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

For the fiscal year ended February 1, 2020
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
macysinclogoa01.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.)
 

151 West 34th Street, New York, New York 10001                    (212) 494-1602
(Address of Principal Executive Offices, including Zip Code)    (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
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  ý
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    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
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter (August 3, 2019) was approximately $6,576,798,072.
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 February 29, 2020
Common Stock, $.01 par value per share
 
309,645,426 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Stockholders to be held May 15, 2020
Part III
 




Unless the context requires otherwise, references to “Macy’s” or the “Company” are references to Macy’s and its subsidiaries and references to “2019,” “2018,” “2017,” “2016” and “2015” are references to the Company’s fiscal years ended February 1, 2020, February 2, 2019, February 3, 2018, January 28, 2017 and January 30, 2016, respectively. Fiscal year 2017 included 53 weeks; fiscal years 2019, 2018, 2016 and 2015 included 52 weeks.
Forward-Looking Statements
This report and other reports, statements and information previously or subsequently filed by the Company with the Securities and Exchange Commission (the “SEC”) contain or may contain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the management of the Company at the time such statements are made. The following are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (i) statements preceded by, followed by or that include the words “may,” “will,” “could,” “should,” “believe,” “expect,” “future,” “potential,” “anticipate,” “intend,” “plan,” “think,” “estimate” or “continue” or the negative or other variations thereof, and (ii) statements regarding matters that are not historical facts. Such forward-looking statements are subject to various risks and uncertainties, including risks and uncertainties relating to:
the effects of the weather, natural disasters, and health pandemics, including the novel coronavirus (COVID-19), on customer demand, our supply chain as well as our consolidated results of operation, financial position and cash flows;
the possible invalidity of the underlying beliefs and assumptions;
the Company's ability to successfully implement its Polaris strategy, including the ability to realize the anticipated benefits within the expected time frame or at all;
the success of the Company’s operational decisions, such as product sourcing, merchandise mix and pricing, and marketing, and strategic initiatives, such as Growth stores, Backstage on-mall off-price business, and vendor direct expansion;
general consumer-spending levels, including the impact of changes in general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, and the costs of basic necessities and other goods;
competitive pressures from department stores, specialty stores, general merchandise stores, manufacturers’ outlets, off-price and discount stores, and all other retail channels, including the Internet, catalogs and television;
the Company’s ability to remain competitive and relevant as consumers’ shopping behaviors migrate to other shopping channels and to maintain its brand and reputation;
possible systems failures and/or security breaches, including any security breach that results in the theft, transfer or unauthorized disclosure of customer, employee or company information, or the failure to comply with various laws applicable to the Company in the event of such a breach;
the cost of employee benefits as well as attracting and retaining quality employees;
transactions and strategy involving the Company's real estate portfolio;
the seasonal nature of the Company’s business;
conditions to, or changes in the timing of, proposed transactions, and changes in expected synergies, cost savings and non-recurring charges;
the potential for the incurrence of charges in connection with the impairment of intangible assets, including goodwill;
possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions;
possible actions taken or omitted to be taken by third parties, including customers, suppliers, business partners, competitors and legislative, regulatory, judicial and other governmental authorities and officials;
changes in relationships with vendors and other product and service providers;

2



currency, interest and exchange rates and other capital market, economic and geo-political conditions;
unstable political conditions, civil unrest, terrorist activities and armed conflicts;
the possible inability of the Company’s manufacturers or transporters to deliver products in a timely manner or meet the Company’s quality standards;
the Company’s reliance on foreign sources of production, including risks related to the disruption of imports by labor disputes, regional and global health pandemics, and regional political and economic conditions; and
duties, taxes, other charges and quotas on imports.
In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the statements in the immediately preceding sentence and the statements under captions such as “Risk Factors” in reports, statements and information filed by the Company with the SEC from time to time constitute cautionary statements identifying important factors that could cause actual amounts, results, events and circumstances to differ materially from those expressed in or implied by such forward-looking statements.


Item 1.
Business.
General
The Company is a corporation organized under the laws of the State of Delaware in 1985. The Company and its predecessors have been operating department stores since 1830. The Company operates 775 store locations in 43 states, the District of Columbia, Puerto Rico and Guam. As of February 1, 2020, the Company's operations were conducted through Macy's, Bloomingdale's, Bloomingdale’s The Outlet, Macy’s Backstage, and bluemercury. In addition, Bloomingdale's in Dubai, United Arab Emirates and Al Zahra, Kuwait are operated under license agreements with Al Tayer Insignia, a company of Al Tayer Group, LLC.
The Company sells a wide range of merchandise, including apparel and accessories (men’s, women’s and kids'), cosmetics, home furnishings and other consumer goods. The specific assortments vary by size of store, merchandising assortments and character of customers in the trade areas. Most stores are located at urban or suburban sites, principally in densely populated areas across the United States.
Disaggregation of the Company's net sales by family of business for 2019, 2018 and 2017 were as follows: 
 
2019
 
2018
 
2017
Women’s Accessories, Intimate Apparel, Shoes, Cosmetics and Fragrances
$
9,454

 
$
9,457

 
$
9,444

Women’s Apparel
5,411

 
5,642

 
5,765

Men’s and Kids’
5,628

 
5,699

 
5,610

Home/Other (a)
4,067

 
4,173

 
4,120

Total
$
24,560

 
$
24,971

 
$
24,939

(a) Other primarily includes restaurant sales, allowance for merchandise returns adjustments, certain loyalty program income and breakage income from unredeemed gift cards.

In 2019, the Company’s subsidiaries provided various support functions to the Company’s retail operations on an integrated, company-wide basis.
The Company’s wholly-owned bank subsidiary, FDS Bank, provides certain collections, customer service and credit marketing services in respect of all credit card accounts that are owned either by Department Stores National Bank (“DSNB”), a subsidiary of Citibank, N.A., or FDS Bank and that constitute a part of the credit programs of the Company’s retail operations.
Macy’s Systems and Technology, Inc. (“MST”), a wholly-owned indirect subsidiary of the Company, provides operational electronic data processing and management information services to all of the Company’s operations other than bluemercury.
Macy’s Merchandising Group, Inc. (“MMG”), a wholly-owned direct subsidiary of the Company, and its subsidiary Macy's Merchandising Group International, LLC, are responsible for the design, development and marketing of Macy’s private label brands and certain licensed brands. Bloomingdale’s uses MMG for a

3



small portion of its private label merchandise. The Company believes that its private label merchandise differentiates its merchandise assortments from those of its competitors and delivers exceptional value to its customers. MMG also offers its services, either directly or indirectly, to unrelated third parties.
Macy’s Logistics and Operations (“Macy’s Logistics”), a division of a wholly-owned indirect subsidiary of the Company, provides warehousing and merchandise distribution services for the Company’s operations and digital customer fulfillment.
The Company’s principal executive office is located at 151 West 34th Street, New York, New York 10001, telephone number: (212) 494-1602.
Employees
As of February 1, 2020, excluding seasonal employees, the Company had approximately 123,000 employees, primarily including regular full-time and part-time. Because of the seasonal nature of the retail business, the number of employees peaks in the holiday season. Approximately 8% of the Company’s employees were represented by unions as of February 1, 2020.
Seasonality
The retail business is seasonal in nature with a high proportion of sales and operating income generated in the months of November and December. Working capital requirements fluctuate during the year, increasing in mid-summer in anticipation of the fall merchandising season and increasing substantially prior to the holiday season when the Company carries significantly higher inventory levels.
Purchasing
The Company purchases merchandise from many suppliers, no one of which accounted for more than 5% of the Company’s purchases during 2019. The Company has no material long-term purchase commitments with any of its suppliers, and believes that it is not dependent on any one supplier. The Company considers its relations with its suppliers to be good.
Private Label Brands and Related Trademarks
The principal private label brands currently offered by the Company include Alfani, American Rag, Aqua, Bar III, Belgique, Charter Club, Club Room, Epic Threads, first impressions, Giani Bernini, Greg Norman for Tasso Elba, Holiday Lane, Home Design, Hotel Collection, Hudson Park, Ideology, I-N-C, jenni, JM Collection, Karen Scott, lune+aster, M-61, Maison Jules, Martha Stewart Collection, Material Girl, Oake, Sky, Style & Co., Sun + Stone, Sutton Studio, Tasso Elba, Thalia Sodi, The Cellar, Tools of the Trade and Wild Pair.
The trademarks associated with the Company's private label brands, other than American Rag, Greg Norman for Tasso Elba, Martha Stewart Collection, Material Girl and Thalia Sodi, are owned by the Company. The American Rag, Greg Norman, Martha Stewart Collection, Material Girl and Thalia Sodi brands are owned by third parties, which license the trademarks associated with the brands to Macy’s pursuant to agreements. The agreements for American Rag, Greg Norman, Material Girl, and Thalia Sodi expired at the end of 2019, while the Martha Stewart agreement extends through 2022.
Competition
The retail industry is highly competitive. The Company’s operations compete with many retail formats on the national and local level, including department stores, specialty stores, general merchandise stores, manufacturers' outlets, off-price and discount stores, online retailers, catalogs and television shopping, among others. The Company seeks to attract customers by offering compelling, high-quality products, great prices and trusted service across all channels. Macy’s stores are located in premier locations and the Company provides a superior omnichannel fashion experience. Other retailers may compete for customers on some or all of these bases, or on other bases, and may be perceived by some potential customers as being better aligned with their particular preferences.
Available Information
The Company makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") available free of charge through its internet website at https://www.macysinc.com as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. The SEC also maintains an

4



internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC; the address of that site is https://www.sec.gov. In addition, the Company has made the following available free of charge through its website at https://www.macysinc.com:
Charters of the Audit Committee, Compensation and Management Development Committee, Finance Committee, and Nominating and Corporate Governance Committee,
Corporate Governance Principles,
Lead Independent Director Policy,
Non-Employee Director Code of Business Conduct and Ethics,
Code of Conduct,
Standards for Director Independence,
Related Person Transactions Policy,
Method to Facilitate Receipt, Retention and Treatment of Communications, and
Proxy Access By-Laws.
Any of these items are also available in print to any shareholder who requests them. Requests should be sent to the Corporate Secretary of Macy’s, Inc. at 151 West 34th Street, New York, New York 10001.
Information about our Executive Officers
The following table sets forth certain information as of March 19, 2020 regarding the Executive Officers of the Company:
 
Name
 
Age
 
Position with the Company
Jeff Gennette
 
58
 
Chief Executive Officer, Chairman of the Board and Director
Paula A. Price
 
58
 
Executive Vice President and Chief Financial Officer
Elisa D. Garcia
 
62
 
Executive Vice President, Chief Legal Officer and Secretary
John T. Harper
 
60
 
Executive Vice President and Chief Operations Officer
Danielle L. Kirgan
 
44
 
Executive Vice President and Chief Transformation Officer
Felicia Williams
 
54
 
Senior Vice President, Controller and Enterprise Risk Officer

Executive Officer Biographies
Jeff Gennette has been Chief Executive Officer of the Company since March 2017 and Chairman of the Board since January 2018; prior thereto he was President from March 2014 to August 2017, Chief Merchandising Officer from February 2009 to March 2014, Chairman and Chief Executive Officer of Macy’s West in San Francisco from February 2008 to February 2009 and Chairman and Chief Executive Officer of Seattle-based Macy’s Northwest from February 2006 through February 2008.
Paula A. Price has been Executive Vice President and Chief Financial Officer of the Company since July 2018; prior thereto she was a full-time lecturer in the Accounting and Management Unit at Harvard Business School from January 2014 to July 2018 and Executive Vice President and Chief Financial Officer of Ahold USA from May 2009 to January 2014.
Elisa D. Garcia has been Executive Vice President, Chief Legal Officer and Secretary of the Company since September 2016; prior thereto she served as Chief Legal Officer of Office Depot, Inc. from December 2013 to September 2016, Executive Vice President and Secretary from July 2007 to September 2016 and General Counsel from July 2007 to December 2013.
John T. Harper has been Executive Vice President, Chief Operations Officer of the Company since January 2020; prior thereto he served as Chief Stores Officer from September 2017 to January 2020, President of Store Operations from May 2009 to September 2017, President of Macy’s Home Store from 2007 to 2009, Vice Chairman of Macy’s Midwest from 2006 to 2007 and Chairman of Hecht’s department stores from 2004 to 2006.

5



Danielle L. Kirgan has been Executive Vice President and Chief Transformation Officer of the Company since February 2020 and Chief Human Resources Officer since October 2017; prior thereto she served as Senior Vice President, People at American Airlines Group, Inc. from October 2016 to October 2017, Chief Human Resources Officer at Darden Restaurants, Inc. from January 2015 to October 2016 and Senior Vice President from May 2010, Vice President, Global Human Resources at ACI Worldwide, Inc. from January 2009 to December 2009, and Vice President, Human Resources at Conagra Foods, Inc. from 2004 to 2008.
Felicia Williams has been Senior Vice President, Controller and Enterprise Risk Officer of the Company since June 2016; prior thereto she served as Senior Vice President, Finance and Risk Management from February 2011 to June 2016, Senior Vice President, Treasury and Risk Management from September 2009 to February 2011, Vice President, Finance and Risk Management from October 2008 to September 2009, and Vice President, Internal Audit from March 2004 to October 2008.

Item 1A.
Risk Factors.
In evaluating Macy's, the risks described below and the matters described in “Forward-Looking Statements” should be considered carefully. Such risks and matters are numerous and diverse, may be experienced continuously or intermittently, and may vary in intensity and effect. Any of such risks and matters, individually or in combination, could have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows, as well as on the attractiveness and value of an investment in Macy's securities.
The recent outbreak of COVID-19 may have a significant negative impact on the Company's business and financial results
In December 2019, there was an outbreak of COVID-19 in China that has since spread to many other regions of the world. The outbreak was subsequently labeled as a global pandemic by the World Health Organization in March 2020. As the pandemic continues to spread throughout the United States, businesses as well as federal, state and local governments have implemented significant actions to attempt to mitigate this public health crisis. Although the ultimate severity of the COVID-19 outbreak is uncertain at this time, the pandemic may have adverse impacts on the Company's financial condition and results of operations, including, but not limited to:
The Company may experience significant reductions or volatility in demand for its retail products as customers may not be able to purchase merchandise due to illness, quarantine or government or self-imposed restrictions placed on our stores' operations. Currently all of our stores are closed and will remain closed until it is safe to reopen. Additionally, social distancing measures or changes in consumer spending behaviors due to COVID-19 may continue to impact traffic in our stores after they resume normal operations and such actions could result in a loss of sales and profit.
The Company may experience temporary or long-term disruptions in its supply chain, as the outbreak has resulted in travel disruptions and has impacted manufacturing and distribution throughout the world. We anticipate that the receipt of products or raw material sourced from impacted areas will be slowed or disrupted in the coming months and our brand partners are expected to face similar challenges in fulfilling our orders for their merchandise. Furthermore, transportation delays and cost increases, more extensive travel restrictions, closures or disruptions of businesses and facilities or social, economic, political or labor instability in the affected areas, may impact our or our suppliers' operations or our customers.
The Company may be required to change its plan for inventory receipts which would place financial pressure on our brand partners. Such actions may negatively impact our relationships with our brand partners or adversely impact their financial performance and position. If this occurs, our current brand partners' ability to meet their obligations to the Company may be impacted or we may also be required to identify new brand partner relationships.
The Company's liquidity may be negatively impacted if its stores do not resume normal operations and the Company may be required to pursue additional sources of financing to meet its financial obligations. Obtaining such financing is not guaranteed and is largely dependent upon market conditions and other factors. Further actions may be required to improve the Company's cash position, including but not limited to, monetizing Company assets, implementing employee furloughs, and foregoing capital expenditures and other discretionary expenses.
The extent of the impact of COVID-19 on the Company's operations and financial results depends on future developments and is highly uncertain due to the unknown duration and severity of the outbreak. The situation is changing rapidly and future impacts may materialize that are not yet known.

6




Strategic, Operational and Competitive Risks

Our strategic initiatives may not be successful, which could negatively affect our profitability and growth.
In February 2020, we announced the Polaris strategy, a three-year plan designed to stabilize profitability and position the Company for sustainable, profitable growth. Our ability to achieve sustainable, profitable growth is subject to the successful implementation of our strategic plans, including the Polaris strategy, and realization of anticipated benefits and savings. If these investments or initiatives do not perform as expected or create implementation or operational challenges, we may incur impairment charges and our profitability and growth could suffer.
Our sales and operating results depend on consumer preferences and consumer spending.
The fashion and retail industries are subject to sudden shifts in consumer trends and consumer spending. Our sales and operating results depend in part on our ability to predict or respond to changes in fashion trends and consumer preferences in a timely manner. We develop new retail concepts and continuously adjust our industry position in certain major and private-label brands and product categories in an effort to attract and retain customers. Any sustained failure to anticipate, identify and respond to emerging trends in lifestyle and consumer preferences could negatively affect our business and results of operations.
Our sales are significantly affected by discretionary spending by consumers. Consumer spending may be affected by many factors outside of our control, including general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, consumer behaviors towards incurring and paying debt, the cost of basic necessities and other goods, the strength of the U.S. Dollar relative to foreign currencies and the effects of the weather, natural disasters or health pandemics. These factors can have psychological or economic impacts on consumers that affect their discretionary spending habits. Any decline in discretionary spending by consumers could negatively affect our business and results of operations.
We face significant competition in the retail industry.
We conduct our retail merchandising business under highly competitive conditions. Although Macy's is one of the nation’s largest retailers, we have numerous and varied competitors at the national and local levels, including department stores, specialty stores, general merchandise stores, manufacturers’ outlets, off-price and discount stores, online retailers, catalogs and television shopping, among others. Competition is characterized by many factors, including assortment, advertising, price, quality, service, location, reputation and credit availability. Any failure by us to compete effectively could negatively affect our business and results of operations.
We face challenges as consumers migrate to online shopping and we depend on our ability to differentiate Macy's in retail's ever-changing environment.
As consumers continue to migrate online, we face pressures to not only compete from a price perspective with our competitors, some of whom sell the same products, but also to differentiate Macy's to stay relevant in retail's ever-changing environment. We continue to significantly invest in our omnichannel capabilities to provide a seamless shopping experience to our customers between our store locations and our online and mobile environments. Insufficient, untimely or misguided investments in this area could significantly impact our profitability and growth and affect our ability to attract new customers, as well as maintain our existing ones.
In addition, declining customer store traffic and migration of sales from brick and mortar stores to digital platforms could lead to additional store closures, restructuring and other costs that could adversely impact our results of operations and cash flows.
Our ability to grow depends in part on our stores remaining relevant to customers.
We are investing in facilities and fixtures upgrades, merchandise assortment and customer service in selected stores to improve customer retention rates and overall customer satisfaction. Some stores are receiving targeted local marketing plans to drive customer traffic. While these stores with the "Growth Treatment" have outperformed the remainder of our store fleet, there can be no assurance that we will be able to achieve continued improvement in our store business.
Because we rely on the ability of our physical retail locations to remain relevant to customers, providing desirable and sought-out shopping experiences is critical to our financial success. Changes in consumer shopping habits, financial difficulties at other anchor tenants, significant mall vacancy issues, mall violence and new on- and off-mall developments could each adversely impact the traffic at current retail locations and lead to a decline in our financial condition or performance.

7



We may not be able to successfully execute our real estate strategy.
We continue to explore opportunities to monetize our real estate portfolio, including sales of stores as well as non-store real estate such as warehouses, outparcels and parking garages. We also continue to evaluate our real estate portfolio to identify opportunities where the redevelopment value of our real estate exceeds the value of non-strategic operating locations. This strategy is multi-pronged and may include transactions, strategic alliances or other arrangements with mall developers or other unrelated third-parties. Due to the cyclical nature of real estate markets, the performance of our real estate strategy is inherently volatile and could have a significant impact on our results of operations or financial condition.
Our revenues and cash requirements are affected by the seasonal nature of our business.
Our business is seasonal, with a high proportion of revenues and operating cash flows generated during the second half of the year, which includes the fall and holiday selling seasons. A disproportionate amount of our revenues is in the fourth quarter, which coincides with the holiday season. Should holiday sales fall below our expectations, a disproportionately negative impact on our results of operations could occur.
We incur significant additional expenses in the period leading up to the months of November and December in anticipation of higher sales volume in those periods, including costs for additional inventory, advertising and employees. If we are not successful in selling inventory, we may have to sell the inventory at significantly reduced prices or may not be able to sell the inventory at all, which could have a material adverse effect on our results of operations and cash flows.
We depend on our ability to attract, train, develop and retain quality employees.
Our business is dependent upon attracting, training, developing and retaining quality employees. Macy's has a large number of employees, many of whom are in entry level or part-time positions with historically high rates of turnover. The ability to meet our labor needs while controlling costs associated with hiring and training new employees is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics. In addition, as a large and complex enterprise operating in a highly competitive and challenging business environment, Macy's is highly dependent upon management personnel to develop and effectively execute successful business strategies and tactics. Any circumstances that adversely impact our ability to attract, train, develop and retain quality employees throughout the organization could negatively affect our business and results of operations.
We depend on the success of advertising and marketing programs.
Our business depends on effective marketing to create high customer traffic at stores and online. Macy's has many initiatives in this area, and we often change advertising and marketing programs to attract customers and increase sales. There can be no assurance as to our continued ability to effectively execute our advertising and marketing programs, and any failure to do so could negatively affect our business and results of operations.
If cash flows from our private label credit card decrease, our financial and operational results may be negatively impacted.
We previously sold most of our credit accounts and related receivables to Citibank. Following the sale, we share in the economic performance of the credit card program with Citibank. Deterioration in economic or political conditions could adversely affect the volume of new credit accounts, the amount of credit card program balances and the ability of credit card holders to pay their balances. These conditions could result in Macy’s receiving lower payments under the credit card program.
Credit card operations are subject to many federal and state laws that may impose certain requirements and limitations on credit card providers. Citibank and our subsidiary bank, FDS Bank, may be required to comply with regulations that may negatively impact the operation of our private label credit card. This negative impact may affect our revenue streams derived from the sale of such credit card accounts and our financial results.
Gross margins could suffer if we are unable to effectively manage our inventory.
Our profitability depends on our ability to manage inventory levels and respond to shifts in consumer demand patterns. Overestimating customer demand for merchandise will likely result in the need to record inventory markdowns and sell excess inventory at clearance prices which would negatively impact our gross margins and operating results. Underestimating customer demand for merchandise can lead to inventory shortages, missed sales opportunities and negative customer experiences.
Our defined benefit plan funding requirements or plan settlement expense could impact our financial results and cash flow.
Significant changes in interest rates, decreases in the fair value of plan assets and timing and amount of benefit payments could affect the funded status of our plans and could increase future funding requirements of the plans. A

8



significant increase in future funding requirements could have a negative impact on our cash flows, financial condition or results of operations.
These plans allow eligible retiring employees to receive lump sum distributions of benefits earned. Under applicable accounting rules, if annual lump sum distributions exceed an actuarially determined threshold of the total of the annual service and interest costs, we would be required to recognize in the current period of operations a settlement expense of a portion of the unrecognized actuarial loss and could have a negative impact on our results of operations.
Increases in labor costs and the cost of employee benefits could impact our financial results and cash flow.
Minimum wage increases by states and wage and benefit increases to attract and retain workers in a tight labor market have driven-up labor costs in the retail sector. These increased costs pressure our margins and could have a negative impact on our financial results.
Our expenses relating to employee health benefits are significant. Unfavorable changes in the cost of such benefits could negatively affect our financial results and cash flow. Healthcare costs have risen significantly in recent years, and recent legislative and private sector initiatives regarding healthcare reform have resulted and could continue to result in significant changes to the U.S. healthcare system. Due to uncertainty regarding legislative or regulatory changes, we are not able to fully determine the impact that future healthcare reform will have on our company-sponsored medical plans.
If our company’s reputation and brand are not maintained at a high level, our operations and financial results may suffer.
We believe our reputation and brand are partially based on the perception that we act equitably and honestly in dealing with our customers, employees, business partners and shareholders. Our reputation and brand may be deteriorated by any incident that erodes the trust or confidence of our customers or the general public, particularly if the incident results in significant adverse publicity or governmental inquiry. In addition, information concerning us, whether or not true, may be instantly and easily posted on social media platforms at any time, which information may be adverse to our reputation or brand. The harm may be immediate without affording us an opportunity for redress or correction. If our reputation or brand is damaged, our customers may refuse to continue shopping with us, potential employees may be unwilling to work for us, business partners may be discouraged from seeking future business dealings with us and, as a result, our operations and financial results may suffer.
If we are unable to protect our intellectual property, our brands and business could be damaged.
We believe that our copyrights, trademarks, trade dress, trade secrets and similar intellectual property are important assets and key elements of our strategy, including those related to our private brand merchandise. We rely on copyright and trademark law, trade secret protection and confidentiality agreements with our employees, consultants, vendors and others to protect our proprietary rights. If the steps we take to protect our proprietary rights are inadequate, or if we are unable to protect or preserve the value of our copyrights, trademarks, trade secrets and other proprietary rights for any reason, our merchandise brands and business could be negatively affected.
Our sales and operating results could be adversely affected by product safety concerns.
If Macy's merchandise offerings do not meet applicable safety standards or consumers' expectations regarding safety, we could experience decreased sales, increased costs and/or be exposed to legal and reputational risk. Events that give rise to actual, potential or perceived product safety concerns could expose Macy's to government enforcement action and/or private litigation. Reputational damage caused by real or perceived product safety concerns could negatively affect our business and results of operations.
A shutdown or disruption in our distribution and fulfillment centers could have an adverse impact on our business and operations.
Our business depends on the orderly receipt and distribution of merchandise and effective management of our distribution and fulfillment centers. Unforeseen disruptions in operations due to fire, severe weather conditions, natural disasters, health pandemics or other catastrophic events, labor disagreements, or other shipping problems may result in the loss or unavailability of inventory and/or delays in the delivery of merchandise to our stores and customers.
Technology and Data Security Risks
A material disruption in our information technology systems could adversely affect our business or results of operations.
We rely extensively on our information technology systems to process transactions, summarize results and manage our business. Our information technology systems are subject to damage or interruption from power outages, computer and

9



telecommunications failures, computer viruses, cyber-attack or other security breaches, catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes, acts of war or terrorism, and usage errors by our employees. If our information technology systems are damaged or cease to function properly, including a material disruption in our ability to authorize and process transactions at our stores or on our online systems, we may have to make a significant investment to fix or replace them, and we may suffer loss of critical data and interruptions or delays in our operations. Any material interruption in our information technology systems could negatively affect our business and results of operations.
In addition, COVID-19 may have an adverse impact on our information technology systems, including telecommuting issues associated with our employee population working remotely or an increase in online orders due to disruptions or closures of our retail store operations.
If our technology-based e-commerce systems do not function properly, our operating results could be negatively affected.
Customers are increasingly using computers, tablets and smart phones to shop online and to do price and comparison shopping. We strive to anticipate and meet our customers’ changing expectations and are focused on building a seamless shopping experience across our omnichannel business. Any failure to provide user-friendly, secure e-commerce platforms that offer a variety of merchandise at competitive prices with low cost and quick delivery options that meet customers’ expectations could place us at a competitive disadvantage, result in the loss of e-commerce and other sales, harm our reputation with customers and have a material adverse impact on the growth of our business and our operating results.
A breach of information technology systems could adversely affect our reputation, business partner and customer relationships and operations, and result in high costs.
Through our sales, marketing activities, and use of third-party information, we collect and store certain non-public personal information that customers provide to purchase products or services, enroll in promotional programs, register on websites, or otherwise communicate to us. This may include phone numbers, driver license numbers, contact preferences, personal information stored on electronic devices, and payment information, including credit and debit card data. We gather and retain information about employees in the normal course of business. We may share information about such persons with vendors that assist with certain aspects of our business. In addition, our online operations depend upon the transmission of confidential information over the Internet, such as information permitting cashless payments.    
We employ safeguards for the protection of this information and have made significant investments to secure access to our information technology network. For instance, we have implemented authentication protocols, installed firewalls and anti-virus/anti-malware software, conducted continuous risk assessments, and established data security breach preparedness and response plans. We also employ encryption and other methods to protect our data, promote security awareness with our associates and work with business partners in an effort to create secure and compliant systems.
However, these protections may be compromised as a result of third-party security breaches, burglaries, cyberattacks, errors by employees or employees of third-party vendors, or contractors, misappropriation of data by employees, vendors or unaffiliated third-parties, or other irregularities that may result in persons obtaining unauthorized access to company data.
Retail data frequently targeted by cybercriminals includes consumer credit card data, personally identifiable information, including social security numbers, and health care information. For retailers, point of sale and e-commerce websites are often attacked through compromised credentials, including those obtained through phishing, vishing and credential stuffing. Other methods of attack include advanced malware, the exploitation of software and operating vulnerabilities, and physical device tampering/skimming at card reader units. We believe these attack methods will continue to evolve.
Despite instituting controls for the protection of such information, no commercial or government entity can be entirely free of vulnerability to attack or compromise given that the techniques used to obtain unauthorized access, disable or degrade service change frequently. During the normal course of business, we have experienced and expect to continue to experience attempts to compromise our information systems. Unauthorized parties may attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deception to employees, contractors, vendors and temporary staff. We may be unable to protect the integrity of our systems or company data. An alleged or actual unauthorized access or unauthorized disclosure of non-public personal information could:
materially damage our reputation and brand, negatively affect customer satisfaction and loyalty, expose us to individual claims or consumer class actions, administrative, civil or criminal investigations or actions, and infringe on proprietary information; and

10



cause us to incur substantial costs, including costs associated with remediation of information technology systems, customer protection costs and incentive payments for the maintenance of business relationships, litigation costs, lost revenues resulting from negative changes in consumer shopping patterns, unauthorized use of proprietary information or the failure to retain or attract customers following an attack. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be unavailable or insufficient to cover all losses or all types of claims that may arise in the continually evolving area of cyber risk.
Supply Chain and Third Party Risks
We depend upon vendors and other sources of merchandise, goods and services outside the U.S.. Our business could be affected by disruptions in, or other legal, regulatory, political, economic or public health issues associated with, our supply network.
We depend on vendors for timely and efficient access to products we sell. We source the majority of our merchandise from manufacturers located outside the U.S., primarily Asia.  Any major changes in tax policy, such as the disallowance of tax deductions for imported merchandise could have a material adverse effect on our business, results of operations and liquidity.
The procurement of all our goods and services is subject to the effects of price increases, which we may or may not be able to pass through to our customers. In addition, our procurement of goods and services from outside the U.S. is subject to risks associated with political or financial instability, trade restrictions, tariffs, currency exchange rates, transport capacity and costs, health pandemics and other factors relating to foreign trade. All of these factors may affect our ability to access suitable merchandise on acceptable terms, are beyond our control and could negatively affect our business, results of operations and liquidity.
The U.S. has been engaged in extended trade negotiations with China, which has resulted in the implementation of tariffs on a significant number of products manufactured in China and imported into the U.S. On May 10, 2019, the current U.S. Administration imposed a 25% tariff on approximately $200 billion worth of imports from China into the U.S. (the “Stage 3 Tariffs”), which imports include merchandise for both private-label and national brands sold in our stores. On August 1, 2019, the current U.S. Administration announced its intent to impose a 10% tariff on all remaining imports from China, valued at approximately $300 billion (the “Stage 4 Tariffs”), which imports also include merchandise sold in our stores. The proposed Stage 4 Tariffs were increased to 15% in August 2019 following retaliatory tariffs from China, and a portion of such 15% tariffs went into effect on September 1, 2019 (the “Stage 4A Tariffs”). Subsequently, in October 2019, the current U.S. Administration announced the suspension of the remaining new 15% tariffs (the “Stage 4B Tariffs”) following positive negotiations with China. On January 15, 2020, the U.S. and China signed an agreement known as the “Phase One” trade deal, pursuant to which, among other things, the Stage 3 Tariffs remained unchanged, the Stage 4A Tariffs were reduced from 15% to 7.5%, and the Stage 4B Tariffs were indefinitely suspended.
We continue to evaluate the impact of the effective tariffs, including potential future retaliatory tariffs, as well as other recent changes in foreign trade policy on our supply chain, costs, sales and profitability, and are actively working through strategies to mitigate such impact, including reviewing sourcing options and working with our vendors and merchants. At this time, it is unknown how long U.S. tariffs on Chinese goods will remain in effect or whether additional tariffs will be imposed. Depending upon their duration and implementation, as well as our ability to mitigate their impact, these changes in foreign trade policy and any recently enacted, proposed and future tariffs on products imported by us from China could negatively impact our business, results of operations and liquidity if they seriously disrupt the movement of products through our supply chain or increase their cost. In addition, while we may be able to shift our sourcing options, executing such a shift would be time consuming and would be difficult or impracticable for many products and may result in an increase in our manufacturing costs. The adoption and expansion of trade restrictions, retaliatory tariffs, or other governmental action related to tariffs or international trade agreements or policies has the potential to adversely impact demand for our products, our costs, our customers, our suppliers, and/or the U.S. economy, which in turn could adversely impact our results of operations and business.
If our vendors, or any raw material vendors on which our vendors or our private label business relies, suffer prolonged manufacturing or transportation disruptions due to public health conditions or other unforeseen events, such as the COVID-19 pandemic, our ability to source product could be adversely impacted which would adversely affect our results of operations.


11



Disruption of global sourcing activities and quality and other concerns over our own brands could negatively impact brand reputation and earnings.
Economic and civil unrest in areas of the world where we source products, as well as shipping and dockage issues, could adversely impact the availability or cost of our products, or both. Most of Macy’s goods imported to the U.S. arrive from Asia through ports located on the U.S. west coast and are subject to potential disruption due to labor unrest, security issues or natural disasters affecting any or all of these ports. In addition, in recent years, we have substantially increased the number and types of merchandise that are sold under Macy’s proprietary brands. While we have focused on the quality of our proprietary branded products, we rely on third-parties to manufacture these products. Such third-party manufacturers may prove to be unreliable, the quality of our globally sourced products may vary from expectations and standards, the products may not meet applicable regulatory requirements which may require us to recall these products, or the products may infringe upon the intellectual property rights of third-parties. We face challenges in seeking indemnities from manufacturers of these products, including the uncertainty of recovering on such indemnity and the lack of understanding by manufacturers of U.S. product liability laws in certain foreign jurisdictions.
We also face concerns relating to human rights, working conditions and other labor rights and conditions and environmental impact in factories or countries where merchandise that we sell is produced and concerns about transparent sourcing and supply chains. We require all vendors for both private and national brands to comply with our vendor and supplier code of conduct which outlines minimum standards to help ensure our merchandise is produced in workplaces free of abusive, exploitative or unsafe working conditions, and to comply with applicable laws and regulations of the United States and the country of manufacture or exportation. Although we have implemented policies and procedures designed to facilitate compliance with laws and regulations relating to production of merchandise, doing business in foreign countries and importing merchandise, and to screen, train and monitor our private label vendors to ensure safe and ethical treatment of workers in our supply chain, there can be no assurance that our vendors and other third parties with whom we do business will not violate such laws and regulations or our policies, which could subject us to liability and could adversely impact our reputation, results of operations and business.
Parties with whom Macy's does business may be subject to insolvency risks or may otherwise become unable or unwilling to perform on their obligations to us.
Macy's is a party to contracts, transactions and business relationships with various third parties, including, without limitation, vendors, suppliers, service providers, lenders and participants in joint ventures, strategic alliances and other joint commercial relationships, pursuant to which such third parties have performance, payment and other obligations to Macy's. In some cases, we depend upon such third parties to provide essential leaseholds, products, services or other benefits, including with respect to store and distribution center locations, merchandise, advertising, software development and support, logistics, other agreements for goods and services to operate our business in the ordinary course, extensions of credit, credit card accounts and related receivables, and other vital matters. Current economic, industry and market conditions could result in increased risks to Macy's associated with the potential financial distress or insolvency of such third parties. If any of these third parties were to become subject to bankruptcy, receivership or similar proceedings, the rights and benefits with respect to our contracts, transactions and business relationships with such third parties could be terminated, modified in a manner adverse to us, or otherwise impaired. We may be unable to arrange for alternate or replacement contracts, transactions or business relationships on terms as favorable as existing contracts, transactions or business relationships. Our inability to do so could negatively affect our cash flows, financial condition and results of operations.
Global, Legal and External Risks
Macy’s business is subject to unfavorable economic and political conditions, extreme violence and other related risks.
Unfavorable global, domestic or regional economic or political conditions and other developments and risks could negatively affect our business and results of operations. For example, unfavorable changes related to interest rates, rates of economic growth, fiscal and monetary policies of governments, inflation, deflation, consumer credit availability, consumer debt levels, consumer debt payment behaviors, tax rates and policy, unemployment trends, energy prices, and other matters that influence the availability and cost of merchandise, consumer confidence, spending and tourism could negatively affect our business and results of operations. In addition, unstable political conditions, civil unrest, terrorist activities, armed conflicts or events of extreme violence may disrupt commerce and could negatively affect our business and results of operations.



12



Our business could be affected by extreme weather conditions, natural disasters or regional or global health pandemics.
Extreme weather conditions in the areas in which our stores are located could negatively affect our business and results of operations. For example, frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather conditions over a prolonged period could make it difficult for our customers to travel to our stores and thereby reduce our sales and profitability. Our business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could reduce demand for a portion of our inventory and thereby reduce our sales and profitability. In addition, extreme weather conditions could result in disruption or delay of production and delivery of materials and products in our supply chain and cause staffing shortages in our stores.
Natural disasters such as hurricanes, tornadoes and earthquakes, or a combination of these or other factors, could damage or destroy our facilities or make it difficult for customers to travel to our stores, thereby negatively affecting our business and results of operations.
Our business and results of operations could also be negatively affected if a regional or global health pandemic were to occur, depending upon its location, duration and severity. Customers might avoid public places, such as our stores, or in extreme cases governments might limit or ban public gatherings or travel, resulting in temporary store closures or changes in consumer spending behavior. A regional or global health pandemic might also result in disruption or delay of production and delivery of materials and products in our supply chain and cause staffing shortages in our stores.
Litigation, legislation or regulatory developments could adversely affect our business and results of operations.
We are subject to various federal, state and local laws, rules, regulations, inquiries and initiatives in connection with both our core business operations and our credit card and other ancillary operations (including the Credit Card Act of 2009 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010). Recent and future developments relating to such matters could increase our compliance costs and adversely affect the profitability of our credit card and other operations. Our effective tax rate is impacted by a number of factors, including changes in federal or state tax law, interpretation of existing laws and the ability to defend and support the tax positions taken on historical tax returns. Certain changes in any of these factors could materially impact the effective tax rate and net income.
We are also subject to anti-bribery, customs, child labor, truth-in-advertising and other laws, including consumer protection regulations and zoning and occupancy ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise and the operation of retail stores and warehouse facilities. Although we undertake to monitor changes in these laws, if these laws change without our knowledge, or are violated by importers, designers, manufacturers, distributors or agents, we could experience delays in shipments and receipt of goods or be subject to fines or other penalties under the controlling regulations, any of which could negatively affect our business and results of operations. In addition, we are regularly involved in various litigation matters that arise in the ordinary course of our business. Adverse outcomes in current or future litigation could negatively affect our financial condition, results of operations and cash flows.
Financial Risks
Inability to access capital markets could adversely affect our business or financial condition.
Changes in the credit and capital markets, including market disruptions, limited liquidity and interest rate fluctuations, may increase the cost of financing or restrict our access to this potential source of future liquidity. A decrease in the ratings that rating agencies assign to Macy’s short and long-term debt may negatively impact our access to the debt capital markets and increase our cost of borrowing. In addition, our bank credit agreements require us to maintain specified interest coverage and leverage ratios. Our ability to comply with the ratios may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If our results of operations or operating ratios deteriorate to a point where we are not in compliance with our debt covenants, and we are unable to obtain a waiver, much of our debt would be in default and could become due and payable immediately. Our assets may not be sufficient to repay in full this indebtedness, resulting in a need for an alternate source of funding. We cannot make any assurances that we would be able to obtain such an alternate source of funding on satisfactory terms, if at all, and our inability to do so could cause the holders of our securities to experience a partial or total loss of their investments in Macy's.
Factors beyond our control could affect Macy's stock price.
Macy’s stock price, like that of other retail companies, is subject to significant volatility because of many factors, including factors beyond our control. These factors may include:

13



general economic, stock, credit and real estate market conditions;
risks relating to Macy’s business and industry, including those discussed above;
strategic actions by us or our competitors;
adverse business announcements by our competitors;
variations in our quarterly results of operations;
future sales or purchases of Macy’s common stock; and
investor perceptions of the investment opportunity associated with Macy’s common stock relative to other investment alternatives.
We may fail to meet the expectations of our stockholders or of analysts at some time in the future. If the analysts who regularly follow Macy’s stock lower their rating or lower their projections for future growth and financial performance, Macy’s stock price could decline. Also, sales of a substantial number of shares of Macy’s common stock in the public market or the appearance that these shares are available for sale could adversely affect the market price of Macy’s common stock.

Item 1B.
Unresolved Staff Comments.
None.
 

14



Item 2.
Properties.
The properties of the Company consist primarily of stores and related facilities, including a logistics network. The Company also owns or leases other properties, including corporate office space in Cincinnati and New York and other facilities at which centralized operational support functions are conducted. As of February 1, 2020, the operations of the Company were reviewed by management using store locations which combines multi-box properties into a single location, whereas the previous property information was provided solely by number of individual store boxes.
As of February 1, 2020, the operations of the Company included 775 store locations in 43 states, the District of Columbia, Puerto Rico and Guam, comprising a total of approximately 120 million square feet. At these locations, store boxes consisted of 342 owned boxes, 384 leased boxes, 108 boxes operated under arrangements where the Company owned the building and leased the land and five boxes of partly owned and partly leased buildings. All owned properties are held free and clear of mortgages. Pursuant to various shopping center agreements, the Company is obligated to operate certain stores for periods of up to 15 years. Some of these agreements require that the stores be operated under a particular name. Most leases require the Company to pay real estate taxes, maintenance and other 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.
The Company's operations were conducted through the following branded store locations:
 
2019
 
Boxes
 
Locations
Macy's
613

 
551

Bloomingdale's
55

 
53

bluemercury
171

 
171

 
839

 
775


Store count activity was as follows:
 
2019
 
Boxes
 
Locations
Store count at beginning of fiscal year
867

 
800

Stores opened
12

 
12

Stores closed, consolidated into or relocated from existing centers
(40
)
 
(37
)
Store count at end of fiscal year
839

 
775

Additional information about the Company’s store boxes as of February 1, 2020 is as follows:
 
By Brand
 
Total
 
Owned
 
Leased
 

Subject to
a Ground
Lease
 
Partly Owned and Partly
Leased
Macy's
 
613

 
329

 
178

 
101

 
5

Bloomingdale's
 
55

 
13

 
35

 
7

 

bluemercury
 
171

 

 
171

 

 

 
 
839

 
342

 
384

 
108

 
5





15



Additional information about the Company’s logistics network as of February 1, 2020 is as follows:
Location
 
Primary Function
 
Owned or Leased
 
Square Footage (thousands)
Cheshire, CT
 
Direct to customer
 
Owned
 
725

Chicago, IL
 
Stores
 
Owned
 
861

Columbus, OH
 
Stores
 
Leased
 
673

Dayton, OH
 
Stores
 
Leased
 
107

Denver, CO
 
Stores
 
Leased
 
20

Goodyear, AZ
 
Direct to customer
 
Owned
 
1,560

Hayward, CA
 
Stores
 
Owned
 
310

Houston, TX
 
Stores
 
Owned
 
992

Joppa, MD
 
Stores
 
Owned
 
850

Kapolei, HI
 
Stores
 
Leased
 
260

Los Angeles, CA
 
Stores
 
Owned
 
1,529

Martinsburg, WV
 
Direct to customer
 
Owned
 
2,200

Miami, FL
 
Stores
 
Leased
 
535

Portland, TN
 
Direct to customer
 
Owned
 
1,455

Raritan, NJ
 
Stores
 
Owned
 
980

Sacramento, CA
 
Direct to customer
 
Leased
 
385

Secaucus, NJ
 
Stores
 
Leased
 
675

South Windsor, CT
 
Stores
 
Owned
 
595

Stone Mountain, GA
 
Stores
 
Owned
 
920

Tampa, FL
 
Stores
 
Owned
 
585

Tulsa, OK
 
Direct to customer
 
Owned
 
2,195

Tukwila, WA
 
Stores
 
Leased
 
500

Union City, CA
 
Stores
 
Leased
 
165

Youngstown, OH
 
Stores
 
Owned
 
645



Item 3.
Legal Proceedings.
The Company and its subsidiaries are involved in various proceedings that are incidental to the normal course of their businesses. As of the date of this report, the Company does not expect that any of such proceedings will have a material adverse effect on the Company’s financial position or results of operations.
 

Item 4.
Mine Safety Disclosures.
Not applicable.


16



PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company's common stock is listed on the New York Stock Exchange under the trading symbol “M.” As of February 1, 2020, the Company had approximately 14,000 stockholders of record.

The declaration and payment of future dividends will be at the discretion of the Company’s Board of Directors, are subject to restrictions under the Company’s credit facility and may be affected by various other factors, including the Company’s earnings, financial condition and legal or contractual restrictions.
The following table provides information regarding the Company’s purchases of common stock during the fourth quarter of 2019.
 
 
Total
Number
of Shares
Purchased
 
Average
Price Paid per
Share ($)
 
Number of Shares
Purchased as Part of Publicly Announced Plans or Programs (1)
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs ($)(1)
 
(thousands)
 
 
 
(thousands)
 
(millions)
November 3, 2019 - November 30, 2019

 

 

 
1,716

December 1, 2019 - January 4, 2020

 

 

 
1,716

January 5, 2020 - February 1, 2020

 

 

 
1,716

 

 

 

 
 
 ___________________
(1)
Beginning in January 2000, the Company’s Board of Directors approved various authorizations to purchase, in the aggregate, up to $18 billion of common stock. As of February 1, 2020, $1,716 million of authorization remained unused. On March 26, 2020, the Company's Board of Directors rescinded its authorization of the remaining unused amount.

17



The following graph compares the cumulative total stockholder return on the Company's common stock with the Standard & Poor's 500 Composite Index and the Company's peer group for the period from January 31, 2015 through February 1, 2020, assuming an initial investment of $100 and the reinvestment of all dividends, if any.
chart-c7544aa5aac05f6cb98.jpg

The companies included in the old peer group are Bed, Bath & Beyond, Dillard's, Gap, J.C. Penney, Kohl's, L Brands, Nordstrom, Ross Stores, Sears Holdings, Target, TJX Companies and Wal-Mart; while the companies included in the new peer group are Bed, Bath & Beyond, Best Buy, Dillard's, Dollar Tree, Gap, Hudson's Bay, J.C. Penney, Kohl's, L Brands, Lowe's, Nordstrom, Ross Stores, Target, and TJX Companies.

The change in peer group was made to be consistent with the peer group that the Compensation and Management Development Committee of the Board of Directors uses in benchmarking and assessing compensation for the Company's executive officers.




18



Item 6.
Selected Financial Data.
The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and the notes thereto and the other information contained elsewhere in this report. The Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), on February 3, 2019, using a modified retrospective approach that allowed for transition in the period of adoption. Therefore, results prior to 2019 have not been recast for the adoption of this standard. Additionally, the Company adopted the ASU No. 2014-09, Revenue from Contracts with Customers, on February 4, 2018 using the full retrospective transition method and recast results from 2017 and 2016. Results from 2015 have not been recast for the adoption of this standard.
 
 
2019
 
2018
 
2017*
 
2016
 
2015
 
(millions, except per share)
Consolidated Statement of Income Data:
 
 
 
 
 
 
 
 
 
Net sales
$
24,560

 
$
24,971

 
$
24,939

 
$
25,908

 
$
27,079

Gross margin (a)
9,389

 
9,756

 
9,758

 
10,242

 
10,583

Operating income
970

 
1,738

 
1,864

 
1,371

 
2,028

Net income
564

 
1,098

 
1,555

 
619

 
1,070

Net income attributable to Macy's, Inc. shareholders
564

 
1,108

 
1,566

 
627

 
1,072

 
 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to
Macy's, Inc. shareholders
$
1.82

 
$
3.60

 
$
5.13

 
$
2.03

 
$
3.26

Diluted earnings per share attributable to
Macy's, Inc. shareholders
$
1.81

 
$
3.56

 
$
5.10

 
$
2.02

 
$
3.22

Average number of shares outstanding
309.7

 
307.7

 
305.4

 
308.5

 
328.4

Cash dividends paid per share
$
1.51

 
$
1.51

 
$
1.51

 
$
1.49

 
$
1.39

Depreciation and amortization
$
981

 
$
962

 
$
991

 
$
1,058

 
$
1,061

Capital expenditures
$
1,157

 
$
932

 
$
760

 
$
912

 
$
1,113

Balance Sheet Data (at year end):
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
685

 
$
1,162

 
$
1,455

 
$
1,297

 
$
1,109

Property and equipment - net
6,633

 
6,637

 
6,672

 
7,017

 
7,616

Total assets
21,172

 
19,194

 
19,583

 
20,082

 
20,576

Short-term debt
539

 
43

 
22

 
309

 
642

Long-term debt
3,621

 
4,708

 
5,861

 
6,562

 
6,995

Total Shareholders’ equity
6,377

 
6,436

 
5,733

 
4,375

 
4,253

 ___________________
*
53 weeks
(a) Gross margin is defined as net sales less cost of sales.






19



Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The discussion in this Item 7 should be read in conjunction with the Consolidated Financial Statements and the related notes included elsewhere in this report. The discussion in this Item 7 contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in “Risk Factors” and “Forward-Looking Statements.”
Company 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 kids'), cosmetics, home furnishings and other consumer goods. As of February 1, 2020, the Company's operations were conducted through Macy's, Bloomingdale's, Macy’s Backstage, Bloomingdale’s The Outlet and bluemercury, which are aggregated into one reporting segment in accordance with the FASB Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting.

Bloomingdale's in Dubai, United Arab Emirates and Al Zahra, Kuwait are operated under a license agreement with Al Tayer Insignia, a company of the Al Tayer Group, LLC.
2019 Operating Results and Summary

Continuing with its 3-year plan introduced in 2017, the Company continued the implementation of its North Star strategy to transform its omnichannel business and focus on key growth areas, embrace customer centricity, and optimize value in its real estate portfolio. The key components to this strategy were:
1.
From Familiar to Favorite included everything the Company does to further its brand awareness and identity to its core customers.
2.
It Must Be Macy’s encompassed delivering the products and experiences customers love and are exclusive to the Company.
3.
Every Experience Matters, in-store and online leveraged the Company's competitive advantage in combining the human touch in its physical stores with cutting-edge technology in its mobile applications and websites.
4.
Funding our Future represented the decisions and actions the Company took to identify and realize resources to fuel growth.
5.
What’s New, What’s Next explored and developed innovation ideas to turn consumer and technology trends to the Company's advantage and to drive growth.

During 2019, the Company executed its five 2019 key strategic initiatives underlying components of the North Star strategy. The following summarizes how these initiatives contributed to 2019 results.
In 2019, the Company expanded the growth treatment to an additional 100 locations, from the original 50 locations in 2018. The Growth150 locations (a mix of stores where the Company accelerated a number of successful store initiatives, such as facility upgrades, merchandising strategies, and localized marketing) contributed to the operating results for 2019, with sales results outperforming the other Macy's store locations.
Continued the expansion of Backstage, Macy's mall-based off-price business, the Company opened 50 new Backstage locations within Macy’s stores during 2019. This expansion brings the total Backstage locations to 218 (six freestanding and 212 inside Macy's stores) as of February 1, 2020.
The Company's vendor direct program (merchandise purchased from the Company's websites and digital applications and shipped directly to customers from the respective vendor) continued its expansion during 2019, adding more than 1 million SKUs and 1,000 new vendors.
The mobile-first strategy has continued to create an improved omnichannel experience for customers through the enhancement of app features, such as My Wallet, My Store and My Stylist. Mobile remains the Company's fastest growing channel, with downloads and mobile active users experiencing significant growth during 2019.

20



Sales at the Company's destination businesses (six merchandise categories: dresses, fine jewelry, big ticket, men's tailored, women's shoes and beauty) grew in 2019 as the Company invested in these categories through merchandise assortment, customer service, improved store environments, and enhanced marketing.

From a brand standpoint in 2019, Bloomingdale's piloted My List, a rental service, with 80 vendors offering 1,500 styles. In addition, Bloomingdale's opened a new location in Norwalk, Connecticut, bringing the total Bloomingdale's locations to 34 as of February 1, 2020. A new Bloomingdale's in Silicon Valley opened in March 2020. Bloomingdale's the Outlets continued its growth in 2019 with the opening of two new locations and has plans for continued expansion in 2020.

The Company continued to grow its luxury beauty products and spa retailer, bluemercury, by opening nine additional freestanding bluemercury stores in urban and suburban markets and adding bluemercury products and boutiques to Macy's stores. The brand also launched its first loyalty program, Bluerewards, during 2019. As of February 1, 2020, the Company operated 191 bluemercury locations (171 freestanding and 20 inside Macy's stores).

2019 Financial Results
Specific 2019 Macy's, Inc. financial performance included:
Net sales decreased 1.6% compared to 2018.
Comparable sales on an owned basis decreased 0.8% and comparable sales on an owned plus licensed basis decreased 0.7%.
Asset sale gains decreased $227 million to $162 million compared to 2018.
Restructuring, impairment, store closing and other costs increased $218 million to $354 million compared to 2018 driven by the restructuring activities, store closures and campus consolidation plans related to the Polaris strategy.
Net income attributable to Macy's, Inc. shareholders for 2019 was $564 million, a decrease of $544 million from $1,108 million in 2018.
Diluted earnings per share attributable to Macy's, Inc. shareholders decreased to $1.81 in 2019 compared to $3.56 in 2018. Excluding restructuring, impairment, store closing and other costs, settlement charges, and losses on early retirement of debt, adjusted diluted earnings per share attributable to Macy's, Inc. shareholders decreased to $2.91 in 2019 from $4.18 in 2018. In addition, excluding asset sales gains, adjusted diluted earnings per share attributable to Macy's, Inc. shareholders decreased to $2.53 in 2019 from $3.26 in 2018.
Earnings before interest, taxes, depreciation and amortization excluding restructuring, impairment, store closing and other costs and settlement charges ("Adjusted EBITDA") was $2,336 million in 2019, as compared to $2,877 million in 2018.
Return on invested capital ("ROIC"), a key measure of operating productivity, was 17.1% for 2019 and 19.9% for 2018.
In 2019, the Company repurchased $525 million of debt in a tender offer. In 2018, the Company repurchased $1,094 million of debt, consisting of $344 million of debt repurchased in the open market and $750 million of debt repurchased in a tender offer.
See pages 30 to 34 for reconciliations of the non-GAAP financial measures presented above to the most comparable U.S. generally accepted accounting principles ("GAAP") financial measures and other important information.

Strategic Initiative Update

On February 4, 2020, Macy’s, Inc. announced its Polaris strategy, a three-year plan designed to stabilize profitability and position the Company for sustainable, profitable growth. The five major components of the Polaris strategy are:

21



Strengthen Customer Relationships: The Company is focusing on building customer lifetime value and expanding the Macy's Star Rewards loyalty program with the launch of Loyalty 3.0 in early February 2020. Loyalty 3.0 allows every Star Rewards member to earn loyalty rewards on their purchases regardless of tender.
Curate Quality Fashion: The Company is repositioning its merchandise category focus to drive sales and improve gross margin. As part of the merchandising strategy, the Company is committed to a more focused approach to its higher-margin private brands business with plans to build four of them into $1 billion brands.
Accelerate Digital Growth: The Company will continue to invest in its websites and mobile apps to deliver a superior fashion experience and accelerate growth. The Company will grow its customer franchise with a strong focus on personalization and continued innovation to deliver the best digital fashion experience to its customers.
Optimize the Store Portfolio: The Company completed a rigorous evaluation of the Macy’s store portfolio. This included a store-level assessment of each store’s overall value to the fleet, including predicted profitability based on consumer trends and demographics. As a result, the Company plans to close approximately 125 of its least productive stores over the next three years, including approximately 30 stores that were announced for closure in the spring of 2020. The Company will expand the Growth treatment to another 100 locations in 2020 and will expand to 50 more Backstage locations within Macy's stores and add 7 more freestanding Backstage locations in 2020.
The Company is testing a retail ecosystem model with a mix of Macy's store formats within a geographic market. As part of this test, the Company opened a new store format, Market by Macy’s, in Dallas in February 2020. This new format is smaller than an average Macy’s store and will be located off-mall in lifestyle centers. Market by Macy’s will feature a mix of curated Macy’s merchandise and local goods, as well as local food and beverage options and a robust community events calendar. The first Market by Macy’s opened in Dallas in February 2020.
Reset Cost Base: The Company is streamlining and right-sizing the organization and expense base to drive improvement in working capital and operating results. This includes reductions in corporate and support functions, campus consolidations and the consolidation of the Company's sole headquarters to New York City, New York. Additionally, the Company is further reshaping its supply chain to support omnichannel customer behavior and the Company’s new retail ecosystem.

Over the next three years, the savings driven by Polaris are expected to total approximately $1.5 billion in 2022, of which approximately $600 million is associated with gross margin improvement and approximately $900 million is related to selling, general and administrative ("SG&A") expense savings. Some of these savings are expected to flow through the Company's financial results whereas the remaining portion will be invested back into the business.
    
The total costs to be incurred by the Company in implementing its Polaris strategy are estimated to be approximately $400 million to $420 million. In 2019, the Company recognized Polaris-related costs of approximately $318 million, of which approximately $161 million were non-cash impairment charges associated with store closures and campus consolidations and approximately $157 million were cash costs primarily related to severance and human resource-related activities and other costs. The remaining costs to be recorded in 2020 are expected to be cash.

The Company may incur significant additional charges in future periods as it more fully defines incremental Polaris strategy initiatives and moves into the execution phases of these projects. Since the scope of such efforts are not fully known at this time, the benefits of such initiatives, and any related charges or capital expenditures, are not currently quantifiable. Actions associated with the Polaris strategy are currently expected to continue through 2022.

COVID-19 Impact
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States. COVID-19 has had a negative impact on the Company's 2020 operations and financial results to date, and the full financial impact of the pandemic cannot be reasonably estimated at this time due to uncertainty as to its severity and duration. The Company has taken the following steps to help mitigate the current impact, as well as the continued uncertainty regarding the ultimate impact of COVID-19 on the Company's business, results of operations, financial position and cash flows:

22



The Company temporarily closed all stores on March 18, 2020 and the stores will remain closed until it is safe to reopen. This included all Macy’s, Bloomingdale’s, Bluemercury, Macy’s Backstage, Bloomingdales the Outlet and Market by Macy’s stores. 
In an effort to increase liquidity, the Company fully drew on the $1,500 million credit facility, announced the suspension of quarterly cash dividends beginning in the second quarter of 2020 and took additional steps to reduce discretionary spending and other expenditures. The Company's Board of Directors rescinded its authorization of any unused amounts under the Company's share repurchase program.
Due to heightened uncertainty relating to the potential impacts of the COVID-19 pandemic on the Company’s business operations, including its duration, its impact on overall demand for merchandise and the effect on the Company's stores, on March 20, 2020, the Company announced the withdrawal of its 2020 guidance, which was previously issued on February 5, 2020 and confirmed on February 25, 2020.
To improve the Company's current cash position and reduce its cash expenditures during this uncertain time, the Company's Board of Directors and Chief Executive Officer will forgo any compensation for the duration of the COVID-19 crisis. In addition, the Company has deferred cash expenditures where possible and temporarily implemented a furlough for the majority of its employee population. Individuals not impacted by the furlough have taken a temporary reduction of their pay.
The COVID-19 pandemic may have a material adverse impact on the Company's operational performance, financial results and cash flows, although the full impact will depend on future developments, including the continued spread and duration of the outbreak and any related restrictions, all of which are highly uncertain and cannot be predicted. The Company continues to monitor the situation closely and may implement further measures to improve liquidity. Such measures may include pursuing additional sources of financing, securitizing Company assets, reducing or deferring future capital expenditures and other expenses, or other yet to be identified actions.

Presentation of Information

The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for the fiscal years ended February 1, 2020 and February 2, 2019. For a discussion of changes from the fiscal year ended February 3, 2018 to February 2, 2019, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2019 (filed April 3, 2019).




23



Results of Operations
 
 
2019
 
 
2018
 
 
2017
 
 
 
Amount
 
% to Sales
 
 
Amount
 
% to Sales
 
 
Amount
 
% to Sales
 
 
 
(dollars in millions, except per share figures)
 
Net sales
 
$
24,560

 
 
 
 
$
24,971

 
 
 
 
$
24,939

 
 
 
Increase (decrease) in comparable sales
 
(0.8
)
%
 
 
1.7

%
 
 
(2.2
)
%
 
Credit card revenues, net
 
771

 
3.1

%
768

 
3.1

%
702

 
2.8

%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
(15,171
)
 
(61.8
)
%
(15,215
)
 
(60.9
)
%
(15,181
)
 
(60.9
)
%
Selling, general and administrative expenses
 
(8,998
)
 
(36.6
)
%
(9,039
)
 
(36.2
)
%
(8,954
)
 
(35.9
)
%
Gains on sale of real estate
 
162

 
0.6

%
389

 
1.5

%
544

 
2.2

%
Restructuring, impairment, store closing and other costs
 
(354
)
 
(1.4
)
%
(136
)
 
(0.5
)
%
(186
)
 
(0.7
)
%
Operating income
 
970

 
3.9

%
1,738

 
7.0

%
1,864

 
7.5

%
Benefit plan income, net
 
31

 
 
 
39

 
 
 
57

 
 
 
Settlement charges
 
(58
)
 
 
 
(88
)
 
 
 
(105
)
 
 
 
Interest expense - net
 
(185
)
 
 
 
 
(236
)
 
 
 
 
(310
)
 
 
 
Gains (losses) on early retirement of debt
 
(30
)
 
 
 
 
(33
)
 
 
 
 
10

 
 
 
Income before income taxes
 
728

 
 
 
 
1,420

 
 
 
 
1,516

 
 
 
Federal, state and local income tax benefit (expense)
 
(164
)
 
 
 
 
(322
)
 
 
 
 
39

 
 
 
Net income
 
564

 
 
 
 
1,098

 
 
 
 
1,555

 
 
 
Net loss attributable to noncontrolling interest
 

 
 
 
 
10

 
 
 
 
11

 
 
 
Net income attributable to Macy's, Inc. shareholders
 
$
564

 
2.3

%
$
1,108

 
4.4

%
$
1,566

 
6.3

%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share attributable to
Macy's, Inc. shareholders
 
$
1.81

 
 
 
 
$
3.56

 
 
 
 
$
5.10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental Financial Measure
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
$
9,389

 
38.2

%
$
9,756

 
39.1

%
$
9,758

 
39.1

%
Digital sales as a percent of comparable sales on an owned basis
 
26.0

%
 
 
23.0

%
 
 
22.0

%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental Non-GAAP Financial Measures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Increase (decrease) in comparable sales on
an owned plus licensed basis
 
(0.7
)
%
 
 
2.0

%
 
 
(1.9
)
%
 
Adjusted diluted earnings per share attributable to
Macy's, Inc. shareholders
 
$
2.91

 
 
 
 
$
4.18

 
 
 
 
$
3.79

 
 
Adjusted EBITDA
 
$
2,336

 
 
 
$
2,877

 
 
 
$
3,109

 
 
ROIC
 
17.1

%
 
 
19.9

%
 
 
20.8

%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See pages 30 to 34 for a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measure and for other important information.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


24



Comparison of 2019 and 2018
Net Sales and Comparable Sales
Net sales for 2019 were $24,560 million, a decrease of $411 million, or 1.6%, from 2018. The decrease in comparable sales on an owned basis for 2019 was 0.8% compared to 2018. The decrease in comparable sales on an owned plus licensed basis for 2019 was 0.7% compared to 2018. Digital sales continued to be strong in 2019, with digital sales as a percent of net sales increasing to 26.0% from 23.0% in 2018. By family of business, destination businesses including dresses, fine jewelry, fragrances, men's tailored clothing, women's shoes and mattresses performed well during 2019. Sales in 2019 were also strong in active apparel and kids. Sales in 2019 were weak in women's sportswear, handbags, color cosmetics and fashion watches. Sales of Macy's-branded private label brands represented nearly 20% of net sales in the Macy's-branded operations in both 2019 and 2018.
Comparable sales on an owned basis within the Company's three brands, which include store-within-store locations, are as follows:
 
2019
 
2018
 
Macy's
 
 
 
 
Stores (a) 
65.0
%
 
68.0
%
 
Digital
23.0
%
 
21.0
%
 
Bloomingdale's
 
 
 
 
Stores (a)
8.0
%
 
8.0
%
 
Digital
3.0
%
 
2.0
%
 
bluemercury
1.0
%
 
1.0
%
 
Total
100.0
%
 
100.0
%
 
(a) Includes Macy's Backstage free-standing locations and Bloomingdale's the Outlets, respectively.
Credit Card Revenues, Net
Net credit card revenues were $771 million for 2019, an increase of $3 million compared to $768 million recognized in 2018. Credit card penetration for 2019 was flat to 2018 at 46.9%. Net credit card revenues for 2019 were primarily driven by strong co-brand sales growth from transactions on the card outside of the Macy's family of brands offset by the decline in net sales and improved profit share associated with the underlying credit card portfolio performance.
Cost of Sales
Cost of sales for 2019 decreased $44 million from 2018. The cost of sales rate as a percent to net sales of 61.8% in 2019 increased 90 basis points in 2018, primarily due to higher promotional markdowns and higher delivery expenses associated with the Company's omnichannel activities, free shipping promotions and loyalty programs.
SG&A Expenses
SG&A expenses for 2019 decreased $41 million from 2018 and the SG&A rate as a percent to net sales increased 40 basis points to 36.6% as compared to 2018. The SG&A dollar reduction reflects lower variable expenses due to lower net sales. In addition, advertising expense, net of cooperative advertising allowances, decreased to $1,142 million in 2019 from $1,162 million in 2018.
Gains on Sale of Real Estate
The Company recognized gains of $162 million in 2019 associated with real estate sales, as compared to $389 million in 2018. 2019 included a gain of $52 million associated with the sale of the Macy's Downtown Seattle location. 2018 included gains of $178 million related to the I. Magnin building in Union Square San Francisco and $58 million related to the continued recognition of the deferred gain from the Macy's Brooklyn transaction which closed in 2015.
Restructuring, Impairment, Store Closing and Other Costs
Restructuring, impairment, store closing and other costs for 2019 and 2018 of $354 million and $136 million, respectively, included severance and other human resource-related costs, asset impairment charges and other costs associated with organizational changes and store closings. 2019 included costs primarily associated with the Polaris strategy, including $161 million of non-cash impairment charges associated with store closures and campus consolidations

25



and $157 million related to severance and other human resource-related costs. 2018 included costs and expenses primarily associated with the organizational changes and store closings announced in January 2019.
Benefit Plan Income, Net
2019 and 2018 included $31 million and $39 million, respectively, of non-cash net benefit plan income relating to the Company's defined benefit plans. This income includes the net of: interest cost, expected return on plan assets and amortization of prior service costs or credits and actuarial gains and losses. The decline from 2018 is mainly driven by the decrease in the expected return on plan assets from 6.75% in 2018 to 6.5% in 2019, partially offset by lower interest cost.
Settlement Charges
$58 million and $88 million of non-cash settlement charges were recognized in 2019 and 2018, respectively. These charges relate to the pro-rata recognition of net actuarial losses associated with the Company’s defined benefit retirement plans and are the result of lump sum distributions associated with retiree distribution elections and restructuring activity.
Net Interest Expense
Net interest expense, excluding losses on early retirement of debt, for 2019 decreased $51 million from 2018. This decrease was primarily driven by the reduction in the Company's debt resulting from the tender offer and open market repurchases in 2018.
Losses on Early Retirement of Debt
In 2019, the Company completed a tender offer debt repurchase of $525 million face value of senior notes and debentures. As a result of these transactions, the Company recognized $30 million in expenses and fees.
In 2018, the Company repurchased $344 million face value of senior notes and debentures and completed a tender offer debt repurchase of $750 million face value of senior notes and debentures. As a result of these transactions, the Company recognized $33 million in expenses and fees net of the write-off of unamortized debt premiums.
 
Effective Tax Rate
The Company's effective tax rate was expense of 22.5% for 2019 and 22.7% for 2018 compared to the federal income tax statutory rate of 21%. The federal income tax statutory rate of 21% reflects U.S. federal tax reform enacted in 2017. The effective tax rates in 2019 and 2018 were impacted by the settlement of certain state and local tax matters.

Net Income Attributable to Macy's, Inc. Shareholders
Net income attributable to Macy's, Inc. shareholders for 2019 decreased $544 million compared to 2018, driven by lower earnings before interest and taxes ("EBIT") partially offset by lower net interest expense and lower federal, state, and local income tax expense.







26



Cash Flow, Liquidity and Capital Resources
The Company's principal sources of liquidity are cash from operations, cash on hand and the credit facility described below.
Because of the COVID-19 outbreak, there is significant uncertainty surrounding the potential impact on the Company's results of operations and cash flows. The Company is proactively taking steps to increase available cash on hand including, but not limited to, targeted reductions in discretionary operating expenses and capital expenditures, and utilizing funds available under the Company's credit agreement. The Company may pursue additional sources of financing to improve its liquidity. However the disruption of the capital markets caused by the COVID-19 outbreak could make any financing more challenging and there can be no assurance that the Company will be able to obtain such additional financing on commercially reasonable terms or at all.

Operating Activities
Net cash provided by operating activities was $1,608 million in 2019 compared to $1,735 million in 2018. The decline was driven by lower EBITDA and a decrease in non-merchandise accounts payable, which were partially offset by lower tax payments and a net improvement in merchandise inventory and payables.
Investing Activities
Net cash used by investing activities for 2019 was $1,002 million, compared to net cash used by investing activities of $456 million for 2018. Investing activities for 2019 included purchases of property and equipment totaling $902 million and capitalized software of $255 million, compared to purchases of property and equipment totaling $657 million and capitalized software of $275 million for 2018. The increase in capital expenditures was largely driven by the Company's Growth store investments, which expanded to another 100 stores in 2019, and Backstage strategic initiatives.
In 2019, the Company continued to execute on its real estate strategy that includes creating value through monetization and, in some cases, redevelopment of real estate assets. Overall, property and equipment sales, primarily related to real estate, generated cash proceeds of $185 million in 2019 compared to $474 million in 2018.
Financing Activities
Net cash used by the Company for financing activities was $1,123 million for 2019, including the repayment of $597 million of debt, the payment of $466 million of cash dividends and a $62 million decrease in outstanding checks. 2019 debt repayments included the repayment at maturity of $36 million of 8.5% senior debentures.

During December 2019, the Company completed a tender offer and purchased $525 million in aggregate principal amount of certain senior unsecured notes and debentures. The purchased senior unsecured notes and debentures included $190 million of 4.375% senior notes due 2023, $113 million of 6.9% senior debentures due 2029, $110 million of 2.875% senior notes due 2023, $100 million of 3.875% senior notes due 2022, and $12 million of 7.0% senior debentures due 2028. The total cash cost for the tender offer was $553 million. The Company recognized $30 million of expense related to the recognition of the tender premium and other costs including deferred debt discount amortization. This expense is presented as losses on early retirement of debt on the Consolidated Statements of Income during 2019.

During December 2018, the Company completed a tender offer and purchased $750 million in aggregate principal amount of certain senior unsecured notes and debentures. The purchased senior unsecured notes and debentures included $164 million of 6.65% senior debentures due 2024, $155 million of 7.0% senior debentures due 2028, $114 million of 6.9% senior debentures due 2029, $103 million of 4.5% senior notes due 2034, $94 million of 6.79% senior debentures due 2027, $35 million of 6.7% senior debentures due 2034, $34 million of 6.375% senior notes due 2037, $34 million of 6.7% senior debentures due 2028, $10 million of 6.9% senior debentures due 2032, $5 million of 8.75% senior debentures due 2029, and $2 million of 7.875% senior debentures due 2030. The total cash cost for the tender offer was $789 million. The Company recognized $28 million of expense related to the recognition of the tender premium and other costs partially offset by the unamortized debt premium associated with this debt. This expense is presented as losses on early retirement of debt on the Consolidated Statements of Income during 2018.

During 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 and other fees related to the transactions. Such repurchases resulted in the recognition of expense of $5 million during 2018 presented as losses on early retirement of debt on the Consolidated Statements of Income.

27




Net cash used by the Company for financing activities was $1,544 million for 2018, including the repayment of $1,149 million of debt and the payment of $463 million of cash dividends, partially offset by the issuance of $45 million of common stock, primarily related to the exercise of stock options, and proceeds of $7 million received from Macy's China Limited's noncontrolling interest shareholder.

Liquidity

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.

As of February 1, 2020 and February 2, 2019, there were no revolving credit loans outstanding under the credit agreements, and there were no borrowings under the agreement during 2019 and 2018. In addition, there were no standby letters of credit outstanding at February 1, 2020 and February 2, 2019. Revolving loans under the credit agreement bear interest based on various published rates.

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. There were no borrowings under the program during 2019 and 2018. As of February 1, 2020 and February 2, 2019, there were no remaining borrowings outstanding under the commercial paper program. As a result of the COVID-19 pandemic, the Company's ability to draw on commercial paper is limited.
The credit agreement requires the Company to maintain a specified interest coverage ratio for the latest four quarters of no less than 3.25 and a specified leverage ratio as of and for the latest four quarters of no more than 3.75. The Company's interest coverage ratio for 2019 was 12.68 and its leverage ratio at February 1, 2020 was 1.78, in each case as calculated in accordance with the credit agreement. The interest coverage ratio is defined as EBITDA divided by net interest expense and the leverage ratio is defined as debt divided by EBITDA. For purposes of these calculations EBITDA is calculated as net income plus interest expense, taxes, depreciation, amortization, non-cash impairment of goodwill, intangibles and real estate, settlement charges, non-recurring cash charges not to exceed in the aggregate $200 million and extraordinary losses less interest income and non-recurring or extraordinary gains. Net interest is adjusted to exclude the premium on early retirement of debt.
A breach of a restrictive covenant in the Company's credit agreement or the inability of the Company to maintain the financial ratios described above could result in an event of default under the credit agreement. In addition, an event of default would occur under the credit agreement if any indebtedness of the Company in excess of an aggregate principal amount of $150 million becomes due prior to its stated maturity or the holders of such indebtedness become able to cause it to become due prior to its stated maturity. Upon the occurrence of an event of default, the lenders could, subject to the terms and conditions of the credit agreement, elect to declare the outstanding principal, together with accrued interest, to be immediately due and payable. Moreover, most of the Company's senior notes and debentures contain cross-default provisions based on the non-payment at maturity, or other default after an applicable grace period, of any other debt, the unpaid principal amount of which is not less than $100 million that could be triggered by an event of default under the credit agreement. In such an event, the Company's senior notes and debentures that contain cross-default provisions would also be subject to acceleration.
At February 1, 2020, no notes or debentures contained provisions requiring acceleration of payment upon a debt rating downgrade. However, the terms of approximately $3,359 million in aggregate principal amount of the Company's senior notes outstanding at that date require the Company to offer to purchase such notes at a price equal to 101% of their principal amount plus accrued and unpaid interest if there is both a change of control (as defined in the applicable indenture) of the Company and the notes are rated by specified rating agencies at a level below investment grade.
As of February 1, 2020, the Company's credit rating and outlook were as described in the table below.

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Moody's
 
Standard & Poor's
 
Fitch
Long-term debt
 
Baa3
 
BBB-
 
BBB
Outlook
 
Stable
 
Stable
 
Stable
In February 2020, Standard and Poor's and Fitch downgraded Macy's long-term debt ratings to BB+ and BBB-, respectively. Outlook by Standard and Poor's and Fitch remained at stable. In March 2020, Moody's downgraded the Company's long-term debt rating from Baa3 to Ba1 and changed the outlook to negative.
Dividends
On February 28, 2020, the Company's board of directors declared a quarterly dividend of 37.75 cents per share on its common stock, payable April 1, 2020, to shareholders of record at the close of business on March 13, 2020.
Share repurchases
As of February 1, 2020, the Company had $1,716 million of authorization remaining under its share repurchase program.
Contractual Obligations and Commitments
At February 1, 2020, the Company had contractual obligations (within the scope of Item 303(a)(5) of Regulation S-K) as follows:

 
Obligations Due, by Period
Total
 
Less than
1 Year
 
1 – 3
Years
 
3 – 5
Years
 
More than
5 Years
(millions)
Short-term debt
$
539

 
$
539

 
$

 
$

 
$

Long-term debt
3,607

 

 
453

 
1,472

 
1,682

Interest on debt
1,723

 
188

 
316

 
248

 
971

Finance lease obligations
34

 
3

 
6

 
6

 
19

Operating leases (a and b)
6,911

 
362

 
667

 
617

 
5,265

Letters of credit
34

 
34

 

 

 

Other obligations
4,274

 
2,778

 
525

 
233

 
738

 
$
17,122

 
$
3,904

 
$
1,967

 
$
2,576

 
$
8,675

(a) Operating lease payments include $3,240 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $706 million of legally binding minimum lease payments for leases signed but not yet commenced.
(b) Operating lease payments include $1,203 million related to non-lease component payments, with $876 million related to options to extend lease terms that are reasonably certain of being exercised.

“Other obligations” in the foregoing table includes post employment and postretirement benefits, self-insurance reserves, group medical/dental/life insurance programs, merchandise purchase obligations and obligations under outsourcing arrangements, construction contracts, energy and other supply agreements identified by the Company and liabilities for unrecognized tax benefits that the Company expects to settle in cash in the next year excluding interest and penalties. The Company's merchandise purchase obligations fluctuate on a seasonal basis, typically being higher in the summer and early fall and being lower in the late winter and early spring. The Company purchases a substantial portion of its merchandise inventories and other goods and services otherwise than through binding contracts. Consequently, the amounts shown as “Other obligations” in the foregoing table do not reflect the total amounts that the Company would need to spend on goods and services in order to operate its businesses in the ordinary course.
Of the Company's $133 million of unrecognized tax benefits at February 1, 2020, within "other obligations" in the foregoing table, the Company has excluded $4 million of deferred tax assets and $117 million of long-term liabilities for unrecognized tax benefits for various tax positions taken. The table also excludes federal, state and local interest and penalties related to unrecognized tax benefits of $60 million. These liabilities may increase or decrease over time as a result

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of tax examinations, and given the status of examinations, the Company cannot reliably estimate the period of any cash settlement with the respective taxing authorities.
Important Information Regarding Non-GAAP Financial Measures
The Company reports its financial results in accordance with GAAP. However, management believes that certain non-GAAP financial measures provide users of the Company's financial information with additional useful information in evaluating operating performance. Management believes that providing supplemental changes in comparable sales on an owned plus licensed basis, which includes the impact of growth in comparable sales of departments licensed to third parties, assists in evaluating the Company's ability to generate sales growth, whether through owned businesses or departments licensed to third parties, on a comparable basis, and in evaluating the impact of changes in the manner in which certain departments are operated. In addition, management believes that excluding certain items that are not associated with the Company's core operations and that may vary substantially in frequency and magnitude period-to-period from diluted earnings per share attributable to Macy's, Inc. shareholders, EBIT and EBITDA, including as a percent to sales, provide useful supplemental measures that assist in evaluating the Company's ability to generate earnings and leverage sales, respectively, and to more readily compare these metrics between past and future periods. Management also believes that EBIT, EBITDA, Adjusted EBIT and Adjusted EBITDA are frequently used by investors and securities analysts in their evaluations of companies, and that such supplemental measures facilitate comparisons between companies that have different capital and financing structures and/or tax rates. In addition, management believes that ROIC is a useful supplemental measure in evaluating how efficiently the Company employs its capital. The Company uses some of these non-GAAP financial measures as performance measures for components of executive compensation.
Non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, the Company's financial results prepared in accordance with GAAP. Certain of the items that may be excluded or included in non-GAAP financial measures may be significant items that could impact the Company's financial position, results of operations or cash flows and should therefore be considered in assessing the Company's actual and future financial condition and performance. Additionally, the amounts received by the Company on account of sales of departments licensed to third parties are limited to commissions received on such sales. The methods used by the Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies.
Changes in Comparable Sales
The following is a tabular reconciliation of the non-GAAP financial measure of changes in comparable sales on an owned plus licensed basis, to GAAP comparable sales (i.e., on an owned basis), which the Company believes to be the most directly comparable GAAP financial measure.
 
 
2019
 
2018
 
2017
Increase (decrease) in comparable sales on an owned basis (note 1)
 
(0.8
)%
 
1.7
%
 
(2.2
)%
Impact of growth in comparable sales of departments licensed to third parties (note 2)
 
0.1
 %
 
0.3
%
 
0.3
 %
Increase (decrease) in comparable sales on an owned plus licensed basis
 
(0.7
)%
 
2.0
%
 
(1.9
)%
Notes:
(1)
Represents the period-to-period percentage change in net sales from stores in operation throughout the year presented and the immediately preceding year and all online sales, adjusting for the 53rd week in 2017, excluding commissions from departments licensed to third parties. Stores impacted by a natural disaster or undergoing significant expansion or shrinkage remain in the comparable sales calculation unless the store, or a material portion of the store, is closed for a significant period of time. Definitions and calculations of comparable sales differ among companies in the retail industry.

(2)
Represents the impact of including the sales of departments licensed to third parties occurring in stores in operation throughout the year presented and the immediately preceding year and all online sales, adjusting for the 53rd week in 2017, in the calculation of comparable sales. The Company licenses third parties to operate certain departments in its stores and online and receives commissions from these third parties based on a percentage of their net sales. In its financial statements prepared in conformity with GAAP, the Company includes these commissions (rather than sales of the departments licensed to third parties) in its net sales. The Company does not, however, include any amounts in respect of licensed department sales (or any commissions earned on such sales) in its comparable sales in accordance

30



with GAAP (i.e., on an owned basis). The amounts of commissions earned on sales of departments licensed to third parties are not material to its net sales for the periods presented.
Adjusted Diluted Earnings Per Share Attributable to Macy's, Inc. Shareholders
The following is a tabular reconciliation of the non-GAAP financial measure diluted earnings per share attributable to Macy's, Inc. shareholders, excluding certain items, to GAAP diluted earnings per share attributable to Macy's, Inc. shareholders, which the Company believes to be the most directly comparable GAAP measure.
 
 
2019
 
2018
 
2017
As reported
 
$
1.81

 
$
3.56

 
$
5.10

Restructuring, impairment, store closing and other costs (a)
 
1.13

 
0.41

 
0.61

Settlement charges
 
0.19

 
0.28

 
0.34

Losses (gains) on early retirement of debt
 
0.10

 
0.11

 
(0.03
)
Income tax impact of certain items identified above
 
(0.32
)
 
(0.18
)
 
(0.33
)
Deferred tax effects of federal tax reform
 

 

 
(1.90