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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended August 3, 2019

OR
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
 
macysincrgbdigitalfilea01.jpg
Macy's, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
13-3324058
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
7 West Seventh Street, Cincinnati, Ohio 45202 and 151 West 34th Street, New York, New York 10001
(Address of Principal Executive Offices, including Zip Code)
(513) 579-7000 and (212) 494-1602
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value per share
M
New York Stock Exchange
    
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     No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company

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 August 3, 2019
Common Stock, $.01 par value per share
 
308,914,893 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
 
26 Weeks Ended
 
August 3, 2019
 
August 4, 2018
 
August 3, 2019
 
August 4, 2018
Net sales
$
5,546

 
$
5,572

 
$
11,050

 
$
11,112

Credit card revenues, net
176

 
186

 
348

 
343

 
 
 
 
 
 
 
 
Cost of sales
(3,395
)
 
(3,320
)
 
(6,798
)
 
(6,701
)
Selling, general and administrative expenses
(2,177
)
 
(2,164
)
 
(4,287
)
 
(4,247
)
Gains on sale of real estate
7

 
46

 
49

 
70

Impairment and other costs
(2
)
 
(17
)
 
(3
)
 
(36
)
Operating income
155

 
303

 
359

 
541

Benefit plan income, net
8

 
11

 
15

 
22

Settlement charges

 
(50
)
 

 
(50
)
Interest expense
(52
)
 
(69
)
 
(106
)
 
(140
)
Losses on early retirement of debt

 
(5
)
 

 
(5
)
Interest income
5

 
7

 
12

 
12

Income before income taxes
116

 
197

 
280

 
380

Federal, state and local income tax expense
(30
)
 
(33
)
 
(57
)
 
(84
)
Net income
86

 
164

 
223

 
296

Net loss attributable to noncontrolling interest

 
2

 

 
10

Net income attributable to Macy's, Inc. shareholders
$
86

 
$
166

 
$
223

 
$
306

Basic earnings per share attributable to Macy's, Inc. shareholders
$
0.28

 
$
0.54

 
$
0.72

 
$
0.99

Diluted earnings per share attributable to Macy's, Inc. shareholders
$
0.28

 
$
0.53

 
$
0.71

 
$
0.98


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
 
26 Weeks Ended
 
August 3, 2019
 
August 4, 2018
 
August 3, 2019
 
August 4, 2018
Net income
$
86

 
$
164

 
$
223

 
$
296

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

 
(29
)
 

 
(29
)
Reclassifications to net income:
 
 
 
 
 
 
 
Amortization of net actuarial loss and prior service credit on post employment and postretirement benefit plans included in net income, before tax
7

 
9

 
15

 
18

Settlement charges, before tax

 
50

 

 
50

Tax effect related to items of other comprehensive income (loss)
(2
)
 
(10
)
 
(4
)
 
(12
)
Total other comprehensive income, net of tax effect
5

 
20

 
11

 
27

Comprehensive income
91

 
184

 
234

 
323

Comprehensive loss attributable to noncontrolling interest

 
2

 

 
10

Comprehensive income attributable to Macy's, Inc. shareholders
$
91

 
$
186

 
$
234

 
$
333


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


3


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

(millions)
 
 
 
 
 
 
 
 
August 3, 2019
 
February 2, 2019
 
August 4, 2018
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and cash equivalents
$
674

 
$
1,162

 
$
1,068

Receivables
240

 
400

 
261

Merchandise inventories
5,029

 
5,263

 
4,956

Prepaid expenses and other current assets
603

 
620

 
580

Total Current Assets
6,546

 
7,445

 
6,865

Property and Equipment - net of accumulated depreciation and
amortization of $4,748, $4,495 and $4,914
6,483

 
6,637

 
6,547

Right of Use Assets
2,636

 

 

Goodwill
3,908

 
3,908

 
3,908

Other Intangible Assets – net
440

 
478

 
483

Other Assets
728

 
726

 
865

Total Assets
$
20,741

 
$
19,194

 
$
18,668

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
Short-term debt
$
6

 
$
43

 
$
63

Merchandise accounts payable
1,674

 
1,655

 
1,795

Accounts payable and accrued liabilities
2,739

 
3,366

 
2,608

Income taxes
20

 
168

 
15

Total Current Liabilities
4,439

 
5,232

 
4,481

Long-Term Debt
4,680

 
4,708

 
5,473

Long-Term Lease Liabilities
2,836

 

 

Deferred Income Taxes
1,206

 
1,238

 
1,194

Other Liabilities
1,265

 
1,580

 
1,626

Shareholders' Equity:
 
 
 
 
 
Macy's, Inc.
6,315

 
6,436

 
5,916

Noncontrolling interest

 

 
(22
)
Total Shareholders’ Equity
6,315

 
6,436

 
5,894

Total Liabilities and Shareholders’ Equity
$
20,741

 
$
19,194

 
$
18,668


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


4


MACY’S, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)

(millions)

 
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Equity
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Shareholders' Equity
Balance at February 2, 2019
$
3

 
$
652

 
$
8,050

 
$
(1,318
)
 
$
(951
)
 
$
6,436

Cumulative-effect adjustment (a)
 
 
 
 
(158
)
 
 
 
 
 
(158
)
Net income
 
 
 
 
136

 
 
 
 
 
136

Other comprehensive income
 
 
 
 
 
 
 
 
6

 
6

Common stock dividends
  ($0.3775 per share)
 
 
 
 
(117
)
 
 
 
 
 
(117
)
Stock-based compensation expense
 
 
14

 
 
 
 
 
 
 
14

Stock issued under stock plans
 
 
(60
)
 
 
 
66

 
 
 
6

Balance at May 4, 2019
3

 
606

 
7,911

 
(1,252
)
 
(945
)
 
6,323

Net income
 
 
 
 
86

 
 
 
 
 
86

Other comprehensive income
 
 
 
 
 
 
 
 
5

 
5

Common stock dividends
($0.3775 per share)
 
 
 
 
(117
)
 
 
 
 
 
(117
)
Stock-based compensation expense
 
 
14

 
 
 
 
 
 
 
14

Stock issued under stock plans
 
 
(3
)
 
 
 
4

 
 
 
1

Other
 
 
 
 
3

 
 
 
 
 
3

Balance at August 3, 2019
$
3

 
$
617

 
$
7,883

 
$
(1,248
)
 
$
(940
)
 
$
6,315

(a) Represents the cumulative-effect adjustment to retained earnings for the adoption of Accounting Standards Update 2016-02 (ASU-2016-02), Leases (Topic 842), on February 3, 2019.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Equity
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Macy's, Inc.
Shareholders’
Equity
 
Non-controlling
Interest
 
Total Shareholders' Equity
Balance at February 3, 2018
$
3

 
$
676

 
$
7,246

 
$
(1,456
)
 
$
(724
)
 
$
5,745

 
$
(12
)
 
$
5,733

Net income (loss)
 
 
 
 
139

 
 
 
 
 
139

 
(8
)
 
131

Other comprehensive income
 
 
 
 
 
 
 
 
7

 
7

 
 
 
7

Common stock dividends ($0.3775 per share)
 
 
 
 
(116
)
 
 
 
 
 
(116
)
 
 
 
(116
)
Stock-based compensation
  expense
 
 
17

 
 
 
 
 
 
 
17

 
 
 
17

Stock issued under stock plans
 
 
(51
)
 
 
 
80

 
 
 
29

 
 
 
29

Stranded tax costs (b)
 
 
 
 
164

 
 
 
(164
)
 

 
 
 

Balance at May 5, 2018
3

 
642

 
7,433

 
(1,376
)
 
(881
)
 
5,821

 
(20
)
 
5,801

Net income (loss)
 
 
 
 
166

 
 
 
 
 
166

 
(2
)
 
164

Other comprehensive income
 
 
 
 
 
 
 
 
20

 
20

 
 
 
20

Common stock dividends ($0.3775 per share)
 
 
 
 
(116
)
 
 
 
 
 
(116
)
 
 
 
(116
)
Stock-based compensation
  expense
 
 
15

 
 
 
 
 
 
 
15

 
 
 
15

Stock issued under stock plans
 
 
(21
)
 
 
 
31

 
 
 
10

 
 
 
10

Balance at August 4, 2018
$
3

 
$
636

 
$
7,483

 
$
(1,345
)
 
$
(861
)
 
$
5,916

 
$
(22
)
 
$
5,894

(b) Represents the reclassification of stranded tax effects to retained earnings as a result of U.S. federal tax reform.

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


5


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

(millions)
 
 
 
 
 
26 Weeks Ended
 
August 3, 2019
 
August 4, 2018
Cash flows from operating activities:
 
 
 
Net income
$
223

 
$
296

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Impairment and other costs
3

 
36

Settlement charges

 
50

Depreciation and amortization
472

 
470

Stock-based compensation expense
28

 
31

Gains on sale of real estate
(49
)
 
(70
)
Deferred income taxes
17

 
36

Benefit plans
15

 
18

Amortization of financing costs and premium on acquired debt
1

 
(5
)
Changes in assets and liabilities:
 
 
 
Decrease in receivables
160

 
88

Decrease in merchandise inventories
234

 
221

Decrease in prepaid expenses and other current assets
19

 
29

Increase in merchandise accounts payable
55

 
219

Decrease in accounts payable and accrued liabilities
(619
)
 
(510
)
Decrease in current income taxes
(149
)
 
(271
)
Change in other assets and liabilities
(60
)
 
(94
)
Net cash provided by operating activities
350

 
544

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(378
)
 
(275
)
Capitalized software
(123
)
 
(133
)
Disposition of property and equipment
59

 
88

Other, net
(12
)
 
8

Net cash used by investing activities
(454
)
 
(312
)
Cash flows from financing activities:
 
 
 
Debt issuance costs
(3
)
 

Debt repaid
(39
)
 
(357
)
Dividends paid
(233
)
 
(232
)
Decrease in outstanding checks
(128
)
 
(90
)
Issuance of common stock
6

 
38

Proceeds from noncontrolling interest

 
5

Net cash used by financing activities
(397
)
 
(636
)
Net decrease in cash, cash equivalents and restricted cash
(501
)
 
(404
)
Cash, cash equivalents and restricted cash beginning of period
1,248

 
1,513

Cash, cash equivalents and restricted cash end of period
$
747

 
$
1,109

Supplemental cash flow information:
 
 
 
Interest paid
$
107

 
$
156

Interest received
12

 
11

Income taxes paid (net of refunds received)
189

 
319

Note: Restricted cash of $73 million and $41 million have been included with cash and cash equivalents for the 26 weeks ended August 3, 2019 and August 4, 2018, respectively.

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

6


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

1.    Organization and 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 kids'), cosmetics, home furnishings and other consumer goods. The Company has stores in 43 states, the District of Columbia, Guam and Puerto Rico. As of August 3, 2019, the Company's operations were conducted through Macy's, Bloomingdale's, Bloomingdale's The Outlet, Macy's Backstage and bluemercury.
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 February 2, 2019 (the "2018 10-K"). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 2018 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 26 weeks ended August 3, 2019 and August 4, 2018, 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 26 weeks ended August 3, 2019 and August 4, 2018 (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 in the most recent years.
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 26 weeks ended August 3, 2019 and August 4, 2018 relate to post employment and postretirement plan items. Settlement charges incurred are included as a separate component of income before income taxes 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 benefit plan income, net on the Consolidated Statements of Income. See Note 6, "Benefit Plans," for further information.
Newly Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), as amended, which requires lessees to recognize substantially all leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right of use ("ROU") model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.


7

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


The new standard was adopted by the Company on February 3, 2019 utilizing a modified retrospective approach that allowed for transition in the period of adoption. The Company adopted the package of practical expedients available at transition that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. Contracts entered into prior to adoption were not reassessed for leases or embedded leases. Upon adoption, the Company used hindsight in determining lease term and impairment. For lease and non-lease components, the Company has elected to account for both as a single lease component.
  
Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of $2,519 million and $2,728 million, respectively, as of February 3, 2019. The difference of $209 million between the additional net lease assets and lease liabilities, net of the deferred tax impact of $54 million, was recorded as an adjustment to retained earnings. Prepaid rent, intangible lease assets, finance lease assets, and accrued and deferred rent as of February 3, 2019 were recorded as part of the ROU asset. Finance lease obligations as of February 3, 2019 were recorded as part of the lease liabilities. The standard did not materially impact the Company's consolidated net income and had no impact on cash flows.

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
 
August 3, 2019
 
August 4, 2018
 
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
$
86

 
 
 
308.9

 
$
166

 
 
 
306.8

Shares to be issued under deferred
compensation and other plans
 
 
 
 
0.9

 
 
 
 
 
0.9

 
$
86

 
 
 
309.8

 
$
166

 
 
 
307.7

Basic earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
0.28

 
 
 
 
 
$
0.54

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock and restricted stock units
 
 
 
 
1.8

 
 
 
 
 
4.3

 
$
86

 
 
 
311.6

 
$
166

 
 
 
312.0

Diluted earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
0.28

 
 
 
 
 
$
0.53

 
 


8

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


 
26 Weeks Ended
 
August 3, 2019
 
August 4, 2018
 
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
$
223

 
 
 
308.6

 
$
306

 
 
 
306.2

Shares to be issued under deferred
compensation and other plans
 
 
 
 
0.9

 
 
 
 
 
0.9

 
$
223

 
 
 
309.5

 
$
306

 
 
 
307.1

Basic earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
0.72

 
 
 
 
 
$
0.99

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock and restricted stock units
 
 
 
 
2.0

 
 
 
 
 
3.6

 
$
223

 
 
 
311.5

 
$
306

 
 
 
310.7

Diluted earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
0.71

 
 
 
 
 
$
0.98

 
 


In addition to the stock options and restricted stock units reflected in the foregoing tables, stock options to purchase 18.9 million shares of common stock and restricted stock units relating to 1.3 million shares of common stock were outstanding at August 3, 2019, but were not included in the computation of diluted earnings per share 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 and restricted stock units reflected in the foregoing tables, stock options to purchase 12.8 million shares of common stock and restricted stock units relating to 1.4 million shares of common stock were outstanding at August 4, 2018, but were not included in the computation of diluted earnings per share because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.


9

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


3. Revenue
Net sales
Revenue is recognized when customers obtain control of goods and services promised by the Company. The amount of revenue recognized is based on the amount that reflects the consideration that is expected to be received in exchange for those respective goods and services. The Company's revenue generating activities include the following:
Retail Sales
Retail sales include merchandise sales, inclusive of delivery income, licensed department income, sales of private brand goods directly to third party retailers and sales of excess inventory to third parties. Sales of merchandise are recorded at the time of shipment to the customer and are reported net of estimated merchandise returns and certain customer incentives. Commissions earned on sales generated by licensed departments are included as a component of total net sales and are recognized as revenue at the time merchandise is sold to customers. Service revenues (e.g., alteration and cosmetic services) are recorded at the time the customer receives the benefit of the service. The Company has elected to present sales taxes on a net basis and, as such, sales taxes are included in accounts payable and accrued liabilities until remitted to the taxing authorities.
For the 13 and 26 weeks ended August 3, 2019, Macy's accounted for 88% of the Company's net sales. For the 13 and 26 weeks ended August 4, 2018, Macy's accounted for 89% and 88%, respectively, of the Company's net sales. Disaggregation of the Company's net sales by family of business for the 13 and 26 weeks ended August 3, 2019 and August 4, 2018 were as follows:
 
13 Weeks Ended
 
26 Weeks Ended
Net sales by family of business
August 3, 2019
 
August 4, 2018
 
August 3, 2019
 
August 4, 2018
 
(millions)
Women's Accessories, Intimate Apparel, Shoes, Cosmetics and Fragrances
$
2,039

 
$
2,022

 
$
4,191

 
$
4,181

Women's Apparel
1,269

 
1,322

 
2,582

 
2,672

Men's and Kids'
1,266

 
1,273

 
2,468

 
2,447

Home/Other (a)
972

 
955

 
1,809

 
1,812

Total
$
5,546

 
$
5,572

 
$
11,050

 
$
11,112

(a) Other primarily includes restaurant sales, allowance for merchandise returns adjustments and breakage income from unredeemed gift cards.
Merchandise Returns
The Company estimates merchandise returns using historical data and recognizes an allowance that reduces net sales and cost of sales. The liability for merchandise returns is included in accounts payable and accrued liabilities on the Company's Consolidated Balance Sheets and was $227 million, $269 million and $243 million as of August 3, 2019, February 2, 2019 and August 4, 2018, respectively. Included in prepaid expenses and other current assets is an asset totaling $154 million, $188 million and $165 million as of August 3, 2019, February 2, 2019 and August 4, 2018, respectively, for the recoverable cost of merchandise estimated to be returned by customers.
Gift Cards and Customer Loyalty Programs
The Company only offers no-fee, non-expiring gift cards to its customers. At the time gift cards are sold or issued, no revenue is recognized; rather, the Company records an accrued liability to customers. The liability is relieved and revenue is recognized equal to the amount redeemed at the time gift cards are redeemed for merchandise. The Company records revenue from unredeemed gift cards (breakage) in net sales on a pro-rata basis over the time period gift cards are actually redeemed. At least three years of historical data, updated annually, is used to determine actual redemption patterns.
The Company maintains customer loyalty programs in which customers earn points based on their purchases. Under the Macy’s brand, points are earned based on customers’ spending on Macy’s private label and co-branded credit cards as well as non-proprietary cards during certain tender-neutral promotional events. Under the Bloomingdale’s brand, the Company offers a tender neutral points-based program. The Company recognizes the estimated net amount of the rewards that will be earned and redeemed as a reduction to net sales at the time of the initial transaction and as tender when the points are subsequently redeemed by a customer.

10

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


The liability for unredeemed gift cards and customer loyalty programs is included in accounts payable and accrued liabilities on the Company's Consolidated Balance Sheets and was $654 million, $856 million and $673 million as of August 3, 2019, February 2, 2019 and August 4, 2018, respectively.
Credit Card Revenues, net
In 2005, the Company entered into an arrangement with Citibank to sell the Company's private label and co-branded credit cards ("Credit Card Program"). Subsequent to this initial arrangement and associated amendments, in 2014, the Company entered into an amended and restated Credit Card Program Agreement (the "Program Agreement") with Citibank. As part of the Program Agreement, the Company receives payments for providing a combination of interrelated services and intellectual property to Citibank in support of the underlying Credit Card Program. Revenue based on the spending activity of the underlying accounts is recognized as the respective card purchases occur and the Company’s profit share is recognized based on the performance of the underlying portfolio. Revenue associated with the establishment of new credit accounts and assisting in the receipt of payments for existing accounts is recognized as such activities occur. Credit card revenues include finance charges, late fees and other revenue generated by the Company’s Credit Card Program, net of fraud losses and expenses associated with establishing new accounts.

4. Leases
The Company leases a portion of the real estate and personal property used in its operations. Most leases require the Company to pay real estate taxes, maintenance, insurance and other similar costs; some also require additional payments based on percentages of sales and some contain purchase options. Certain of the Company’s real estate leases have terms that extend for a significant number of years and provide for rental rates that increase or decrease over time. Lease terms include the noncancellable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods, termination options and purchase options.   
Operating lease liabilities are recognized at the lease commencement date based on the present value of the fixed lease payments using the Company's incremental borrowing rates for its population of leases. Related operating ROU assets are recognized based on the initial present value of the fixed lease payments, reduced by contributions from landlords, plus any prepaid rent and direct costs from executing the leases. ROU assets are tested for impairment in the same manner as long-lived assets.

Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Variable lease payments are recognized as lease expense as they are incurred. 
Certain of the Company's leases contain covenants that restrict the ability of the tenant (typically a subsidiary of the Company) to take specified actions (including the payment of dividends or other amounts on account of its capital stock) unless the tenant satisfies certain financial tests.


11

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


ROU assets and lease liabilities consist of:
 
 
August 3, 2019
 
Classification
(millions)
Assets
 
 
Finance lease assets (a)
Right of Use Assets
$
11

Operating lease assets (b)
Right of Use Assets
2,625

Total leased assets
 
$
2,636

 
 
 
Liabilities
 
 
Current
 
 
Finance
Accounts payable and accrued liabilities
$
1

Operating (b)
Accounts payable and accrued liabilities
350

 
 
 
Noncurrent
 
 
Finance
Long-Term Lease Liabilities
24

Operating (b)
Long-Term Lease Liabilities
2,812

Total lease liabilities
 
$
3,187

(a) Finance lease assets are recorded net of accumulated amortization of $12 million as of August 3, 2019.
(b) As of August 3, 2019, operating lease assets included $398 million of non-lease components and current and noncurrent lease liabilities included $34 million and $369 million, respectively, of non-lease components.
The components of net lease expense are disclosed below. For the 13 and 26 weeks ended August 3, 2019, expense related to non-lease components was $21 million and $42 million, respectively, and variable lease expense was $3 million and $7 million, respectively.
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
August 3, 2019
 
August 3, 2019
 
Classification
(millions)
Operating lease expense (c)
Selling, general and administrative expenses
$
106

 
$
214

Sublease income
Selling, general and administrative expenses
(1
)
 
(1
)
Net lease expense
 
$
105

 
$
213

(c) Certain supply chain operating lease expense amounts are included in cost of sales.












12

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


As of August 3, 2019, the maturity of lease liabilities is as follows:
 
 
Finance
Leases (d)
 
Operating
Leases (e and f)
 
Total
 
(millions)
Fiscal year
 
 
 
 
 
2019
$
1

 
$
180

 
$
181

2020
3

 
332

 
335

2021
3

 
333

 
336

2022
3

 
311

 
314

2023
3

 
307

 
310

After 2023
31

 
5,385

 
5,416

Total undiscounted lease payments
44

 
6,848

 
6,892

Less amount representing interest
19

 
3,686

 
3,705

Total lease liabilities
$
25

 
$
3,162

 
$
3,187

(d) Finance lease payments include $12 million related to options to extend lease terms that are reasonably certain of being exercised.
(e) Operating lease payments include $3,292 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $936 million of legally binding minimum lease payments for leases signed but not yet commenced.
(f) Operating lease payments include $1,172 million related to non-lease component payments, with $844 million related to options to extend lease terms that are reasonably certain of being exercised.

Additional supplemental information regarding assumptions and cash flows for operating and finance leases is as follows:
 
August 3, 2019
Lease Term and Discount Rate
(millions)
Weighted-average remaining lease term (years)
 
Finance leases
18.0

Operating leases
23.7

Weighted-average discount rate
 
Finance leases
6.64
%
Operating leases
6.70
%

 
26 Weeks Ended
 
August 3, 2019
Other Information
 
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows used from operating leases
$
182

Financing cash flows used from financing leases
1

Leased assets obtained in exchange for new operating lease liabilities
39











13

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


As of February 2, 2019, as disclosed in the 2018 10-K, minimum rental commitments for noncancellable leases, including executed leases not yet commenced, were as follows:
 
Capitalized
Leases (g)
 
Operating
Leases
 
Total
 
(millions)
Fiscal year
 
 
 
 
 
2019
$
3

 
$
325

 
$
328

2020
3

 
315

 
318

2021
3

 
309

 
312

2022
3

 
283

 
286

2023
3

 
264

 
267

After 2023
31

 
2,758

 
2,789

Total minimum lease payments
46

 
$
4,254

 
$
4,300

Less amount representing interest
20

 
 
 
 
Present value of net minimum capitalized lease payments
$
26

 
 
 
 
(g) For purposes of the disclosure, capitalized lease is used interchangeably with finance lease.

5.    Financing Activities
The following table shows the detail of debt repayments:
 
 
26 Weeks Ended
 
August 3, 2019
 
August 4, 2018
 
(millions)
6.9% Senior debentures due 2029
$

 
$
90

4.5% Senior notes due 2034

 
80

6.7% Senior notes due 2028

 
60

6.375% Senior notes due 2037

 
43

6.7% Senior debentures due 2034

 
28

7.0% Senior debentures due 2028

 
27

6.65% Senior debentures due 2024

 
11

6.9% Senior debentures due 2032

 
5

8.5% Senior debentures due 2019
36

 

9.5% Amortizing debentures due 2021
2

 
2

9.75% Amortizing debentures due 2021
1

 
1

 
$
39

 
$
347



During the 26 weeks ended August 4, 2018, the Company repurchased $344 million face value of senior notes and debentures. The debt repurchases were made in the open market for a total cost of $354 million, including expenses related to the transactions. Such repurchases resulted in the recognition of expense of $5 million during the 13 and 26 weeks ended August 4, 2018 presented as losses on early retirement of debt on the Consolidated Statements of Income.

On May 9, 2019, the Company entered into a new credit agreement with certain financial institutions that replaced the previous credit agreement which was set to expire on May 6, 2021. Similar to the previous agreement, the new credit agreement provides for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing). The new credit agreement is scheduled to expire on May 9, 2024, subject to up to two one-year extensions that may be requested by the Company and agreed to by the lenders.



14

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


6.    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.
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
 
26 Weeks Ended
 
August 3, 2019
 
August 4, 2018
 
August 3, 2019
 
August 4, 2018
 
(millions)
 
(millions)
401(k) Qualified Defined Contribution Plan
$
24

 
$
24

 
$
49

 
$
47

 
 
 
 
 
 
 
 
Non-Qualified Defined Contribution Plan
$
1

 
$
1

 
$
2

 
$
1

 
 
 
 
 
 
 
 
Pension Plan
 
 
 
 
 
 
 
Service cost
$
1

 
$
1

 
$
2

 
$
3

Interest cost
26

 
27

 
52

 
53

Expected return on assets
(48
)
 
(53
)
 
(96
)
 
(106
)
Recognition of net actuarial loss
7

 
8

 
14

 
16

Amortization of prior service credit

 

 

 

 
$
(14
)
 
$
(17
)
 
$
(28
)
 
$
(34
)
Supplementary Retirement Plan
 
 
 
 
 
 
 
Service cost
$

 
$

 
$

 
$

Interest cost
6

 
5

 
12

 
11

Recognition of net actuarial loss
2

 
2

 
4

 
4

Amortization of prior service cost

 

 

 

 
$
8

 
$
7

 
$
16

 
$
15

 
 
 
 
 
 
 
 
Total Retirement Expense
$
19

 
$
15

 
$
39

 
$
29

 
 
 
 
 
 
 
 
Postretirement Obligations
 
 
 
 
 
 
 
Service cost
$

 
$

 
$

 
$

Interest cost
1

 
1

 
2

 
2

Recognition of net actuarial gain
(2
)
 
(1
)
 
(3
)
 
(2
)
Amortization of prior service credit

 

 

 

 
$
(1
)
 
$

 
$
(1
)
 
$





15

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


For the 13 and 26 weeks ended August 4, 2018, the Company incurred non-cash settlement charges of $50 million related 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 the result of an increase in lump sum distributions associated with store closings, organizational restructuring and periodic distribution activity.

7.    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:
 
 
August 3, 2019
 
August 4, 2018
 
 
 
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
$
112

 
$
31

 
$
81

 
$

 
$
96

 
$
27

 
$
69