adopt such presentation on a prospective basis.

7

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
 
April 29, 2017
 
April 30, 2016
 
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
$
71

 
 
 
305.0

 
$
116

 
 
 
309.7

Shares to be issued under deferred
compensation and other plans
 
 
 
 

 
 
 
 
 
0.9

 
$
71

 
 
 
305.0

 
$
116

 
 
 
310.6

Basic earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
.23

 
 
 
 
 
$
.37

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock and restricted stock units
 
 
 
 
1.9

 
 
 
 
 
2.9

 
$
71

 
 
 
306.9

 
$
116

 
 
 
313.5

Diluted earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
.23

 
 
 
 
 
$
.37

 
 

In addition to the stock options, restricted stock and restricted stock units reflected in the foregoing tables, stock options to purchase 16.2 million shares of common stock and restricted stock units relating to 1.6 million shares of common stock were outstanding at April 29, 2017, but were not included in the computation of diluted earnings per share for the 13 weeks ended April 29, 2017 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 11.2 million shares of common stock and restricted stock units relating to 1.0 million shares of common stock were outstanding at April 30, 2016, but were not included in the computation of diluted earnings per share for the 13 weeks ended April 30, 2016 because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.


8

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


3.    Financing Activities
The following table shows the detail of debt repayments:
 
 
13 Weeks Ended
 
April 29, 2017
 
April 30, 2016
 
(millions)
6.7% debentures due 2034
$
11

 
$

6.375% senior notes due 2037
135

 

9.5% amortizing debentures due 2021
2

 
2

9.75% amortizing debentures due 2021
1

 
1

 
$
149

 
$
3

During the 13 weeks ended April 29, 2017, the Company repurchased $146 million face value of senior notes and debentures. The debt repurchases were made in the open market for a total cost of $149 million, including expenses related to the transactions. Such repurchases resulted in the recognition of additional interest expense of $3 million during the 13 weeks ended April 29, 2017. This additional interest expense is presented as premium on early retirement of debt on the Consolidated Statements of Income.

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.

9

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
 
April 29, 2017
 
April 30, 2016
 
(millions)
401(k) Qualified Defined Contribution Plan
$
21

 
$
24

 
 
 
 
Non-Qualified Defined Contribution Plan
$

 
$

 
 
 
 
Pension Plan
 
 
 
Service cost
$
1

 
$
1

Interest cost
27

 
28

Expected return on assets
(56
)
 
(56
)
Recognition of net actuarial loss
8

 
8

Amortization of prior service credit

 

 
$
(20
)
 
$
(19
)
Supplementary Retirement Plan
 
 
 
Service cost
$

 
$

Interest cost
6

 
6

Recognition of net actuarial loss
2

 
2

Amortization of prior service cost

 

 
$
8

 
$
8

 
 
 
 
Total Retirement Expense
$
9

 
$
13

 
 
 
 
Postretirement Obligations
 
 
 
Service cost
$

 
$

Interest cost
1

 
2

Recognition of net actuarial gain
(1
)
 
(1
)
Amortization of prior service cost

 

 
$

 
$
1


During the 13 weeks ended April 30, 2016, the Company incurred $13 million 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.


10

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:
 
 
April 29, 2017
 
April 30, 2016
 
 
 
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
$
90

 
$
21

 
$
69

 
$

 
$
125

 
$
17

 
$
108

 
$


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:
 
 
April 29, 2017
 
April 30, 2016
 
Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
(millions)
Long-term debt
$
6,310

 
$
6,385

 
$
6,251

 
$
6,870

 
$
6,962

 
$
7,113


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 weeks ended April 29, 2017 and April 30, 2016, Condensed Consolidating Balance Sheets as of April 29, 2017, April 30, 2016 and January 28, 2017, and the related Condensed Consolidating Statements of Cash Flows for the 13 weeks ended April 29, 2017 and April 30, 2016 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 April 29, 2017
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
2,056

 
$
5,126

 
$
(1,844
)
 
$
5,338

Cost of sales

 
(1,378
)
 
(3,772
)
 
1,844

 
(3,306
)
Gross margin

 
678

 
1,354

 

 
2,032

Selling, general and administrative expenses
(1
)
 
(704
)
 
(1,107
)
 

 
(1,812
)
Operating income (loss)
(1
)
 
(26
)
 
247

 

 
220

Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External
1

 
(85
)
 

 

 
(84
)
Intercompany

 
(34
)
 
34

 

 

Premium on early retirement of debt

 
(3
)
 

 

 
(3
)
Equity in earnings (loss) of subsidiaries
71

 
(9
)
 

 
(62
)
 

Income (loss) before income taxes
71

 
(157
)
 
281

 
(62
)
 
133

Federal, state and local income
tax benefit (expense)

 
30

 
(93
)
 

 
(63
)
Net income (loss)
71

 
(127
)
 
188

 
(62
)
 
70

Net loss attributable to noncontrolling interest

 

 
1

 

 
1

Net income (loss) attributable to
Macy's, Inc. shareholders
$
71

 
$
(127
)
 
$
189

 
$
(62
)
 
$
71

Comprehensive income (loss)
$
77

 
$
(121
)
 
$
192

 
$
(72
)
 
$
76

Comprehensive loss attributable to
noncontrolling interest

 

 
1

 

 
1

Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$
77

 
$
(121
)
 
$
193

 
$
(72
)
 
$
77


12

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



Condensed Consolidating Statement of Comprehensive Income
For the 13 Weeks Ended April 30, 2016
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
2,454

 
$
5,374

 
$
(2,057
)
 
$
5,771

Cost of sales

 
(1,604
)
 
(3,969
)
 
2,057

 
(3,516
)
Gross margin

 
850

 
1,405

 

 
2,255

Selling, general and administrative expenses
(1
)
 
(882
)
 
(1,083
)
 

 
(1,966
)
Settlement charges

 
(3
)
 
(10
)
 


(13
)
Operating income (loss)
(1
)
 
(35
)
 
312

 

 
276

Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External
1

 
(99
)
 

 

 
(98
)
Intercompany

 
(58
)
 
58

 

 

Equity in earnings (loss) of subsidiaries
116

 
10

 

 
(126
)
 

Income (loss) before income taxes
116

 
(182
)
 
370

 
(126
)
 
178

Federal, state and local income
tax benefit (expense)

 
61

 
(124
)
 

 
(63
)
Net income (loss)
116

 
(121
)
 
246

 
(126
)
 
115

Net loss attributable to noncontrolling interest

 

 
1

 

 
1

Net income (loss) attributable to
Macy's, Inc. shareholders
$
116

 
$
(121
)
 
$
247

 
$
(126
)
 
$
116

Comprehensive income (loss)
$
108

 
$
(129
)
 
$
241

 
$
(113
)
 
$
107

Comprehensive loss attributable to
noncontrolling interest

 

 
1

 

 
1

Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$
108

 
$
(129
)
 
$
242

 
$
(113
)
 
$
108




13

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



Condensed Consolidating Balance Sheet
As of April 29, 2017
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
779

 
$
99

 
$
323

 
$

 
$
1,201

Receivables

 
118

 
227

 

 
345

Merchandise inventories

 
2,560

 
3,066

 

 
5,626

Prepaid expenses and other current assets

 
71

 
326

 

 
397

Total Current Assets
779

 
2,848

 
3,942

 

 
7,569

Property and Equipment – net

 
3,293

 
3,593

 

 
6,886

Goodwill

 
3,315

 
582

 

 
3,897

Other Intangible Assets – net

 
49

 
447

 

 
496

Other Assets

 
45

 
748

 

 
793

Deferred Income Taxes
24

 

 

 
(24
)
 

Intercompany Receivable
920

 

 
1,833

 
(2,753
)
 

Investment in Subsidiaries
3,003

 
3,535

 

 
(6,538
)
 

Total Assets
$
4,726

 
$
13,085

 
$
11,145

 
$
(9,315
)
 
$
19,641

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

 
$
306

 
$
7

 
$

 
$
313

Merchandise accounts payable

 
841

 
1,187

 

 
2,028

Accounts payable and accrued liabilities
22

 
916

 
1,967

 

 
2,905

Income taxes
317

 
6

 
32

 

 
355

Total Current Liabilities
339

 
2,069

 
3,193

 

 
5,601

Long-Term Debt

 
6,395

 
17

 

 
6,412

Intercompany Payable
18

 
2,801

 
(66
)
 
(2,753
)
 

Deferred Income Taxes

 
704

 
802

 
(24
)
 
1,482

Other Liabilities
67

 
498

 
1,281

 

 
1,846

Shareholders' Equity:
 
 
 
 
 
 
 
 
 
Macy's, Inc.
4,302

 
618

 
5,920

 
(6,538
)
 
4,302

Noncontrolling Interest

 

 
(2
)
 

 
(2
)
Total Shareholders' Equity
4,302

 
618

 
5,918

 
(6,538
)
 
4,300

Total Liabilities and Shareholders' Equity
$
4,726

 
$
13,085

 
$
11,145

 
$
(9,315
)
 
$
19,641








14

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



Condensed Consolidating Balance Sheet
As of April 30, 2016
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
287

 
$
112

 
$
335

 
$

 
$
734

Receivables

 
158

 
241

 

 
399

Merchandise inventories

 
2,707

 
3,031

 

 
5,738

Income tax receivable
66

 

 

 
(47
)
 
19

Prepaid expenses and other current assets

 
121

 
369

 

 
490

Total Current Assets
353

 
3,098

 
3,976

 
(47
)
 
7,380

Property and Equipment – net

 
3,840

 
3,635

 

 
7,475

Goodwill

 
3,315

 
582

 

 
3,897

Other Intangible Assets – net

 
50

 
461

 

 
511

Other Assets

 
154

 
744

 

 
898

Deferred Income Taxes
23

 

 

 
(23
)
 

Intercompany Receivable

 

 
3,433

 
(3,433
)
 

Investment in Subsidiaries
4,651

 
3,810

 

 
(8,461
)
 

Total Assets
$
5,027

 
$
14,267

 
$
12,831

 
$
(11,964
)
 
$
20,161

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

 
$
641

 
$
1

 
$

 
$
642

Merchandise accounts payable

 
872

 
1,143

 

 
2,015

Accounts payable and accrued liabilities
34

 
1,192

 
1,464

 

 
2,690

Income taxes

 
9

 
38

 
(47
)
 

Total Current Liabilities
34

 
2,714

 
2,646

 
(47
)
 
5,347

Long-Term Debt

 
6,971

 
19

 

 
6,990

Intercompany Payable
787

 
2,646

 

 
(3,433
)
 

Deferred Income Taxes

 
726

 
833

 
(23
)
 
1,536

Other Liabilities
58

 
547

 
1,529

 

 
2,134

Shareholders' Equity:
 
 
 
 
 
 
 
 
 
Macy's, Inc.
4,148

 
663

 
7,798

 
(8,461
)
 
4,148

Noncontrolling Interest

 

 
6

 

 
6

Total Shareholders' Equity
4,148

 
663

 
7,804

 
(8,461
)
 
4,154

Total Liabilities and Shareholders' Equity
$
5,027

 
$
14,267

 
$
12,831

 
$
(11,964
)
 
$
20,161







15

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


Condensed Consolidating Balance Sheet
As of January 28, 2017
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
938

 
$
81

 
$
278

 
$

 
$
1,297

Receivables

 
169

 
353

 

 
522

Merchandise inventories

 
2,565

 
2,834

 

 
5,399

Prepaid expenses and other current assets

 
84

 
324

 

 
408

Total Current Assets
938

 
2,899

 
3,789

 

 
7,626

Property and Equipment – net

 
3,397

 
3,620

 

 
7,017

Goodwill

 
3,315

 
582

 

 
3,897

Other Intangible Assets – net

 
51

 
447

 

 
498

Other Assets

 
47

 
766

 

 
813

Deferred Income Taxes
26

 

 

 
(26
)
 

Intercompany Receivable
375

 

 
2,428

 
(2,803
)
 

Investment in Subsidiaries
3,137

 
3,540

 

 
(6,677
)
 

Total Assets
$
4,476

 
$
13,249

 
$
11,632

 
$
(9,506
)
 
$
19,851

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

 
$
306

 
$
3

 
$

 
$
309

Merchandise accounts payable

 
590

 
833

 

 
1,423

Accounts payable and accrued liabilities
16

 
1,064

 
2,483

 

 
3,563

Income taxes
71

 
16

 
265

 

 
352

Total Current Liabilities
87

 
1,976

 
3,584

 

 
5,647

Long-Term Debt

 
6,544

 
18

 

 
6,562

Intercompany Payable

 
2,803

 

 
(2,803
)
 

Deferred Income Taxes

 
688

 
781

 
(26
)
 
1,443

Other Liabilities
66

 
500

 
1,311

 

 
1,877

Shareholders' Equity:
 
 
 
 
 
 
 
 
 
Macy's, Inc.
4,323

 
738

 
5,939

 
(6,677
)
 
4,323

Noncontrolling Interest

 

 
(1
)
 

 
(1
)
Total Shareholders' Equity
4,323

 
738

 
5,938

 
(6,677
)
 
4,322

Total Liabilities and Shareholders' Equity
$
4,476

 
$
13,249

 
$
11,632

 
$
(9,506
)
 
$
19,851



16

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



Condensed Consolidating Statement of Cash Flows
For the 13 Weeks Ended April 29, 2017
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
71

 
$
(127
)
 
$
188

 
$
(62
)
 
$
70

Equity in (earnings) loss of subsidiaries
(71
)
 
9

 

 
62

 

Dividends received from subsidiaries
211

 

 

 
(211
)
 

Depreciation and amortization

 
89

 
154

 

 
243

(Increase) decrease in working capital
244

 
130

 
(485
)
 

 
(111
)
Other, net
7

 
22

 
3

 

 
32

Net cash provided (used) by operating activities
462

 
123

 
(140
)
 
(211
)
 
234

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Purchase of property and equipment and capitalized software, net

 
93

 
(174
)
 

 
(81
)
Other, net

 

 
21

 

 
21

Net cash provided (used) by investing activities

 
93

 
(153
)
 

 
(60
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Debt repaid, net of debt issued

 
(149
)
 
3

 

 
(146
)
Dividends paid
(155
)
 

 
(171
)
 
211

 
(115
)
Common stock acquired, net of
issuance of common stock
2

 

 
(1
)
 

 
1

Intercompany activity, net
(476
)
 
(18
)
 
494

 

 

Other, net
8

 
(31
)
 
13

 

 
(10
)
Net cash provided (used) by
financing activities
(621
)
 
(198
)
 
338

 
211

 
(270
)
Net increase (decrease) in cash
and cash equivalents
(159
)
 
18

 
45

 

 
(96
)
Cash and cash equivalents at beginning of period
938

 
81

 
278

 

 
1,297

Cash and cash equivalents at end of period
$
779

 
$
99

 
$
323

 
$

 
$
1,201








17

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



Condensed Consolidating Statement of Cash Flows
For the 13 Weeks Ended April 30, 2016
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
116

 
$
(121
)
 
$
246

 
$
(126
)
 
$
115

Impairments and other charges

 
3

 
10

 

 
13

Equity in earnings of subsidiaries
(116
)
 
(10
)
 

 
126

 

Dividends received from subsidiaries
182

 

 

 
(182
)
 

Depreciation and amortization

 
102

 
158

 

 
260

(Increase) decrease in working capital
(34
)
 
55

 
(451
)
 

 
(430
)
Other, net
19

 
16

 
15

 

 
50

Net cash provided (used) by operating activities
167

 
45

 
(22
)
 
(182
)
 
8

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Purchase of property and equipment and capitalized software, net

 
(54
)
 
(158
)
 

 
(212
)
Other, net

 
(2
)
 
3

 

 
1

Net cash used by investing activities

 
(56
)
 
(155
)
 

 
(211
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Debt issued, net of debt repaid

 
(3
)
 

 

 
(3
)
Dividends paid
(112
)
 

 
(182
)
 
182

 
(112
)
Common stock acquired, net of
issuance of common stock
(104
)
 

 

 

 
(104
)
Proceeds from noncontrolling interest

 

 
4

 

 
4

Intercompany activity, net
(415
)
 
52

 
363

 

 

Other, net
10

 
(17
)
 
50

 

 
43

Net cash provided (used) by
financing activities
(621
)
 
32

 
235

 
182

 
(172
)
Net increase (decrease) in cash and
cash equivalents
(454
)
 
21

 
58

 

 
(375
)
Cash and cash equivalents at beginning of period
741

 
91

 
277

 

 
1,109

Cash and cash equivalents at end of period
$
287

 
$
112

 
$
335

 
$

 
$
734




18


MACY'S, INC.

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 2017" and "first quarter of 2016" are to the Company's 13-week fiscal periods ended April 29, 2017 and April 30, 2016, 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 2016 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 2016 10-K (particularly in "Risk Factors" and in "Forward-Looking Statements"). This discussion includes non-GAAP financial measures. For information about these measures, see the disclosure under the caption "Important Information Regarding Non-GAAP Financial Measures" on pages 23 to 24.
Overview
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 operates approximately 840 stores in 45 states, the District of Columbia, Guam and Puerto Rico. As of April 29, 2017, the Company's operations were conducted through Macy's, Bloomingdale's, Bloomingdale's The Outlet, Macy's Backstage, bluemercury and Macy's China Limited. In addition, Bloomingdale's in Dubai, United Arab Emirates and Al Zahra, Kuwait are operated under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC.
The Company has begun the implementation of a strategy to transform its omnichannel business and focus on key growth areas, embrace customer centricity, and optimize value in its real estate portfolio. Inspired by the North Star which guided the Company's founder, R.H. Macy, to an optimistic future during his sailing days, there are five points to this strategy.
1.
From Familiar to Favorite includes everything the Company does to further its brand awareness and identity to its core customers. Actions include understanding and anticipating customers’ needs, strengthening the Company's fashion authority and executing initiatives around its loyalty and pricing strategies.
2.
It Must Be Macy’s encompasses delivering the products and experiences customers love and are exclusive to the Company. This includes styles and home fashion for every day and special occasions, from the Company's leading private brands, as well as exclusive national brands or assortments. It celebrates the Company's iconic events and includes strategies to appeal to more value-oriented customers.
3.
Every Experience Matters, in-store and online. The Company's competitive advantage is the ability to combine the human touch in its physical stores with cutting-edge technology in its mobile applications and websites. Key to this point is the enhancement of a customer's experience as they explore our stores, mobile applications and websites, find their favorite styles, sizes and colors, and receive their purchase through the shopping channels they prefer.
4.
Funding our Future represents the decisions and actions the Company takes to identify and realize resources to fuel growth. This involves a focus on cost reduction and reinvestment as well as creating value from the Company's real estate portfolio.
5.
What’s New, What’s Next explores and develops those innovations to turn consumer and technology trends to the Company's advantage and drive growth. This includes exploring previously unmet customer needs and making smart investment decisions based on customer insights and analytics.
The Company has taken a number of key steps over the past couple of years to position itself to successfully implement the North Star strategy. Specifically, in January 2017, the Company announced a series of actions to streamline its store portfolio, intensify cost efficiency efforts and execute its real estate strategy. Further, in August 2016, the Company announced its intention to close approximately 100 Macy’s stores, 66 of which were closed by the end of the first quarter of 2017 and 2 additional stores will close by mid-2017. In addition, the Company has reorganized the field structure that supports the remaining stores and conducted a significant restructuring of the Company's central operations to focus resources on strategic priorities and reduce expense.

19


MACY'S, INC.

The Company’s real estate strategy is designed to create value through both monetization and redevelopment of certain assets:
In January 2016, the Company completed a $270 million real estate transaction to recreate Macy's Brooklyn store. The Company continues to own and operate the first four floors and lower level of its existing nine-story retail store, which is currently being reconfigured and remodeled. The remaining portion of the store and its nearby parking facility were sold to Tishman Speyer in a single sales transaction. As the sales agreement required the Company to conduct certain redevelopment activities at Macy's Brooklyn store, the Company is recognizing the gain on the transaction, approximately $250 million, under the percentage of completion method of accounting over the redevelopment period. Accordingly, $126 million has been recognized to-date and the remaining gain is anticipated to be recognized over the next two years.
In fiscal 2016, the Company had property and equipment sales, primarily related to real estate, totaling $673 million in cash proceeds and recognized real estate gains of $209 million. These proceeds include the cash received from the sale of the Company's 248,000 square-foot Union Square Men’s building in San Francisco for approximately $250 million in January 2017. The Company will use part of the proceeds to consolidate the Men’s store into its main Union Square store. The Company will lease the Men’s store property for two to three years as it completes the reconfiguration of the main store. The Company is expected to recognize a gain of approximately $235 million in January 2018.
In January 2017, the Company finalized the formation of a strategic alliance with Brookfield Asset Management, a leading global alternative asset manager, to create increased value in its real estate portfolio. Under the alliance, Brookfield has an exclusive right for up to 24 months to create a “pre-development plan” for each of approximately 50 Macy’s real estate assets, with an option for Macy’s to continue to identify and add assets into the alliance. The breadth of opportunity within the portfolio ranges from the additional development on a portion of an asset (such as a Company-controlled land parcel adjacent to a store) to the complete redevelopment of an existing store.  Once a "pre-development plan" is created, the Company has the option to accept the pre-development plan and then either contribute the asset into a joint venture for the development plan to commence or sell the asset to Brookfield. If the Company chooses to contribute the asset into a joint venture, the Company may elect to participate as a funding or non-funding partner. After development, the joint venture may sell the asset and distribute proceeds accordingly.
In February 2017, the Company sold its downtown Minneapolis store and parking facility for $59 million of proceeds and recognized a gain of approximately $47 million in the first quarter of 2017.
In April 2017, the Company launched a marketing effort for the upper floors of its flagship State Street Macy's store in downtown Chicago. Development and increased utilization of the upper floors are expected to drive more foot traffic to the store.
In May 2017, the Company signed a contract to sell an additional two floors of the downtown Seattle Macy's store; four floors were sold in a similar transaction in 2015. This transaction is expected to close in the Fall of 2017.
In the first quarter, the Company opened new Macy’s stores in Murray, UT and Los Angeles, CA as well as one Bloomingdale’s store in Kuwait under a license agreement with Al Tayer Group. The Company expects to open new Macy's and Bloomingdale's stores in Al Maryah Central in Abu Dhabi, UAE, in fiscal 2018 under a license agreement with Al Tayer Group and two additional Bloomingdale's stores in San Jose, CA and Norwalk, CT in fiscal 2019.
Both Macy's off-price business, Macy's Backstage, and its clearance strategy, Last Act, have been successful in providing unique value opportunities to both existing and new Macy's customers. The Company is currently focused on opening new Macy's Backstage stores within existing Macy's store locations. In the first quarter, the Company opened 11 new Macy’s Backstage stores within existing Macy’s stores, bringing the total locations in operation to 33 (7 freestanding and 26 inside Macy's stores) as of April 29, 2017. The Company expects to open 19 additional Macy’s Backstage locations inside Macy’s stores in the remainder of fiscal 2017.
The Company is focused on accelerating the growth of its luxury beauty products and spa retailer, bluemercury, by opening additional freestanding bluemercury stores in urban and suburban markets, enhancing its online capabilities and adding bluemercury products and boutiques to Macy's stores. 10 new freestanding bluemercury locations were opened in the first quarter of 2017 and 20 additional locations are expected to open later in the fiscal year. As of April 29, 2017, the Company is operating 131 bluemercury locations (111 freestanding and 20 inside Macy's stores).
The Company's operations are impacted by competitive pressures from department stores, off-price 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,

20


MACY'S, INC.

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, uncertainty regarding governmental spending and tax policies, unemployment levels, tightened consumer credit, an improving housing market and a fluctuating stock market. In addition, consumer spending levels of international customers are impacted by the strength of the U.S. dollar relative to foreign currencies. 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.
All economic conditions ultimately affect the Company's overall operations. However, the effects of economic conditions can be experienced differently and 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 each of the Company's branded operations.
The Company affirms its previously provided guidance for full-year fiscal 2017. The Company expects comparable sales on an owned basis to decline between 2.2 percent and 3.3 percent, with comparable sales on an owned plus licensed basis to decline between 2.0 percent and 3.0 percent. Total sales are expected to be down between 3.2 percent and 4.3 percent in fiscal 2017. Total sales for fiscal 2017 reflect a 53rd week, whereas comparable sales are on a 52-week basis. Adjusted diluted earnings per share of between $3.37 and $3.62 are expected in fiscal 2017, excluding the impact of the anticipated settlement charges related to the company’s defined benefit plans and premiums and fees associated with debt repurchases. Excluding the impact of the anticipated fourth quarter gain on the sale of the Union Square Men’s building in San Francisco, the anticipated settlement charges related to the company’s defined benefit plans and premiums and fees associated with debt repurchases, adjusted diluted earnings per share of $2.90 to $3.15 are expected in fiscal 2017.

Results of Operations
Comparison of the First Quarter of 2017 and the First Quarter of 2016
 
 
First Quarter of 2017
 
 
First Quarter of 2016
 
 
 
 
Amount
 
% to Sales
 
 
Amount
 
% to Sales
 
 
 
 
(dollars in millions, except per share figures)
Net sales
 
$
5,338

 
 
 
 
$
5,771

 
 
 
 
Decrease in sales
 
(7.5
)
%
 
 
(7.4
)
%
 
 
Decrease in comparable sales
 
(5.2
)
%
 
 
(6.1
)
%
 
 
Cost of sales
 
(3,306
)
 
(61.9
)
%
(3,516
)
 
(60.9
)
%
Gross margin
 
2,032

 
38.1

%
2,255

 
39.1

%
Selling, general and administrative expenses
 
(1,812
)
 
(34.0
)
%
(1,966
)
 
(34.1
)
%
Settlement charges
 

 

%
(13
)
 
(0.2
)
%
Operating income
 
220

 
4.1

%
276

 
4.8

%
Interest expense - net
 
(84
)
 
 
 
 
(98
)
 
 
 
 
Premiums on early retirement of debt
 
(3
)
 
 
 
 

 
 
 
 
Income before income taxes
 
133