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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   Commission File Number:
January 29, 2011   1-13536

LOGO

7 West Seventh Street

Cincinnati, Ohio 45202

(513) 579-7000

and

151 West 34th Street

New York, New York 10001

(212) 494-1602

 

Incorporated in Delaware   I.R.S. No. 13-3324058

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, par value $.01 per share   New York Stock Exchange
7.45% Senior Debentures due 2017   New York Stock Exchange
6.79% Senior Debentures due 2027   New York Stock Exchange
7% Senior Debentures due 2028   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  x    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  x

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
                                    (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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 (July 31, 2010) was approximately $7,873,300,000.

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 25, 2011

Common Stock, $0.01 par value per share   423,747,325 shares

DOCUMENTS INCORPORATED BY REFERENCE

 

Document

   Parts Into
Which Incorporated

Proxy Statement for the Annual Meeting of Stockholders to be held May 20, 2011 (Proxy Statement)

   Part III

 

 

 


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Explanatory Note

On August 30, 2005, the Company completed the acquisition of The May Department Stores Company (“May”) by means of a merger of May with and into a wholly-owned subsidiary of the Company (the “Merger”). As a result of the Merger, May’s separate corporate existence terminated. Upon the completion of the Merger, the subsidiary was merged with and into the Company and its separate corporate existence terminated. On June 1, 2007, the Company changed its name from Federated Department Stores, Inc. to Macy’s, Inc. (“Macy’s”).

Unless the context requires otherwise, references to “Macy’s” or the “Company” are references to Macy’s and its subsidiaries and references to “2010,” “2009,” “2008,” “2007” and “2006” are references to the Company’s fiscal years ended January 29, 2011, January 30, 2010, January 31, 2009, February 2, 2008 and February 3, 2007, respectively.

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 possible invalidity of the underlying beliefs and assumptions;

 

   

competitive pressures from department and specialty stores, general merchandise stores, manufacturers’ outlets, off-price and discount stores, and all other retail channels, including the Internet, mail-order catalogs and television;

 

   

general consumer-spending levels, including the impact of general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, the costs of basic necessities and other goods and the effects of the weather or natural disasters;

 

   

conditions to, or changes in the timing of, proposed transactions and changes in expected synergies, cost savings and non-recurring charges;

 

   

possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions;

 

   

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;

 

   

adverse changes in relationships with vendors and other product and service providers;

 

   

risks related to currency, interest and exchange rates and other capital market, economic and geo-political conditions;

 

   

risks associated with severe weather, natural disasters and changes in weather patterns;

 

   

risks associated with an outbreak of an epidemic or pandemic disease;

 

   

the potential impact of national and international security concerns on the retail environment, including any possible military action, terrorist attacks or other hostilities;


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risks associated with the possible inability of the Company’s manufacturers to deliver products in a timely manner or meet the Company’s quality standards;

 

   

risks associated with the Company’s reliance on foreign sources of production, including risks related to the disruption of imports by labor disputes, regional health pandemics, and regional political and economic conditions;

 

   

risks related to duties, taxes, other charges and quotas on imports; and

 

   

risks associated with 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.

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” and “Special Considerations” 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. On June 1, 2007, the Company changed its corporate name from Federated Department Stores, Inc. to Macy’s, Inc. and the Company’s shares began trading under the ticker symbol “M” on the New York Stock Exchange (“NYSE”). As of January 29, 2011, the operations of the Company included approximately 850 stores in 45 states, the District of Columbia, Guam and Puerto Rico under the names “Macy’s” and “Bloomingdale’s” as well as macys.com and bloomingdales.com. The Company also operates four Bloomingdale’s Outlet stores.

On June 1, 2005, the Company and certain of its subsidiaries entered into a Purchase, Sale and Servicing Transfer Agreement (the “Purchase Agreement”) with Citibank, N.A. (together with its subsidiaries, as applicable, “Citibank”). The Purchase Agreement provided for, among other things, the purchase by Citibank of substantially all of (i) the credit card accounts and related receivables owned by FDS Bank, (ii) the “Macy’s” credit card accounts and related receivables owned by GE Money Bank, immediately upon the purchase by the Company of such accounts from GE Money Bank, and (iii) the proprietary credit card accounts and related receivables owned by May (collectively, the “Credit Assets”). In connection with the sale of these assets, the Company and Citibank entered into a long-term marketing and servicing alliance pursuant to the terms of a Credit Card Program Agreement (the “Program Agreement”) with an initial term of ten years expiring on July 17, 2016 and, unless terminated by either party as of the expiration of the initial term, an additional renewal term of three years. The Program Agreement provides for, among other things, (i) the ownership by Citibank of the accounts purchased by Citibank pursuant to the Purchase Agreement, (ii) the ownership by Citibank of new accounts opened by the Company’s customers, (iii) the provision of credit by Citibank to the holders of the credit cards associated with the foregoing accounts, (iv) the servicing of the foregoing accounts, and (v) the allocation between Citibank and the Company of the economic benefits and burdens associated with the foregoing and other aspects of the alliance.

On August 30, 2005, upon the completion of the Merger, the Company acquired May’s approximately 500 department stores and approximately 800 bridal and formalwear stores. Most of the acquired May department stores were converted to the Macy’s nameplate in September 2006, resulting in a national retailer with stores in almost all major markets. The operations of the acquired Lord & Taylor division and the bridal group (consisting of David’s Bridal, After Hours Formalwear and Priscilla of Boston) have been divested and are presented as discontinued operations.

 

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In 2008, the Company announced the “My Macy’s” localization initiative which was developed with the goal of accelerating sales growth in existing locations by ensuring that core customers surrounding each Macy’s store find merchandise assortments, size ranges, marketing programs and shopping experiences that are custom-tailored to their needs. My Macy’s has concentrated more management talent in local markets, effectively reducing the “span of control” over local stores; created new positions in the field to work with district planning and buying executives in helping to understand and act on the merchandise needs of local customers; and empowered locally based executives to make more and better decisions. Also as part of My Macy’s, the Company’s Macy’s branded stores are organized in a unified operating structure and division central office organizations were eliminated. This has reduced central office and administrative expense, eliminated duplication, sharpened execution, and helped the Company to partner more effectively with its suppliers and business partners.

During January 2010, the Company announced plans to launch a new Bloomingdale’s Outlet store concept in 2010, to initially consist of four Bloomingdale’s Outlet stores, each with approximately 25,000 square feet. All four Bloomingdale’s Outlet stores opened during 2010. Additional Bloomingdale’s Outlet stores are expected to roll out to selected locations across the country in 2011 and beyond. Additionally, in February 2010, Bloomingdale’s opened in Dubai, United Arab Emirates under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC, under which the Company is entitled to a license fee in accordance with the terms of the underlying agreement, generally based upon the greater of the contractually earned or guaranteed minimum amounts.

The Company’s retail stores and Internet websites sell a wide range of merchandise, including men’s, women’s and children’s apparel and accessories, cosmetics, home furnishings and other consumer goods. The specific assortments vary by size of store, merchandising character 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.

For 2010, 2009 and 2008, the following merchandise constituted the following percentages of sales:

 

     2010     2009     2008  

Feminine Accessories, Intimate Apparel, Shoes and Cosmetics

     36     36     36

Feminine Apparel

     26        26        27   

Men’s and Children’s

     23        22        22   

Home/Miscellaneous

     15        16        15   
                        
     100     100     100
                        

In 2010, the Company’s subsidiaries provided various support functions to the Company’s retail operations on an integrated, company-wide basis.

 

   

The Company’s bank subsidiary, FDS Bank, and its financial, administrative and credit services subsidiary, Macy’s Credit and Customer Service, Inc. (“MCCS”), provide credit processing, certain collections, customer service and credit marketing services in respect of all proprietary and non-proprietary 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.

 

   

Macy’s Merchandising Group, Inc. (“MMG”), a wholly-owned direct subsidiary of the Company, is responsible for the design, development and marketing of Macy’s private label brands and certain

 

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licensed brands. Bloomingdale’s uses MMG for only a very small portion of its private label merchandise. The Company believes that its private label merchandise further differentiates its merchandise assortments from those of its competitors and delivers exceptional value to its customers. The principal private label brands currently offered by Macy’s include Alfani, American Rag, Bar III, Charter Club, Club Room, Epic Threads, first impressions, Giani Bernini, greendog, Holiday Lane, Hotel Collection, I-N-C, jenni by jennifer moore, John Ashford, JM Collection, Karen Scott, Martha Stewart Collection, Morgan Taylor, Style & Co., Tasso Elba, the cellar, Tools of the Trade, and Via Europa. The principal licensed brands managed by MMG are American Rag and Martha Stewart Collection. The trademarks associated with all of the foregoing brands, other than American Rag and Martha Stewart Collection, are owned by Macy’s. The American Rag and Martha Stewart Collection brands are owned by third parties, which license the trademarks associated with such brands to Macy’s pursuant to agreements which are presently scheduled to expire in 2050 and 2027, respectively.

 

   

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.

MMG also offers their services, either directly or indirectly, to unrelated third parties.

The Company’s executive offices are located at 7 West Seventh Street, Cincinnati, Ohio 45202, telephone number: (513) 579-7000 and 151 West 34th Street, New York, New York 10001, telephone number: (212) 494-1602.

Employees. As of January 29, 2011, the Company had approximately 166,000 regular full-time and part-time employees. Because of the seasonal nature of the retail business, the number of employees peaks in the holiday season. Approximately 10% of the Company’s employees as of January 29, 2011 were represented by unions. Management considers its relations with its employees to be satisfactory.

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 must carry 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 net purchases during 2010. 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 satisfactory.

Competition. The retailing industry is intensely competitive. The Company’s stores and direct-to-customer business operations compete with many retailing formats in the geographic areas in which they operate, including department stores, specialty stores, general merchandise stores, off-price and discount stores, new and established forms of home shopping (including the Internet, mail order catalogs and television) and manufacturers’ outlets, among others. The retailers with which the Company competes include Bed Bath & Beyond, Belk, Bon Ton, Burlington Coat Factory, Dillard’s, Gap, J.C. Penney, Kohl’s, Limited, Lord & Taylor, Neiman Marcus, Nordstrom, Saks, Sears, Target, TJ Maxx and Wal-Mart. The Company seeks to attract customers by offering superior selections, obvious value, and distinctive marketing in stores that are located in premier locations, and by providing an exciting shopping environment and superior service through an omnichannel 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.

 

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Available Information. The Company makes its annual reports 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 Exchange Act available free of charge through its internet website at http://www.macysinc.com as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. The public also may read and copy any of these filings at the SEC’s Public Reference Room, 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-732-0330. The SEC also maintains an Internet site that contains the Company’s filings; the address of that site is http://www.sec.gov. In addition, the Company has made the following available free of charge through its website at http://www.macysinc.com:

 

   

Audit Committee Charter,

 

   

Compensation and Management Development Committee Charter,

 

   

Finance Committee Charter,

 

   

Nominating and Corporate Governance Committee Charter,

 

   

Corporate Governance Principles,

 

   

Non-Employee Director Code of Business Conduct and Ethics, and

 

   

Code of Conduct.

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 7 West 7th Street, Cincinnati, OH 45202.

Executive Officers of the Registrant.

The following table sets forth certain information as of March 25, 2011 regarding the executive officers of the Company:

 

Name

   Age     

Position with the Company

Terry J. Lundgren

     59       Chairman of the Board; President and Chief Executive Officer; Director

Janet E. Grove

     60       Vice Chair

Timothy M. Adams

     57       Chief Private Brand Officer

Thomas L. Cole

     62       Chief Administrative Officer

Jeffrey Gennette

     49       Chief Merchandising Officer

Julie Greiner

     57       Chief Merchandise Planning Officer

Karen M. Hoguet

     54       Chief Financial Officer

Ronald Klein

     61       Chief Stores Officer

Peter Sachse

     53       Chief Marketing Officer

Mark S. Cosby

     52       President - Stores

Joel A. Belsky

     57       Executive Vice President and Controller

Dennis J. Broderick

     62       Executive Vice President, General Counsel and Secretary

Terry J. Lundgren has been Chairman of the Board since January 2004 and President and Chief Executive Officer of the Company since February 2003; prior thereto he served as the President/Chief Operating Officer and Chief Merchandising Officer of the Company from April 2002 to February 2003. Mr. Lundgren served as the President and Chief Merchandising Officer of the Company from May 1997 to April 2002.

Janet E. Grove has been Vice Chair of the Company since February 2009 responsible for facilitating the transition of merchandising, planning and private brand development functions under the new Macy’s organization structure and International Retail Store Development initiatives; prior thereto she served as Vice

 

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Chair, Merchandising, Private Brand and Product Development of the Company from February 2003 to February 2009. Ms. Grove also served as Chairman of MMG from 1998 to 2009 and Chief Executive Officer of MMG from 1999 to 2009.

Timothy M. Adams has been the Chief Private Brand Officer of the Company since February 2009; prior thereto he served as Chairman and CEO of Macy’s Home Store from July 2005 to February 2009 and as Chairman of Macy’s Florida from April 2001 to July 2005.

Thomas L. Cole has been Chief Administrative Officer of the Company since February 2009; prior thereto he served as Vice Chair, Support Operations of the Company from February 2003 to February 2009. Until February 2009, he also was responsible for the operations of Macy’s Logistics since 1995, of MST since 2001, and of MCCS since 2002.

Jeffrey Gennette has been Chief Merchandising Officer of the Company since February 2009; prior thereto he served as Chairman and CEO of Macy’s West from February 2008 to February 2009, as Chairman of Macy’s Northwest from December 2005 to February 2008 and as Executive Vice President and Director of Stores of Macy’s Central from March 2004 to December 2005. Mr. Gennette served as Senior Vice President/General Merchandise Manager of Macy’s West from May 2001 to March 2004.

Julie Greiner has been Chief Merchandise Planning Officer of the Company since February 2009; prior thereto she served as Chairman and CEO of Macy’s Florida from July 2005 to February 2009 and as Senior Executive Vice President and Director of Stores of Bloomingdale’s from April 1998 to July 2005.

Karen M. Hoguet has been Chief Financial Officer of the Company since February 2009; prior thereto she served as Executive Vice President and Chief Financial Officer of the Company from June 2005 to February 2009. Mrs. Hoguet served as Senior Vice President and Chief Financial Officer of the Company from October 1997 to June 2005.

Ronald Klein has been Chief Stores Officer of the Company since February 2009; prior thereto he served as Chairman and CEO of Macy’s East from February 2004 to February 2009.

Peter Sachse has been Chief Marketing Officer of the Company since February 2009 and Chairman of macys.com since April 2006; prior thereto he served as President of Macy’s Corporate Marketing from May 2007 to February 2009 and as Chief Marketing Officer of the Company from June 2003 to May 2007.

Mark S. Cosby has been President – Stores of the Company since February 2009; prior thereto he served as President and Chief Operating Officer of Macy’s East from May 2007 to February 2009 and as Senior Vice President – Property Development of the Company from July 2006 to May 2007.

Joel A. Belsky has been Executive Vice President and Controller of the Company since May 2009; prior thereto he served as Vice President and Controller of the Company from October 1996 through April 2009.

Dennis J. Broderick has been Secretary of the Company since July 1993 and Executive Vice President and General Counsel of the Company since May 2009; prior thereto he served as Senior Vice President and General Counsel of the Company from January 1990 to April 2009.

 

Item 1A. Risk Factors.

In evaluating the Company, the risks described below and the matters described in “Forward-Looking Statements” should be considered carefully. Such risks and matters could significantly and adversely affect the Company’s business, prospects, financial condition, results of operations and cash flows.

 

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The Company faces significant competition in the retail industry.

The Company conducts its retail merchandising business under highly competitive conditions. Although the Company is one of the nation’s largest retailers, it has numerous and varied competitors at the national and local levels, including conventional and specialty department stores, other specialty stores, category killers, mass merchants, value retailers, discounters, and Internet and mail-order retailers. Competition may intensify as the Company’s competitors enter into business combinations or alliances. Competition is characterized by many factors, including assortment, advertising, price, quality, service, location, reputation and credit availability. If the Company does not compete effectively with regard to these factors, its results of operations could be materially and adversely affected.

The Company’s 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. The Company’s sales and operating results depend in part on its ability to predict or respond to changes in fashion trends and consumer preferences in a timely manner. The Company develops new retail concepts and continuously adjusts its industry position in certain major and private-label brands and product categories in an effort to satisfy customers. Any sustained failure to anticipate, identify and respond to emerging trends in lifestyle and consumer preferences could have a material adverse effect on the Company’s business. The Company’s sales are impacted by discretionary spending by consumers. Consumer spending may be affected by many factors outside of the Company’s control, including general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt and customer behaviors towards incurring and paying debt, the costs of basic necessities and other goods and the effects of the weather or natural disasters.

The Company’s business is subject to unfavorable economic and political conditions and other developments and risks.

Unfavorable global, domestic or regional economic or political conditions and other developments and risks could negatively affect the Company’s business. 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, oil prices, and other matters that influence the availability and cost of merchandise, consumer confidence, spending and tourism could adversely impact the Company’s business and results of operations. In addition, unstable political conditions or civil unrest, including terrorist activities and worldwide military and domestic disturbances and conflicts, may disrupt commerce and could have a material adverse effect on the Company’s business and results of operations.

The Company’s revenues and cash requirements are affected by the seasonal nature of its business.

The Company’s business is seasonal, with a high proportion of revenues and operating cash flows generated during the second half of the fiscal year, which includes the fall and holiday selling seasons. A disproportionate amount of revenues fall in the fourth fiscal quarter, which coincides with the holiday season. In addition, the Company incurs 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 for additional inventory, advertising and employees.

The Company’s business could be affected by extreme weather conditions or natural disasters.

Extreme weather conditions in the areas in which the Company’s stores are located could adversely affect the Company’s business. For example, frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather conditions over a prolonged period could make it difficult for the Company’s customers to

 

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travel to its stores and thereby reduce the Company’s sales and profitability. The Company’s 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 render a portion of the Company’s inventory incompatible with those unseasonable conditions. Reduced sales from extreme or prolonged unseasonable weather conditions could adversely affect the Company’s business.

In addition, natural disasters such as hurricanes, tornadoes and earthquakes, or a combination of these or other factors, could severely damage or destroy one or more of the Company’s stores or warehouses located in the affected areas, thereby disrupting the Company’s business operations.

The Company’s pension costs could increase at a higher than anticipated rate.

Significant changes in interest rates, decreases in the fair value of plan assets and investment losses on plan assets could affect the funded status of the Company’s plans and could increase future funding requirements of the pension plans. A significant increase in future funding requirements could have a negative impact on the Company’s cash flows, financial condition or results of operations.

Increases in the cost of employee benefits could impact the Company’s financial results and cash flow.

The Company’s expenses relating to employee health benefits are significant. Unfavorable changes in the cost of such benefits could impact the Company’s financial results and cash flow. Healthcare costs have risen significantly in recent years, and recent legislative and private sector initiatives regarding healthcare reform could result in significant changes to the U.S. healthcare system. The Company is not able at this time to determine the impact that healthcare reform could have on the Company-sponsored medical plans.

Inability to access capital markets could adversely affect the Company’s 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 the Company’s access to this potential source of future liquidity. A decrease in the ratings that rating agencies assign to the Company’s short and long-term debt may negatively impact the Company’s access to the debt capital markets and increase the Company’s cost of borrowing. In addition, the Company’s bank credit agreements require the Company to maintain specified interest coverage and leverage ratios. The Company’s ability to comply with the ratios may be affected by events beyond its control, including prevailing economic, financial and industry conditions. If the Company’s results of operations or operating ratios deteriorate to a point where the Company is not in compliance with its debt covenants, and the Company is unable to obtain a waiver, much of the Company’s debt would be in default and could become due and payable immediately. The Company’s assets may not be sufficient to repay in full this indebtedness, resulting in a need for an alternate source of funding. The Company cannot make any assurances that it would be able to obtain such an alternate source of funding on satisfactory terms, if at all, and its inability to do so could cause the holders of its securities to experience a partial or total loss of their investments in the Company.

The Company periodically reviews the carrying value of its goodwill for possible impairment; if future circumstances indicate that goodwill is impaired, the Company could be required to write down amounts of goodwill and record impairment charges.

In the fourth quarter of fiscal 2008, the Company reduced the carrying value of its goodwill from $9,125 million to $3,743 million and recorded a related non-cash impairment charge of $5,382 million. The Company continues to monitor relevant circumstances, including consumer spending levels, general economic conditions and the market prices for the Company’s common stock, and the potential impact that such circumstances might have on the valuation of the Company’s goodwill. It is possible that changes in such circumstances, or in the numerous variables associated with the judgments, assumptions and estimates made by the Company in assessing

 

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the appropriate valuation of its goodwill, could in the future require the Company to further reduce its goodwill and record related non-cash impairment charges. If the Company were required to further reduce its goodwill and record related non-cash impairment charges, the Company’s financial position and results of operations would be adversely affected.

The Company depends on its ability to attract and retain quality employees.

The Company’s business is dependent upon attracting and retaining a large number of quality employees. Many of these employees are in entry level or part-time positions with historically high rates of turnover. The Company’s ability to meet its labor needs while controlling the 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. Changes that adversely impact the Company’s ability to attract and retain quality employees could adversely affect the Company’s business.

The Company depends upon designers, vendors and other sources of merchandise, goods and services.

The Company’s relationships with established and emerging designers have been a significant contributor to the Company’s past success. The Company’s ability to find qualified vendors and access products in a timely and efficient manner is often challenging, particularly with respect to goods sourced outside the United States. The Company’s procurement of goods and services from outside the United States is subject to risks associated with political or financial instability, trade restrictions, tariffs, currency exchange rates, transport capacity and costs and other factors relating to foreign trade. In addition, the Company’s procurement of all its goods and services is subject to the effects of price increases which the Company may or may not be able to pass through to its customers. All of these factors may affect the Company’s ability to access suitable merchandise on acceptable terms, are beyond the Company’s control and could adversely impact the Company’s performance.

The Company depends upon the success of its advertising and marketing programs.

The Company’s advertising and promotional costs, net of cooperative advertising allowances, amounted to $1,072 million for 2010. The Company’s business depends on high customer traffic in its stores and effective marketing. The Company has many initiatives in this area, and often changes its advertising and marketing programs. There can be no assurance as to the Company’s continued ability to effectively execute its advertising and marketing programs, and any failure to do so could have a material adverse effect on the Company’s business and results of operations.

The benefits expected to be realized from the expansion of the Company’s market localization initiatives and the changes to its operating structure are subject to various risks.

The Company’s success in fully realizing the anticipated benefits from the expansion of its market localization initiatives and the changes to its operating structure will depend in large part on achieving anticipated cost savings, business opportunities and growth prospects. The Company’s ability to benefit from expanded market localization initiatives and the changes to its operating structure is subject to both the risks affecting the Company’s business generally and the inherent difficulties associated with implementing these initiatives. The failure of the Company to fully realize the benefits expected to result from these initiatives could have a material adverse effect on the Company’s business and results of operations.

Parties with whom the Company does business may be subject to insolvency risks or may otherwise become unable or unwilling to perform their obligations to the Company.

The Company is a party to contracts, transactions and business relationships with various third parties, including 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

 

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obligations to the Company. In some cases, the Company depends 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 in order to operate the Company’s 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 the Company 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 of the Company in relation to its contracts, transactions and business relationships with such third parties could be terminated, modified in a manner adverse to the Company, or otherwise impaired. The Company cannot make any assurances that it would be able to arrange for alternate or replacement contracts, transactions or business relationships on terms as favorable as the Company’s existing contracts, transactions or business relationships, if at all. Any inability on the part of the Company to do so could negatively affect the Company’s cash flows, financial condition and results of operations.

A material disruption in the Company’s computer systems could adversely affect the Company’s business or results of operations.

The Company relies extensively on its computer systems to process transactions, summarize results and manage its business. The Company’s computer systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes, acts of war or terrorism, and usage errors by the Company’s employees. If the Company’s computer systems are damaged or cease to function properly, the Company may have to make a significant investment to fix or replace them, and the Company may suffer loss of critical data and interruptions or delays in its operations in the interim. Any material interruption in the Company’s computer systems could adversely affect its business or results of operations.

A privacy breach could result in negative publicity and adversely affect the Company’s business.

The protection of customer, employee, and company data is critical to the Company. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements across business units. In addition, customers have a high expectation that the Company will adequately protect their personal information. A significant breach of customer, employee, or company data could attract a substantial amount of media attention, damage the Company’s customer relationships and reputation and result in lost sales, fines, or lawsuits.

A regional or global health pandemic could severely affect the Company’s business.

A health pandemic is a disease that spreads rapidly and widely by infection and affects many individuals in an area or population at the same time. If a regional or global health pandemic were to occur, depending upon its location, duration and severity, the Company’s business could be severely affected. Customers might avoid public places in the event of a health pandemic, and local, regional or national governments might limit or ban public gatherings to halt or delay the spread of disease. A regional or global health pandemic might also adversely impact the Company’s business by disrupting or delaying production and delivery of materials and products in its supply chain and by causing staffing shortages in its stores.

The Company is subject to numerous regulations that could adversely affect its business.

The Company is subject to 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 the Company undertakes to monitor changes in these laws, if these laws change without the Company’s knowledge, or are violated by importers, designers, manufacturers or distributors, the Company could experience

 

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delays in shipments and receipt of goods or be subject to fines or other penalties under the controlling regulations, any of which could adversely affect the Company’s business.

Litigation or regulatory developments could adversely affect the Company’s business or financial condition.

The Company is subject to various federal, state and local laws, rules, regulations and initiatives, including laws and regulations with respect to the credit card industry including the Credit Card Act of 2009 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), which may change from time to time. In addition, the Company is regularly involved in various litigation matters that arise in the ordinary course of its business. Litigation or regulatory developments could adversely affect the Company’s business and financial condition.

Factors beyond the Company’s control could affect the Company’s stock price.

The Company’s stock price, like that of other retail companies, is subject to significant volatility because of many factors, including factors beyond the control of the Company. These factors may include:

 

   

general economic and stock and credit market conditions;

 

   

risks relating to the Company’s business and its industry, including those discussed above;

 

   

strategic actions by the Company or its competitors;

 

   

variations in the Company’s quarterly results of operations;

 

   

future sales or purchases of the Company’s common stock; and

 

   

investor perceptions of the investment opportunity associated with the Company’s common stock relative to other investment alternatives.

In addition, the Company may fail to meet the expectations of its stockholders or of analysts at some time in the future. If the analysts that regularly follow the Company’s stock lower their rating or lower their projections for future growth and financial performance, the Company’s stock price could decline. Also, sales of a substantial number of shares of the Company’s common stock in the public market or the appearance that these shares are available for sale could adversely affect the market price of the Company’s common stock.

 

Item 1B. Unresolved Staff Comments.

None.

 

Item 2. Properties.

The properties of the Company consist primarily of stores and related facilities, including warehouses and distribution and fulfillment centers. 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 January 29, 2011, the operations of the Company included 850 retail stores in 45 states, the District of Columbia, Puerto Rico and Guam, comprising a total of approximately 154,200,000 square feet. Of such stores, 467 were owned, 268 were leased and 115 stores were operated under arrangements where the Company owned the building and leased the land. Substantially 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 20 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.

 

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Additional information about the Company’s stores and warehouses, distribution and fulfillment centers (“DC’s”) as of January 29, 2011 is as follows:

 

Geographic Region

   Total
Stores
     Owned
Stores
     Leased
Stores
     Stores
Subject to
a Ground
Lease
     Total
DC’s
     Owned
DC’s
 

Mid-Atlantic

     107         55         33         19         3         2   

North

     84         65         15         4         2         2   

Northeast

     104         54         41         9         2         2   

Northwest

     126         39         69         18         3         1   

Southeast

     110         72         17         21         3         2   

Southwest

     117         45         48         24         3         3   

Midwest

     96         58         27         11         2         2   

South Central

     106         79         18         9         3         2   
                                                     
     850         467         268         115         21         16   
                                                     

The eight geographic regions detailed in the foregoing table are based on the Company’s Macy’s branded operational structure.

The Company’s retail stores are located at urban or suburban sites, principally in densely populated areas across the United States. Store count activity was as follows:

 

     2010     2009     2008  

Store count at beginning of fiscal year

     850        847        853   

New stores opened and other expansions

     7        9        11   

Stores closed

     (7     (6     (17
                        

Store count at end of fiscal year

     850        850        847   
                        

 

Item 3. Legal Proceedings.

On October 3, 2007, Ebrahim Shanehchian, an alleged participant in the Macy’s, Inc. Profit Sharing 401(k) Investment Plan (the “401(k) Plan”), filed a lawsuit in the United States District Court for the Southern District of Ohio on behalf of persons who participated in the 401(k) Plan and The May Department Stores Company Profit Sharing Plan (the “May Plan”) between February 27, 2005 and the present. The lawsuit has been conditionally certified as a class action. The complaint alleges that the Company, as well as members of the Company’s board of directors and certain members of senior management, breached various fiduciary duties owed under the Employee Retirement Income Security Act (“ERISA”) to participants in the 401(k) Plan and the May Plan, by making false and misleading statements regarding the Company’s business, operations and prospects in relation to the integration of the acquired May operations, resulting in supposed “artificial inflation” of the Company’s stock price and “imprudent investment” by the 401(k) Plan and the May Plan in Macy’s stock. The plaintiff seeks an unspecified amount of compensatory damages and costs. The Company believes the lawsuit is without merit and intends to contest it vigorously.

The Company and its subsidiaries are also 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. Reserved.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Common Stock is listed on the NYSE under the trading symbol “M.” As of January 29, 2011, the Company had approximately 23,000 stockholders of record. The following table sets forth for each fiscal quarter during 2010 and 2009 the high and low sales prices per share of Common Stock as reported on the NYSE Composite Tape and the dividend declared with respect to each fiscal quarter on each share of Common Stock.

 

     2010      2009  
   Low      High      Dividend      Low      High      Dividend  

1st Quarter

     15.34         25.25         0.0500         6.27         14.09         0.0500   

2nd Quarter

     16.93         24.84         0.0500         10.27         15.29         0.0500   

3rd Quarter

     18.70         25.26         0.0500         13.58         20.84         0.0500   

4th Quarter

     22.78         26.32         0.0500         15.39         19.77         0.0500   

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 2010.

 

     Total
Number
of Shares
Purchased
     Average
Price per
Share ($)
     Number of Shares
Purchased under
Program (1)
     Open
Authorization
Remaining (1)($)
 
   (thousands)             (thousands)      (millions)  

October 31, 2010 – November 27, 2010

     0         0         0         852   

November 28, 2010 – January 1, 2011

     0         0         0         852   

January 2, 2011 – January 29, 2011

     0         0         0         852   
                             
     0         0         0      
                             

 

(1) Commencing in January 2000, the Company’s board of directors has from time to time approved authorizations to purchase, in the aggregate, up to $9,500 million of Common Stock. All authorizations are cumulative and do not have an expiration date. As of January 29, 2011, $852 million of authorization remained unused. Although the Company has not made any purchases of Common Stock since February 1, 2008 and currently does not intend to make any such purchases in 2011, it may resume purchases of Common Stock under these or possible future authorizations in the open market, in privately negotiated transactions or otherwise at any time and from time to time without prior notice.

 

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The following graph compares the cumulative total stockholder return on the Common Stock with the Standard & Poor’s 500 Composite Index and the Standard & Poor’s Retail Department Store Index for the period from January 27, 2006 through January 28, 2011, assuming an initial investment of $100 and the reinvestment of all dividends, if any.

LOGO

The companies included in the S&P Retail Department Store Index are Dillard’s, Macy’s, J.C. Penney, Kohl’s, Nordstrom and Sears.

 

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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.

 

     2010     2009**     2008**     2007     2006*  
   (millions, except per share data)  

Consolidated Statement of Operations Data:

          

Net sales

   $ 25,003      $ 23,489      $ 24,892      $ 26,313      $ 26,970   

Cost of sales

     (14,824     (13,973     (15,009     (15,677     (16,019

Inventory valuation adjustments – May integration

     0        0        0        0        (178
                                        

Gross margin

     10,179        9,516        9,883        10,636        10,773   

Selling, general and administrative expenses

     (8,260     (8,062     (8,481     (8,554     (8,678

Impairments, store closing costs and division consolidation costs

     (25     (391     (398     0        0   

Goodwill impairment charges

     0        0        (5,382     0        0   

May integration costs

     0        0        0        (219     (450

Gains on sale of accounts receivable

     0        0        0        0        191   
                                        

Operating income (loss)

     1,894        1,063        (4,378     1,863        1,836   

Interest expense (a)

     (579     (562     (588     (579     (451

Interest income

     5        6        28        36        61   
                                        

Income (loss) from continuing operations before income taxes

     1,320        507        (4,938     1,320        1,446   

Federal, state and local income tax benefit (expense)

     (473     (178     163        (411     (458
                                        

Income (loss) from continuing operations

     847        329        (4,775     909        988   

Discontinued operations, net of income taxes (b)

     0        0        0        (16     7   
                                        

Net income (loss)

   $ 847      $ 329      $ (4,775   $ 893      $ 995   
                                        

Basic earnings (loss) per share:

          

Income (loss) from continuing operations

   $ 2.00      $ .78      $ (11.34   $ 2.04      $ 1.83   

Net income (loss)

     2.00        .78        (11.34     2.00        1.84   

Diluted earnings (loss) per share:

          

Income (loss) from continuing operations

   $ 1.98      $ .78      $ (11.34   $ 2.01      $ 1.80   

Net income (loss)

     1.98        .78        (11.34     1.97        1.81   

Average number of shares outstanding

     422.2        420.4        420.0        445.6        539.0   

Cash dividends paid per share (c)

   $ .2000      $ .2000      $ .5275      $ .5175      $ .5075   

Depreciation and amortization

   $ 1,150      $ 1,210      $ 1,278      $ 1,304      $ 1,265   

Capital expenditures

   $ 505      $ 460      $ 897      $ 1,105      $ 1,392   

Balance Sheet Data (at year end):

          

Cash and cash equivalents

   $ 1,464      $ 1,686      $ 1,385      $ 676      $ 1,294   

Total assets

     20,631        21,300        22,145        27,789        29,550   

Short-term debt

     454        242        966        666        650   

Long-term debt

     6,971        8,456        8,733        9,087        7,847   

Shareholders’ equity

     5,530        4,653        4,620        9,907        12,254   

 

* 53 weeks
** The Company changed its methodology for recording deferred state income taxes from a blended rate basis to a separate entity basis, and has reflected the effects of such change retroactively to fiscal 2008. Even though the Company considers the change to have had only an immaterial impact on its financial condition, results of operations and cash flows, the financial condition, results of operations and cash flows for the prior periods as previously reported have been adjusted to reflect the change.
(a) Interest expense in 2010 includes approximately $66 million of expenses associated with the early retirement of approximately $1,000 million of outstanding debt. Interest expense includes a gain of approximately $54 million in 2006 related to the completion of a debt tender offer.
(b) Discontinued operations include (1) for 2007, the after-tax results of the After Hours Formalwear business, including an after-tax loss of $7 million on the disposal of After Hours Formalwear, and (2) for 2006, the after-tax results of operations of the Lord & Taylor division and the Bridal Group division (including David’s Bridal, After Hours Formalwear, and Priscilla of Boston), including after-tax losses of $38 million and $18 million on the disposals of the Lord & Taylor division and the David’s Bridal and Priscilla of Boston businesses, respectively.
(c) Cash dividends paid for 2006 have been adjusted to reflect the two-for-one stock-split effected in the form of a stock dividend distributed on June 9, 2006.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company is a retail organization operating retail stores and Internet websites under two brands (Macy’s and Bloomingdale’s) that sell a wide range of merchandise, including men’s, women’s and children’s apparel and accessories, cosmetics, home furnishings and other consumer goods in 45 states, the District of Columbia, Guam and Puerto Rico. As of January 29, 2011, the Company’s operations were conducted through Macy’s, macys.com, Bloomingdale’s, bloomingdales.com and Bloomingdale’s Outlet which are aggregated into one reporting segment in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting.”

The Company is focused on four key strategies for continued growth in sales, earnings and cash flow in the years ahead: (i) maximizing the My Macy’s localization initiative; (ii) developing private and exclusive brands; (iii) embracing customer centricity, including engaging customers on the selling floor; and (iv) driving the omnichannel business.

The My Macy’s localization initiative was developed with the goal of accelerating sales growth in existing locations by ensuring that core customers surrounding each Macy’s store find merchandise assortments, size ranges, marketing programs and shopping experiences that are custom-tailored to their needs. My Macy’s has concentrated more management talent in local markets, effectively reducing the “span of control” over local stores; created new positions in the field to work with district planning and buying executives in helping to understand and act on the merchandise needs of local customers; and empowered locally based executives to make more and better decisions. Also as part of My Macy’s, the Company’s Macy’s branded stores are organized in a unified operating structure and division central office organizations were eliminated. This has reduced central office and administrative expense, eliminated duplication, sharpened execution, and helped the Company to partner more effectively with its suppliers and business partners.

The Company’s omnichannel strategy allows customers to shop seamlessly in stores, online and via mobile devices. As part of the comprehensive focus on its omnichannel business, the Company is building an efficient and resourceful organization that thrives on unrelenting creativity and innovation. Current and future expansions to the macys.com and bloomingdales.com online businesses represent investments in merchandising, marketing and site development, all of which complement ongoing improvements in systems infrastructure, fulfillment capacity and customer service.

During 2010, the Company launched a new Bloomingdale’s Outlet store concept, which initially consists of four Bloomingdale’s Outlet stores, each with approximately 25,000 square feet. Additional Bloomingdale’s Outlet stores are expected to roll out to selected locations across the country in 2011 and beyond. Bloomingdale’s Outlet stores offer a range of apparel and accessories, including women’s ready-to-wear, men’s, children’s, women’s shoes, fashion accessories, jewelry, handbags and intimate apparel.

Additionally, in February 2010, Bloomingdale’s opened in Dubai, United Arab Emirates under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC, under which the Company is entitled to a license fee in accordance with the terms of the underlying agreement, generally based upon the greater of the contractually earned or guaranteed minimum amounts.

During 2010, the Company opened two new Macy’s stores, one new Bloomingdale’s store, and four Bloomingdale’s Outlet stores. During 2009, the Company opened five new Macy’s department stores, re-opened two Macy’s department stores that had been damaged in 2008 by Hurricane Ike, opened one replacement Macy’s department store, and also expanded into an additional Macy’s location in an existing mall. In 2011, the Company intends to open three Bloomingdale’s Outlet stores and re-open a Macy’s department store that had been closed in 2010 due to flood damage.

 

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The Company’s operations are impacted by competitive pressures from department stores, specialty stores, mass merchandisers and all other retail channels. The Company’s operations are also impacted by general consumer spending levels, including the impact of general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, the costs of basic necessities and other goods and the effects of weather or natural disasters and other factors over which the Company has little or no control.

Throughout 2008 and into 2009, consumer spending levels were adversely affected by a number of factors, including substantial declines in the level of general economic activity and real estate and investment values, substantial increases in consumer pessimism, unemployment and the costs of basic necessities, and a significant tightening of consumer credit. These conditions adversely affected, and to varying degrees continue to adversely affect, the amount of funds that consumers are willing and able to spend for discretionary purchases, including purchases of some of the merchandise offered by the Company. These conditions also adversely affected the projected future cash flows attributable to the Company’s operations, including the projected future cash flows assumed in connection with the acquisition of The May Department Stores Company (“May”), resulting in the Company recording in the fourth quarter of 2008 a reduction in the carrying value of its goodwill, and a related non-cash impairment charge, in the amount of $5,382 million. The Company experienced significantly higher sales growth and steady gross margin and cash flow in 2010, and therefore is optimistic about the improvement in current and future economic conditions.

The effects of economic conditions have been, and may continue to be, experienced differently, or at different times, in the various geographic regions in which the Company operates, in relation to the different types of merchandise that the Company offers for sale, or in relation to the Company’s Macy’s-branded and Bloomingdale’s-branded operations. All economic conditions, however, ultimately affect the Company’s overall operations. Based on its assessment of current and anticipated market conditions and its recent performance, the Company is assuming that its comparable store sales in 2011 will increase approximately 3% from 2010 levels.

The discussion in this Item 7 should be read in conjunction with our 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.”

Results of Operations

Net sales include merchandise sales, leased department income, shipping and handling fees and sales to third party retailers. In 2010, the Company began including sales of private brand goods directly to third party retailers and sales of excess inventory to third parties in net sales. These items were previously reported, net of the related cost of sales, in selling, general and administrative expenses (“SG&A”) expenses. This change in presentation had an immaterial impact on reported net sales, does not impact comparable store sales, net income (loss) or diluted earnings (loss) per share, and was not applied retroactively to annual periods prior to fiscal 2010.

The Company changed its methodology for recording deferred state income taxes from a blended rate basis to a separate entity basis, and has reflected the effects of such change to 2010 and all prior periods. Even though the Company considers the change to have had only an immaterial impact on its financial condition, results of operations and cash flows for the periods presented, the financial condition, results of operations and cash flows for the prior periods as previously reported have been adjusted to reflect the change.

Comparison of the 52 Weeks Ended January 29, 2011 and January 30, 2010. Net income for 2010 was $847 million, compared to net income of $329 million for 2009, reflecting the benefits of the strategic initiatives at

 

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Macy’s and the continued strong performance at Bloomingdale’s. The net income for 2010 includes the impact of $25 million of impairments and store closing costs. The net income for 2009 included the impact of $391 million of impairments, store closing costs and division consolidation costs.

Net sales for 2010 totaled $25,003 million, compared to net sales of $23,489 million for 2009, an increase of $1,514 million or 6.4%. On a comparable store basis, net sales for 2010 were up 4.6% compared to 2009. Sales from the Company’s Internet businesses in 2010 increased 28.7% compared to 2009 and positively affected the Company’s 2010 comparable store sales by 0.9%. The Company has realized continued success in the My Macy’s localization strategy. Geographically, sales in 2010 were strongest in Florida and the upper Midwest. By family of business, sales in 2010 were strongest in updated women’s apparel, particularly the Company’s I-N-C brand, jewelry and watches, men’s apparel and accessories, luggage, furniture and mattresses. Sales of the Company’s private label brands continued to be strong and represented approximately 20% of net sales in the Macy’s-branded stores in 2010. Sales in 2010 were less strong in traditional women’s sportswear. The Company calculates comparable store sales as sales from stores in operation throughout 2009 and 2010 and all net Internet sales. Stores undergoing remodeling, expansion or relocation remain in the comparable store sales calculation unless the store is closed for a significant period of time. Definitions and calculations of comparable store sales differ among companies in the retail industry.

Cost of sales was $14,824 million or 59.3% of net sales for 2010, compared to $13,973 million or 59.5% of net sales for 2009, an increase of $851 million. The improved cost of sales rate reflects the benefit of good inventory management throughout 2010. The valuation of merchandise inventories on the last-in, first-out basis did not impact cost of sales in either period.

SG&A expenses were $8,260 million or 33.0% of net sales for 2010, compared to $8,062 million or 34.3% of net sales for 2009, an increase of $198 million. The SG&A rate as a percent of net sales was lower in 2010, as compared to 2009, reflecting an increase in net sales. SG&A expenses in 2010 increased due to higher selling costs as a result of stronger sales, higher workers’ compensation and general liability insurance costs, higher pension and supplementary retirement plan expense, and higher costs in support of the Company’s omnichannel operations, partially offset by lower depreciation and amortization expense, lower stock-based compensation expense, higher income from credit operations and lower advertising expense. Workers’ compensation and general liability insurance costs were $148 million for 2010, compared to $124 million for 2009. Pension and supplementary retirement plan expense amounted to $144 million for 2010, compared to $110 million for 2009. Depreciation and amortization expense was $1,150 million for 2010, compared to $1,210 million for 2009. Stock-based compensation expense was $66 million for 2010, compared to $76 million for 2009. Income from credit operations was $332 million in 2010 as compared to $323 million in 2009. Advertising expense, net of cooperative advertising allowances, was $1,072 million for 2010 compared to $1,087 million for 2009.

Impairments, store closing costs and division consolidation costs for 2010 amounted to $25 million and included $18 million of asset impairment charges and $7 million of other costs and expenses related to the store closings announced in January 2011.

Impairments, store closing costs and division consolidation costs for 2009 amounted to $391 million and included $115 million of asset impairment charges, $6 million of other costs and expenses related to the store closings announced in January 2010, and $270 million of restructuring-related costs and expenses associated with the division consolidation and localization initiatives, primarily severance and other human resource-related costs.

Net interest expense was $574 million for 2010, compared to $556 million for 2009, an increase of $18 million. The increase in net interest expense is primarily due to approximately $66 million of expenses associated with the early retirement of approximately $1,000 million of outstanding debt during 2010, partially offset by lower levels of borrowings due primarily to such early retirement of outstanding debt.

 

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The Company’s effective tax rate of 35.8% for 2010 and 35.2% for 2009 differ from the federal income tax statutory rate of 35%, and on a comparative basis, principally because of the effect of state and local income taxes and the settlement of various tax issues and tax examinations. Federal, state and local income tax expense for 2009 included a benefit of approximately $21 million related to the settlement of federal income tax examinations, primarily attributable to the disposition of former subsidiaries.

Comparison of the 52 Weeks Ended January 30, 2010 and January 31, 2009. Net income for 2009 was $329 million, compared to the net loss of $4,775 million for 2008. The net income for 2009 included the impact of $391 million of impairments, store closing costs and division consolidation costs. The net loss for 2008 included the impact of $5,382 million of goodwill impairment charges and $398 million of impairments, store closing costs and division consolidation costs.

Net sales for 2009 totaled $23,489 million, compared to net sales of $24,892 million for 2008, a decrease of $1,403 million or 5.6%. On a comparable store basis, net sales for 2009 were down 5.3% compared to 2008. Sales from the Company’s Internet businesses in 2009 increased 19.6% compared to 2008 and positively affected the Company’s 2009 comparable store sales by 0.6%. Geographically, sales in 2009 were strong in the Midwest and weaker in Florida and California. By family of business, sales in 2009 were strongest in moderate apparel, updated better women’s sportswear, women’s shoes, outerwear, jewelry and watches, housewares, home textiles and mattresses. Sales of the Company’s private label brands continued to be strong and represented approximately 19% of net sales in the Macy’s-branded stores in 2009. The weaker businesses during 2009 included traditional better women’s sportswear, men’s suits, handbags, fragrances, fine china and crystal and furniture. The Company calculates comparable store sales as net sales from stores in operation throughout 2008 and 2009 and all net Internet sales. Stores undergoing remodeling, expansion or relocation remain in the comparable store sales calculation unless the store is closed for a significant period of time. Definitions and calculations of comparable store sales differ among companies in the retail industry.

Cost of sales was $13,973 million or 59.5% of net sales for 2009, compared to $15,009 million or 60.3% of net sales for 2008, a decrease of $1,036 million. The improved cost of sales rate reflected the benefit of good inventory management throughout 2009. The valuation of merchandise inventories on the last-in, first-out basis did not impact cost of sales in either period.

SG&A expenses were $8,062 million or 34.3% of net sales for 2009, compared to $8,481 million or 34.1% of net sales for 2008, a decrease of $419 million. The SG&A rate as a percent of net sales was higher in 2009, as compared to 2008, primarily because of weaker sales. SG&A expenses in 2009 benefited from consolidation-related expense savings, lower depreciation and amortization expenses, lower workers’ compensation and general liability insurance costs and lower advertising expense, partially offset by higher stock-based compensation expense, higher performance based incentive compensation expense, lower income from credit operations and higher costs in support of the Company’s omnichannel operations. Depreciation and amortization expense was $1,210 million for 2009, compared to $1,278 million for 2008. Workers’ compensation and general liability insurance costs were $124 million for 2009, compared to $164 million for 2008. Advertising expense, net of cooperative advertising allowances, was $1,087 million for 2009 compared to $1,239 million for 2008. Stock-based compensation expense was $76 million for 2009, compared to $43 million for 2008. Income from credit operations was $323 million in 2009 as compared to $372 million in 2008. Pension and supplementary retirement plan expense amounted to $110 million for 2009, compared to $114 million for 2008.

Impairments, store closing costs and division consolidation costs for 2009 amounted to $391 million and included $115 million of asset impairment charges, $6 million of other costs and expenses related to the store closings announced in January 2010, and $270 million of restructuring-related costs and expenses associated with the division consolidation and localization initiatives, primarily severance and other human resource-related costs.

 

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Impairments, store closing costs and division consolidation costs for 2008 amounted to $398 million and included $211 million of asset impairment charges, $11 million of other costs and expenses related to the store closings announced in January 2009, and $176 million of restructuring-related costs and expenses associated with the division consolidation and localization initiatives, primarily severance and other human resource-related costs.

Goodwill impairment charges for 2008 amounted to $5,382 million, which represented a write down of goodwill in the amount of the excess of the previous carrying value of goodwill over the implied fair value of goodwill, as calculated under the two-step goodwill impairment process in accordance with ASC Subtopic 350-20, “Goodwill.”

Net interest expense was $556 million for 2009, compared to $560 million for 2008, a decrease of $4 million. The decrease in net interest expense for 2009, as compared to 2008, resulted primarily from a lower level of borrowings due to retirement of debt at maturity and the debt tender offer completed during 2009, and was partially offset by a decrease in interest income due to lower rates on invested cash.

The Company’s effective income tax rate of 35.2% for 2009 differed from the federal income tax statutory rate of 35.0% principally because of the effect of state and local income taxes and the settlement of various tax issues and tax examinations. Federal, state and local income tax expense for 2009 included a benefit of approximately $21 million related to the settlement of federal income tax examinations, primarily attributable to the disposition of former subsidiaries. The Company’s effective income tax rate for 2008 differed from the federal income tax statutory rate of 35.0%, principally because of the impact of non-deductible goodwill impairment charges, the effect of state and local income taxes and the settlement of various tax issues and tax examinations.

Liquidity and Capital Resources

The Company’s principal sources of liquidity are cash from operations, cash on hand and the credit facility described below.

Net cash provided by operating activities in 2010 was $1,506 million, compared to $1,750 million provided in 2009. The decrease in cash provided by operating activities in 2010 compared to 2009 includes a greater decrease in other liabilities not separately identified, primarily accelerated pension contributions. During 2010, the Company made pension funding contributions totaling approximately $825 million, compared to pension funding contributions made during 2009 of approximately $370 million.

Net cash used by investing activities was $465 million for 2010, compared to net cash used by investing activities of $377 million for 2009. Investing activities for 2010 include purchases of property and equipment totaling $339 million and capitalized software of $166 million, compared to purchases of property and equipment totaling $355 million and capitalized software of $105 million for 2009. Cash flows from investing activities included $74 million and $60 million from the disposition of property and equipment for 2010 and 2009, respectively.

The Company’s budgeted capital expenditures are approximately $800 million for 2011, primarily related to store remodels, maintenance, technology and omnichannel investments, and distribution network improvements, including construction of a new fulfillment center. Management presently anticipates funding such expenditures with cash on hand and cash from operations.

Net cash used by the Company for all financing activities was $1,263 million for 2010, including the repayment of $1,245 million of debt and the payment of $84 million of cash dividends, partially offset by an increase in outstanding checks of $24 million and the issuance of $43 million of common stock, primarily related

 

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to the exercise of stock options. The debt repaid during 2010 includes the early retirement of approximately $1,000 million of outstanding debt with various stated maturities, and payment at maturity of $76 million of 8.5% senior notes due June 1, 2010 and $150 million of 10.625% senior debentures due November 1, 2010.

Net cash used by the Company for all financing activities was $1,072 million for 2009, including the repayment of $966 million of debt, a decrease in outstanding checks of $29 million, and the payment of $84 million of cash dividends. The debt repaid during 2009 included $350 million of 6.30% senior notes due April 1, 2009 and $600 million of 4.80% senior notes due July 15, 2009.

The Company is a party to a credit agreement with certain financial institutions providing for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $2,000 million (which amount may be increased to $2,500 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing) outstanding at any particular time. This agreement is set to expire August 30, 2012. As of January 29, 2011 and throughout all of 2010, the Company had no borrowings outstanding under this agreement.

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 4.50. The Company’s interest coverage ratio for 2010 was 5.64 and its leverage ratio at January 29, 2011 was 2.34, in each case as calculated in accordance with the credit agreement. The interest coverage ratio is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) over net interest expense and the leverage ratio is defined as debt over 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, non-recurring cash charges not to exceed in the aggregate $500 million from the date of the agreement and extraordinary losses less interest income and non-recurring or extraordinary gains. Debt and net interest are adjusted to exclude the premium on acquired debt and the resulting amortization, respectively.

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 January 29, 2011, no notes or debentures contain provisions requiring acceleration of payment upon a debt rating downgrade. However, the terms of approximately $3,000 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 in specified circumstances involving both a change of control (as defined in the applicable indenture) of the Company and the rating of the notes by specified rating agencies at a level below investment grade.

The rate of interest payable in respect of $612 million in aggregate principal amount of the Company’s senior notes outstanding at January 29, 2011 decreased by .50 percent per annum to 8.375% effective in May 2010 as a result of an upgrade of the notes by specified rating agencies. The rate of interest payable in respect of

 

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these senior notes outstanding at January 29, 2011 could increase by up to 1.50 percent per annum or decrease by up to .50 percent per annum from its current level in the event of one or more downgrades or upgrades of the notes by specified rating agencies.

During 2010, the Company repurchased no shares of its common stock under its share repurchase program. The Company’s share repurchase program is currently suspended. As of January 29, 2011, the Company had approximately $850 million of authorization remaining under its share repurchase program. The Company may continue or, from time to time, suspend repurchases of shares under its share repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors.

On February 25, 2011, the Company’s board of directors declared a quarterly dividend of 5 cents per share on its common stock, payable April 1, 2011 to Macy’s shareholders of record at the close of business on March 15, 2011.

At January 29, 2011, 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

   $ 451       $ 451       $ 0       $ 0       $ 0   

Long-term debt

     6,702         0         1,219         1,179         4,304   

Interest on debt

     5,082         472         814         685         3,111   

Capital lease obligations

     58         6         10         7         35   

Other long-term liabilities

     1,354         26         375         245         708   

Operating leases

     2,612         245         446         340         1,581   

Letters of credit

     38         38         0         0         0   

Other obligations

     2,320         1,988         265         61         6   
                                            
   $ 18,617       $ 3,226       $ 3,129       $ 2,517       $ 9,745   
                                            

“Other obligations” in the foregoing table consist primarily of merchandise purchase obligations and obligations under outsourcing arrangements, construction contracts, employment contracts, group medical/dental/life insurance programs, 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. 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.

The Company has not included in the contractual obligations table approximately $170 million of long-term liabilities for unrecognized tax benefits for various tax positions taken or approximately $76 million of related accrued federal, state and local interest and penalties. These liabilities may increase or decrease over time as a result 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. The Company has included in the contractual obligations table $11 million of liabilities for unrecognized tax benefits that the Company expects to settle in cash in the next year. The Company has not included in the contractual obligation table the $220 million Pension Plan liability. The Company’s funding policy is to contribute amounts necessary to satisfy pension funding requirements, including requirements of the Pension Protection Act of 2006, plus such additional amounts from time to time as are determined to be appropriate to improve the Pension Plan’s funded status. The Pension Plan’s

 

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funded status is affected by many factors including discount rates and the performance of Pension Plan assets. On March 28, 2011, the Company made a voluntary funding contribution to the Pension Plan of $225 million. The Company does not presently anticipate making any additional funding contributions to the Pension Plan during 2011, but may choose to do so in its discretion.

Management believes that, with respect to the Company’s current operations, cash on hand and funds from operations, together with its credit facility and other capital resources, will be sufficient to cover the Company’s reasonably foreseeable working capital, capital expenditure and debt service requirements and other cash requirements in both the near term and over the longer term. The Company’s ability to generate funds from operations may be affected by numerous factors, including general economic conditions and levels of consumer confidence and demand; however, the Company expects to be able to manage its working capital levels and capital expenditure amounts so as to maintain sufficient levels of liquidity. To the extent that the Company’s cash balances from time to time exceed amounts that are needed to fund its immediate liquidity requirements, the Company will consider alternative uses of some or all of such excess cash. Depending upon its actual and anticipated sources and uses of liquidity, conditions in the capital markets and other factors, the Company will from time to time consider the issuance of debt or other securities, or other possible capital markets transactions, for the purpose of raising capital which could be used to refinance current indebtedness or for other corporate purposes, and the redemption or repurchase of debt or other securities through open market purchases, privately negotiated transactions or otherwise.

Management believes the department store business and other retail businesses will continue to consolidate. The Company intends from time to time to consider additional acquisitions of, and investments in, department stores and other complementary assets and companies. Acquisition transactions, if any, are expected to be financed from one or more of the following sources: cash on hand, cash from operations, borrowings under existing or new credit facilities and the issuance of long-term debt or other securities, including common stock.

Critical Accounting Policies

Merchandise Inventories

Merchandise inventories are valued at the lower of cost or market using the last-in, first-out (LIFO) retail inventory method. Under the retail inventory method, inventory is segregated into departments of merchandise having similar characteristics, and is stated at its current retail selling value. Inventory retail values are converted to a cost basis by applying specific average cost factors for each merchandise department. Cost factors represent the average cost-to-retail ratio for each merchandise department based on beginning inventory and the fiscal year purchase activity. The retail inventory method inherently requires management judgments and contains estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation as well as gross margins.

Permanent markdowns designated for clearance activity are recorded when the utility of the inventory has diminished. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise and fashion trends. When a decision is made to permanently mark down merchandise, the resulting gross profit reduction is recognized in the period the markdown is recorded.

The Company receives certain allowances from various vendors in support of the merchandise it purchases for resale. The Company receives certain allowances as reimbursement for markdowns taken and/or to support the gross margins earned in connection with the sales of merchandise. These allowances are generally credited to cost of sales at the time the merchandise is sold in accordance with ASC Subtopic 605-50, “Customer Payments and Incentives.” The Company also receives advertising allowances from more than 1,000 of its merchandise vendors pursuant to cooperative advertising programs, with some vendors participating in multiple programs. These allowances represent reimbursements by vendors of costs incurred by the Company to promote the

 

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vendors’ merchandise and are netted against advertising and promotional costs when the related costs are incurred in accordance with ASC Subtopic 605-50. Advertising allowances in excess of costs incurred are recorded as a reduction of merchandise costs. The arrangements pursuant to which the Company’s vendors provide allowances, while binding, are generally informal in nature and one year or less in duration. The terms and conditions of these arrangements vary significantly from vendor to vendor and are influenced by, among other things, the type of merchandise to be supported. Although it is highly unlikely that there will be any significant reduction in historical levels of vendor support, if such a reduction were to occur, the Company could experience higher costs of sales and higher advertising expense, or reduce the amount of advertising that it uses, depending on the specific vendors involved and market conditions existing at the time.

Physical inventories are generally taken within each merchandise department annually, and inventory records are adjusted accordingly, resulting in the recording of actual shrinkage. While it is not possible to quantify the impact from each cause of shrinkage, the Company has loss prevention programs and policies that are intended to minimize shrinkage. Physical inventories are taken at all store locations for substantially all merchandise categories approximately three weeks before the end of the fiscal year. Shrinkage is estimated as a percentage of sales at interim periods and for this approximate three-week period, based on historical shrinkage rates.

Long-Lived Asset Impairment and Restructuring Charges

The carrying values of long-lived assets are periodically reviewed by the Company whenever events or changes in circumstances indicate that a potential impairment has occurred. For long-lived assets held for use, a potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of those assets in operations. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long-lived asset exceeds its fair value. The Company believes its estimated cash flows are sufficient to support the carrying value of its long-lived assets. If estimated cash flows significantly differ in the future, the Company may be required to record asset impairment write-downs.

If the Company commits to a plan to dispose of a long-lived asset before the end of its previously estimated useful life, estimated cash flows are revised accordingly, and the Company may be required to record an asset impairment write-down. Additionally, related liabilities arise such as severance, contractual obligations and other accruals associated with store closings from decisions to dispose of assets. The Company estimates these liabilities based on the facts and circumstances in existence for each restructuring decision. The amounts the Company will ultimately realize or disburse could differ from the amounts assumed in arriving at the asset impairment and restructuring charge recorded.

The Company classifies certain long-lived assets as held for disposal by sale and ceases depreciation when the particular criteria for such classification are met, including the probable sale within one year. For long-lived assets to be disposed of by sale, an impairment charge is recorded if the carrying amount of the asset exceeds its fair value less costs to sell. Such valuations include estimations of fair values and incremental direct costs to transact a sale.

Goodwill and Intangible Assets

The Company reviews the carrying value of its goodwill and other intangible assets with indefinite lives at least annually for possible impairment in accordance with ASC Topic 350, “Intangibles – Goodwill and Other.” Goodwill and other intangible assets with indefinite lives have been assigned to reporting units for purposes of impairment testing. The reporting units are the Company’s retail operating divisions. Goodwill and other intangible assets with indefinite lives are tested for impairment annually at the end of the fiscal month of May. The goodwill impairment test involves a two-step process. The first step involves estimating the fair value of

 

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each reporting unit based on its estimated discounted cash flows and comparing the estimated fair value of each reporting unit to its carrying value. If this comparison indicates that a reporting unit’s estimated fair value is less than its carrying value, a second step is required. If applicable, the second step requires the Company to allocate the fair value of the reporting unit to the estimated fair value of the reporting unit’s net assets, with any fair value in excess of amounts allocated to such net assets representing the implied fair value of goodwill for that reporting unit. If the carrying value of an individual indefinite-lived intangible asset exceeds its fair value, such individual indefinite-lived intangible asset is written down by an amount equal to such excess.

The Company uses judgment in assessing whether assets may have become impaired between annual impairment tests. The occurrence of a change in circumstances, such as continued adverse business conditions or other economic factors, would determine the need for impairment testing between annual impairment tests. Due to deterioration in the general economic environment during 2008 (and the impact thereof on the Company’s then-most recently completed annual business plan) and the resultant decline in the Company’s market capitalization, the Company believed that an additional goodwill impairment test was required as of January 31, 2009. In performing the first step of this impairment test, the Company estimated the fair value of its reporting units by discounting their projected future cash flows to present value, and reconciling the aggregate estimated fair value of the Company’s reporting units to the trading value of the Company’s common stock (together with an implied control premium). The Company believes that this reconciliation process represents a market participant approach to valuation. Based on this analysis, the Company determined that the carrying value of each of the Company’s reporting units exceeded its fair value at January 31, 2009, which resulted in all of the Company’s reporting units failing the first step of the goodwill impairment test. The Company then undertook the second step of the goodwill impairment test, which involved, among other things, obtaining third-party appraisals of substantially all of the Company’s tangible and intangible assets. Based on the results of its goodwill impairment testing as of January 31, 2009, the Company recorded a pre-tax goodwill impairment charge of $5,382 million ($5,083 million after income taxes) in the fourth quarter of 2008. As a result of the 2008 goodwill impairment charge, the Macy’s retail operating division is the only reporting unit with goodwill.

Based on the results of the most recent annual impairment test of goodwill and indefinite-lived intangible assets completed during the second quarter of 2010, the Company determined that goodwill and indefinite-lived intangible assets were not impaired as of May 29, 2010 and the estimated fair value of the Macy’s retail operating division substantially exceeded its carrying value.

The goodwill impairment testing process involves the use of significant assumptions, estimates and judgments by management, and is subject to inherent uncertainties and subjectivity. Estimating a reporting unit’s discounted cash flows involves the use of significant assumptions, estimates and judgments with respect to a variety of factors, including sales, gross margin and SG&A rates, capital expenditures, cash flows and the selection and use of an appropriate discount rate. Projected sales, gross margin and SG&A expense rate assumptions and capital expenditures are based on the Company’s annual business plan or other forecasted results. Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting unit directly resulting from the use of its assets in its operations. The allocation of the estimated fair value of the Company’s reporting units to the estimated fair value of their net assets also involves the use of significant assumptions, estimates and judgments. Both the estimates of the fair value of the Company’s reporting units and the allocation of the estimated fair value of the reporting units to their net assets are based on the best information available to the Company’s management as of the date of the assessment.

The use of different assumptions, estimates or judgments in either step of the goodwill impairment testing process, including with respect to the estimated future cash flows of the Company’s reporting units, the discount rate used to discount such estimated cash flows to their net present value, the reasonableness of the resultant implied control premium relative to the Company’s market capitalization, and the appraised fair value of the reporting units’ tangible and intangible assets and liabilities, could materially increase or decrease the fair value of the reporting unit and/or its net assets and, accordingly, could materially increase or decrease any related impairment charge.

 

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Income Taxes

Income taxes are estimated based on the tax statutes, regulations and case law of the various jurisdictions in which the Company operates. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets are evaluated for recoverability based on all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. Deferred income tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred income tax assets will not be realized.

The Company changed its methodology for recording deferred state income taxes from a blended rate basis to a separate entity basis, and has reflected the effects of such change to 2010 and all prior periods. Even though the Company considers the change to have had only an immaterial impact on its financial condition, results of operations and cash flows for the periods presented, the financial condition, results of operations and cash flows for the prior periods as previously reported have been adjusted to reflect the change.

Uncertain tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Uncertain tax positions meeting the more-likely-than-not recognition threshold are then measured to determine the amount of benefit eligible for recognition in the financial statements. Each uncertain tax position is measured at the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. Uncertain tax positions are evaluated and adjusted as appropriate, while taking into account the progress of audits of various taxing jurisdictions. The Company does not anticipate that resolution of these matters will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Significant judgment is required in evaluating the Company’s uncertain tax positions, provision for income taxes, and any valuation allowance recorded against deferred tax assets. Although the Company believes that its judgments are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the Company’s historical income provisions and accruals.

Self-Insurance Reserves

The Company, through its insurance subsidiaries, is self-insured for workers’ compensation and general liability claims up to certain maximum liability amounts. Although the amounts accrued are actuarially determined by third parties based on analysis of historical trends of losses, settlements, litigation costs and other factors, the amounts the Company will ultimately disburse could differ from such accrued amounts.

Pension and Supplementary Retirement Plans

The Company has a funded defined benefit pension plan (the “Pension Plan”) and an unfunded defined benefit supplementary retirement plan (the “SERP”). The Company accounts for these plans in accordance with ASC Topic 715, “Compensation – Retirement Benefits.” Under ASC Topic 715, an employer recognizes the funded status of a defined benefit postretirement plan as an asset or liability on the balance sheet and recognizes changes in that funded status in the year in which the changes occur through comprehensive income. Additionally, pension expense is recognized on an accrual basis over employees’ approximate service periods. The pension expense calculation is generally independent of funding decisions or requirements. The Company anticipates that Pension and SERP expense, which was approximately $144 million in 2010, will remain comparable in 2011.

 

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The Pension Protection Act of 2006 provides the funding requirements for the Pension Plan which are different from the employer’s accounting for the plan as outlined in ASC Topic 715. During 2010, the Company made funding contributions to the Pension Plan totaling approximately $825 million. On March 28, 2011, the Company made a voluntary funding contribution to the Pension Plan of $225 million. The Company does not presently anticipate making any additional funding contributions to the Pension Plan during 2011, but may choose to do so in its discretion. Management believes that, with respect to the Company’s current operations, cash on hand and funds from operations, together with available borrowing under its credit facility and other capital resources, will be sufficient to cover the Company’s Pension Plan cash requirements in both the near term and also over the longer term.

At January 29, 2011, the Company had unrecognized actuarial losses of $1,116 million for the Pension Plan and $113 million for the SERP. The unrecognized losses for the Pension Plan and the SERP will be recognized as a component of pension expense in future years in accordance with ASC Topic 715, and is expected to impact 2011 Pension and SERP expense by approximately $90 million.

The calculation of pension expense and pension liabilities requires the use of a number of assumptions. Changes in these assumptions can result in different expense and liability amounts, and future actual experience may differ significantly from current expectations. The Company believes that the most critical assumptions relate to the long-term rate of return on plan assets (in the case of the Pension Plan), the discount rate used to determine the present value of projected benefit obligations and the weighted average rate of increase of future compensation levels.

As of January 29, 2011, the Company lowered the assumed annual long-term rate of return for the Pension Plan’s assets from 8.75% to 8.00% based on expected future returns on the portfolio. The Company develops its expected long-term rate of return assumption by evaluating input from several professional advisors taking into account the asset allocation of the portfolio and long-term asset class return expectations, as well as long-term inflation assumptions. Pension expense increases or decreases as the expected rate of return on the assets of the Pension Plan decreases or increases, respectively. Lowering the expected long-term rate of return on the Pension Plan’s assets by 0.25% (from 8.00% to 7.75%) would increase the estimated 2011 pension expense by approximately $8 million and raising the expected long-term rate of return on the Pension Plan’s assets by 0.25% (from 8.00% to 8.25%) would decrease the estimated 2011 pension expense by approximately $8 million.

The Company discounted its future pension obligations using a rate of 5.40% at January 29, 2011, compared to 5.65% at January 30, 2010. The discount rate used to determine the present value of the Company’s Pension Plan and SERP obligations is based on a yield curve constructed from a portfolio of high quality corporate debt securities with various maturities. Each year’s expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate for Pension Plan and SERP obligations. Pension liability and future pension expense both increase or decrease as the discount rate is reduced or increased, respectively. Lowering the discount rate by 0.25% (from 5.40% to 5.15%) would increase the projected benefit obligation at January 29, 2011 by approximately $98 million and would increase estimated 2011 pension expense by approximately $11 million. Increasing the discount rate by 0.25% (from 5.40% to 5.65%) would decrease the projected benefit obligation at January 29, 2011 by approximately $89 million and would decrease estimated 2011 pension expense by approximately $10 million.

The assumed weighted average age-graded rate of increase in future compensation levels was 4.5% at January 29, 2011 and January 30, 2010 for the Pension Plan, and 4.9% at January 29, 2011 and January 30, 2010 for the SERP. The Company develops its rate of compensation increase assumption on an age-graded basis based on recent experience and reflects an estimate of future compensation levels taking into account general increase levels, seniority, promotions and other factors. This assumption was revised during 2009 based on the completion of a third-party assumption study reflecting more recent experience. Pension liabilities and future pension expense both increase or decrease as the weighted average rate of increase of future compensation levels is

 

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increased or decreased, respectively. Increasing or decreasing the assumed weighted average rate of increase of future compensation levels by 0.25% would increase or decrease the projected benefit obligation at January 29, 2011 by approximately $16 million and change estimated 2011 pension expense by approximately $4 million.

New Pronouncements

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, which provides amendments and requires new disclosures relating to ASC Topic 820, “Fair Value Measurements and Disclosures,” and also conforming amendments to guidance relating to ASC Topic 715, “Compensation – Retirement Benefits.” The Company adopted this guidance on January 31, 2010, except for the disclosure requirement regarding purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which the Company adopted on January 30, 2011. This guidance is limited to the form and content of disclosures, and the portion thereof that has been adopted did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. The Company does not anticipate that the full adoption of this guidance will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In July 2010, the FASB issued Accounting Standard Update No. 2010-20, which amends various sections of ASC Topic 310, “Receivables,” relating to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendment requires companies to provide disaggregated levels of disclosure by portfolio segment and class of financing receivable to enable users of the financial statements to understand the nature of credit risk, how the risk is analyzed in determining the related allowance for credit losses and changes to the allowance during the reporting period. The Company adopted this guidance as of January 29, 2011, except as it relates to disclosures regarding activities during a reporting period, which is effective for interim and annual periods beginning on or after December 31, 2010. This guidance is limited to the form and content of disclosures. The initial adoption did not have, and the full adoption is not expected to have, an impact on the Company’s consolidated financial position, results of operations or cash flows.

In December 2010, the FASB issued Accounting Standard Update No. 2010-28, which amends ASC Topic 350, “Goodwill and Other,” relating to the goodwill impairment test of a reporting unit with zero or negative carrying amounts. This guidance is effective for interim and annual periods beginning after December 15, 2010. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to market risk from changes in interest rates that may adversely affect its financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposures through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company does not use financial instruments for trading or other speculative purposes and is not a party to any leveraged financial instruments.

The Company is exposed to interest rate risk through its borrowing activities, which are described in Note 8 to the Consolidated Financial Statements. The majority of the Company’s borrowings are under fixed rate instruments. However, the Company, from time to time, may use interest rate swap and interest rate cap agreements to help manage its exposure to interest rate movements and reduce borrowing costs. At January 29, 2011, the Company was not a party to any derivative financial instruments and based on the Company’s lack of market risk sensitive instruments outstanding at January 29, 2011, the Company has determined that there was no material market risk exposure to the Company’s consolidated financial position, results of operations or cash flows as of such date.

 

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Item 8. Consolidated Financial Statements and Supplementary Data.

Information called for by this item is set forth in the Company’s Consolidated Financial Statements and supplementary data contained in this report and is incorporated herein by this reference. Specific financial statements and supplementary data can be found at the pages listed in the following index:

INDEX

 

     Page  

Report of Management

     F-2   

Report of Independent Registered Public Accounting Firm

     F-3   

Consolidated Statements of Operations for the fiscal years ended
January 29, 2011, January  30, 2010 and January 31, 2009

     F-4   

Consolidated Balance Sheets at January 29, 2011 and January 30, 2010

     F-5   

Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended
January 29, 2011, January 30, 2010 and January 31, 2009

     F-6   

Consolidated Statements of Cash Flows for the fiscal years ended
January 29, 2011, January  30, 2010 and January 31, 2009

     F-7   

Notes to Consolidated Financial Statements

     F-8   

 

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

 

Item 9A. Controls and Procedures.

a. Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have carried out, as of January 29, 2011, with the participation of the Company’s management, an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in reports the Company files under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

b. Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The Company’s management conducted an assessment of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on this assessment, the Company’s management has concluded that, as of January 29, 2011, the Company’s internal control over financial reporting is effective.

The Company’s independent registered public accounting firm, KPMG LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of January 29, 2011 and has issued an attestation report expressing an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting, as stated in their report located on page F-3.

c. Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting that occurred during the Company’s most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

d. Certifications

The certifications of the Company’s Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act are filed as Exhibits 31.1 and 31.2 to this report. Additionally, in 2010 the Company’s Chief Executive Officer certified to the NYSE that he was not aware of any violation by the Company of the NYSE corporate governance listing standards.

 

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Item 9B. Other Information.

In January 2011, the Company determined that the performance restricted stock unit agreements issued to participants in the Company’s long-term incentive program (including the Company’s principal executive officer, principal financial officer and other named executive officers) on March 19, 2010 contained an erroneous definition of “Net Sales” in the definition of the EBITDA Margin performance goal. On February 25, 2011, the Compensation and Management Development Committee of the Board of Directors authorized the Company to include language in the form of the performance restricted stock unit agreement to be used for 2011 grants, which is filed as Exhibit 10.23 to this report, correcting the definition of Net Sales in the 2010 agreement. Additional information regarding the performance restricted stock units granted to the Company’s named executive officers in fiscal 2010 is set forth under “Compensation Discussion & Analysis” and “Compensation of the Named Executives for 2010” in the Proxy Statement to be delivered to shareholders in connection with our 2011 Annual Meeting of Shareholders and incorporated herein by reference.

 

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PART III

 

Item 10. Directors and Executive Officers of the Registrant.

Information called for by this item is set forth under “Item 1 – Election of Directors” and “Further Information Concerning the Board of Directors – Committees of the Board” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement to be delivered to stockholders in connection with our 2011 Annual Meeting of Shareholders (the “Proxy Statement”), and “Item 1. Business – Executive Officers of the Registrant” in this report and incorporated herein by reference.

 

Item 11. Executive Compensation.

Information called for by this item is set forth under “Compensation Discussion & Analysis,” “Compensation of the Named Executives for 2010,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement and incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information called for by this item is set forth under “Stock Ownership – Certain Beneficial Owners” and “Stock Ownership – Stock Ownership of Directors and Executive Officers” in the Proxy Statement and incorporated herein by reference.

 

Item 13. Certain Relationships and Related Transactions.

Information called for by this item is set forth under “Further Information Concerning the Board of Directors – Director Independence” and “Policy on Related Person Transactions” in the Proxy Statement and incorporated herein by reference.

 

Item 14. Principal Accountant Fees and Services.

Information called for by this item is set forth under “Item 2 – Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement and incorporated herein by reference.

 

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PART IV

 

Item 15. Exhibits and Financial Statement Schedules.

(a) The following documents are filed as part of this report:

1. Financial Statements:

The list of financial statements required by this item is set forth in Item 8 “Consolidated Financial Statements and Supplementary Data” and is incorporated herein by reference.

2. Financial Statement Schedules:

All schedules are omitted because they are inapplicable, not required, or the information is included elsewhere in the Consolidated Financial Statements or the notes thereto.

3. Exhibits:

 

Exhibit

Number

  

Description

  

Document if Incorporated by Reference

3.1    Amended and Restated Certificate of Incorporation    Exhibit 3.1 to the Company’s Current Report on Form 8-K dated May 18, 2010 (the “May 18, 2010 Form 8-K”)
3.1.1    Certificate of Designations of Series A Junior Participating Preferred Stock    Exhibit 3.1.1 to the Company’s Annual Report on
Form 10-K for the fiscal year ended January 28, 1995
3.2    Amended and Restated By-Laws    Exhibit 3.2 to the May 18, 2010 Form 8-K
4.1    Amended and Restated Certificate of Incorporation    See Exhibits 3.1 and 3.1.1
4.2    Amended and Restated By-Laws    See Exhibit 3.2
4.3    Indenture, dated as of January 15, 1991, among the Company (as successor to The May Department Stores Company (“May Delaware”)), Macy’s Retail Holdings, Inc. (“Macy’s Retail”) (f/k/a The May Department Stores Company (NY) or “May New York”) and The Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”, successor to J.P. Morgan Trust Company and as successor to The First National Bank of Chicago), as Trustee (the “1991 Indenture”)    Exhibit 4(2) to May New York’s Current Report on Form 8-K filed on January 15, 1991
4.3.1    Guarantee of Securities, dated as of August 30, 2005, by the Company relating to the 1991 Indenture    Exhibit 10.13 to the Company’s Current Report on
Form 8-K filed on August 30, 2005 (the “August 30, 2005 Form 8-K”)
4.4    Indenture, dated as of December 15, 1994, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company and The First National Bank of Boston), as Trustee (the “1994 Indenture”)    Exhibit 4.1 to the Company’s Registration Statement on Form S-3 (Registration No. 33-88328) filed on January 9, 1995

 

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Exhibit

Number

  

Description

  

Document if Incorporated by Reference

4.4.1    Eighth Supplemental Indenture to the 1994 Indenture, dated as of July 14, 1997, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company and The First National Bank of Boston), as Trustee    Exhibit 2 to the Company’s Current Report on Form 8-K filed on July 15, 1997 (the “July 1997 Form 8-K”)
4.4.2    Ninth Supplemental Indenture to the 1994 Indenture, dated as of July 14, 1997, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company and The First National Bank of Boston), as Trustee    Exhibit 3 to the July 1997 Form 8-K
4.4.3    Tenth Supplemental Indenture to the 1994 Indenture, dated as of August 30, 2005, among the Company, Macy’s Retail and U.S. Bank National Association (as successor to State Street Bank and Trust Company and as successor to The First National Bank of Boston), as Trustee    Exhibit 10.14 to the August 30, 2005 Form 8-K
4.4.4    Guarantee of Securities, dated as of August 30, 2005, by the Company relating to the 1994 Indenture    Exhibit 10.16 to the August 30, 2005 Form 8-K
4.5    Indenture, dated as of September 10, 1997, between the Company and U.S. Bank National Association (successor to Citibank, N.A.), as Trustee (the “1997 Indenture”)    Exhibit 4.4 to the Company’s Amendment No. 1 to Form S-3 (Registration No. 333-34321) filed on September 11, 1997
4.5.1    First Supplemental Indenture to the 1997 Indenture, dated as of February 6, 1998, between the Company and U.S. Bank National Association (successor to Citibank, N.A.), as Trustee    Exhibit 2 to the Company’s Current Report on Form 8-K filed on February 6, 1998
4.5.2    Third Supplemental Indenture to the 1997 Indenture, dated as of March 24, 1999, between the Company and U.S. Bank National Association (successor to Citibank, N.A.), as Trustee    Exhibit 4.2 to the Company’s Registration Statement on Form S-4 (Registration No. 333-76795) filed on April 22, 1999
4.5.3    Fifth Supplemental Trust Indenture dated as of March 27, 2001, between the Company and U.S. Bank National Association (successor to Citibank, N.A.), as Trustee    Exhibit 4 to the Company’s Current Report on Form 8-K filed on March 26, 2001
4.5.4    Seventh Supplemental Indenture to the 1997 Indenture, dated as of August 30, 2005 among the Company, Macy’s Retail and U.S. Bank National Association (successor to Citibank, N.A.), as Trustee    Exhibit 10.15 to the August 30, 2005 Form 8-K

 

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Exhibit

Number

  

Description

  

Document if Incorporated by Reference

4.5.5    Guarantee of Securities, dated as of August 30, 2005, by the Company relating to the 1997 Indenture    Exhibit 10.17 to the August 30, 2005 Form 8-K
4.6    Indenture, dated as of June 17, 1996, among the Company (as successor to May Delaware), Macy’s Retail (f/k/a May New York) and The Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”, successor to J.P. Morgan Trust Company), as Trustee (the “1996 Indenture”)    Exhibit 4.1 to the Registration Statement on Form S-3 (Registration No. 333-06171) filed on June 18, 1996 by May Delaware
4.6.1    First Supplemental Indenture to the 1996 Indenture, dated as of August 30, 2005, by and among the Company (as successor to May Delaware), Macy’s Retail (f/k/a May New York) and BNY Mellon, as Trustee    Exhibit 10.9 to the August 30, 2005 Form 8-K
4.7    Indenture, dated as of July 20, 2004, among the Company (as successor to May Delaware), Macy’s Retail (f/k/a May New York) and BNY Mellon, as Trustee (the “2004 Indenture”)    Exhibit 4.1 to the Current Report on Form 8-K (File No. 001-00079) filed July 21, 2004 by May Delaware
4.7.1    First Supplemental Indenture to the 2004 Indenture, dated as of August 30, 2005 among the Company (as successor to May Delaware), Macy’s Retail and BNY Mellon, as Trustee    Exhibit 10.10 to the August 30, 2005 Form 8-K
4.8    Indenture, dated as of November 2, 2006, by and among Macy’s Retail, the Company and U.S. Bank National Association, as Trustee (the “2006 Indenture”)    Exhibit 4.6 to the Company’s Registration Statement on Form S-3ASR (Registration No. 333-138376) filed on November 2, 2006
4.8.1    First Supplemental Indenture to the 2006 Indenture, dated November 29, 2006, among Macy’s Retail, the Company and U.S. Bank National Association, as Trustee    Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 29, 2006
4.8.2    Second Supplemental Indenture to the 2006 Indenture, dated March 12, 2007, among Macy’s Retail, the Company and U.S. Bank National Association, as Trustee    Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 12, 2007 (the “March 12, 2007 Form 8-K”)
4.8.3    Third Supplemental Indenture to the 2006 Indenture, dated March 12, 2007, among Macy’s Retail, the Company and U.S. Bank National Association, as Trustee    Exhibit 4.2 to the March 12, 2007 Form 8-K
4.8.4    Fourth Supplemental Indenture to the 2006 Indenture, dated as of August 31, 2007, among Macy’s Retail, as issuer, the Company, as guarantor, and U.S. Bank National Association, as trustee    Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 31, 2007

 

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Exhibit

Number

  

Description

  

Document if Incorporated by Reference

4.8.5    Fifth Supplemental Trust Indenture to the 2006 Indenture, dated as of June 26, 2008, among Macy’s Retail, as issuer, Macy’s, Inc., as guarantor, and U.S. Bank National Association, as trustee    Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 26, 2008
10.1+    Amendment and Restatement Agreement dated as of dated as of December 18, 2008, among Macy’s, Inc., Macy’s Retail, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and paying agent, and Bank of America, N.A., as administrative agent, which includes as an exhibit the Amended and Restated Credit Agreement dated as of January 5, 2009, among Macy’s, Inc., Macy’s Retail, the lenders from time to time parties thereto, JPMorgan Chase Bank, N.A. and Bank of America, N.A., as administrative agents, JPMorgan Chase Bank, N.A., as paying agent, and J.P. Morgan Securities Inc. and Banc of America Securities LLC, as joint bookrunners and joint lead arrangers    Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on September 8, 2009 (the “September 8, 2009 Form 10-Q”)
10.2    Amended and Restated Guarantee Agreement, dated as of January 5, 2009, among the Company, Macy’s Retail, certain subsidiary guarantors and JPMorgan Chase Bank, N.A., as paying agent    Exhibit 10.2 to the September 8, 2009 Form 10-Q
10.3    Commercial Paper Dealer Agreement, dated as of August 30, 2005, among the Company, Macy’s Retail and Banc of America Securities LLC    Exhibit 10.6 to the August 30, 2005 Form 8-K
10.4    Commercial Paper Dealer Agreement, dated as of August 30, 2005, among the Company, Macy’s Retail and Goldman, Sachs & Co.    Exhibit 10.7 to the August 30, 2005 Form 8-K
10.5    Commercial Paper Dealer Agreement, dated as of August 30, 2005, among the Company, Macy’s Retail and J.P. Morgan Securities Inc.    Exhibit 10.8 to the August 30, 2005 Form 8-K
10.6    Commercial Paper Dealer Agreement, dated as of October 4, 2006, among the Company and Loop Capital Markets, LLC    Exhibit 10.6 to the 2006 Form 10-K
10.7    Tax Sharing Agreement    Exhibit 10.10 to the Company’s Registration Statement on Form 10, filed on November 27, 1991, as amended (the “Form 10”)

 

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Exhibit

Number

  

Description

  

Document if Incorporated by Reference

10.8+    Purchase, Sale and Servicing Transfer Agreement, effective as of June 1, 2005, among the Company, FDS Bank, Prime II Receivables Corporation (“Prime II”) and Citibank, N.A. (“Citibank”)    Exhibit 10.3 to the September 8, 2009 Form 10-Q
10.8.1    Letter Agreement, dated August 22, 2005, among the Company, FDS Bank, Prime II and Citibank    Exhibit 10.17.1 to the Company’s Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended January 28, 2006 (the “2005 Form 10-K”)
10.8.2+    Second Amendment to Purchase, Sale and Servicing Transfer Agreement, dated October 24, 2005, between the Company and Citibank    Exhibit 10.4 to the September 8, 2009 Form 10-Q
10.8.3    Third Amendment to Purchase, Sale and Servicing Transfer Agreement, dated May 1, 2006, between the Company and Citibank    Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 3, 2006
10.8.4+    Fourth Amendment to Purchase, Sale and Servicing Transfer Agreement, dated May 22, 2006, between the Company and Citibank    Exhibit 10.5 to the September 8, 2009 Form 10-Q
10.9+    Credit Card Program Agreement, effective as of June 1, 2005, among the Company, FDS Bank, Macy’s Credit and Customer Services, Inc. (“MCCS”) (f/k/a FACS Group, Inc.) and Citibank    Exhibit 10.6 to the September 8, 2009 Form 10-Q
10.9.1+    First Amendment to Credit Card Program Agreement, dated October 24, 2005, between the Company and Citibank    Exhibit 10.7 to the September 8, 2009 Form 10-Q
10.9.2+    Second Amendment to Credit Card Program Agreement, dated May 22, 2006, between the Company, FDS Bank, MCCS, Macy’s West Stores, Inc. (f/k/a Macy’s Department Stores, Inc,) (“MWSI”), Bloomingdale’s, Inc. (“Bloomingdale’s”) and Department Stores National Bank (“DSNB”) and Citibank    Exhibit 10.8 to the September 8, 2009 Form 10-Q
10.9.3    Restated Letter Agreement, dated May 30, 2008 and effective as of December 18, 2006, among the Company, FDS Bank, MCCS, MWSI, Bloomingdale’s, Inc. (“Bloomingdale’s), and DSNB (as assignee of Citibank, N.A.)    Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 3, 2008 (the “May 3, 2008 Form 10-Q”)
10.9.4    Restated Letter Agreement, dated May 30, 2008 and effective as of March 22, 2007, among the Company, FDS Bank, MCCS, MWSI, Bloomingdale’s and DSNB    Exhibit 10.7 to the May 3, 2008 Form 10-Q

 

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Exhibit

Number

  

Description

  

Document if Incorporated by Reference

10.9.5    Restated Letter Agreement, dated May 30, 2008 and effective as of April 6, 2007, among the Company, FDS Bank, MCCS, MWSI, Bloomingdale’s and DSNB    Exhibit 10.8 to the May 3, 2008 Form 10-Q
10.9.6    Restated Letter Agreement, dated May 30, 2008 and effective as of June 1, 2007, among the Company, FDS Bank, MCCS, MWSI, Bloomingdale’s and DSNB    Exhibit 10.9 to the May 3, 2008 Form 10-Q
10.9.7    Restated Third Amendment to Credit Card Program Agreement, dated May 31, 2008 and effective as of February 3, 2008, among the Company, FDS Bank, MCCS, MWSI, Bloomingdale’s and DSNB    Exhibit 10.10 to the May 3, 2008 Form 10-Q
10.9.8+    Fourth Amendment to Credit Card Program Agreement, effective as of August 1, 2008, among the Company, FDS Bank, MCCS, MWSI, Bloomingdale’s and DSNB.    Exhibit 10.9 to the September 8, 2009 Form 10-Q
10.9.9+    Fifth Amendment to Credit Card Program Agreement, effective as of January 1, 2009, among the Company, FDS Bank, MCCS, MWSI, Bloomingdale’s and DSNB    Exhibit 10.10 to the September 8, 2009 Form 10-Q
10.9.10+    Sixth Amendment to Credit Card Program Agreement, effective as of June 1, 2009, among the Company, FDS Bank, MCCS, MWSI, Bloomingdale’s and DSNB    Exhibit 10.11 to the September 8, 2009 Form 10-Q
10.9.11+    Seventh Amendment to Credit Card Program Agreement, effective as of February 26, 2010, among the Company, FDS Bank, MCCS, MWSI, Bloomingdale’s and DSNB    Exhibit 10.9.11 to the Company’s Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended January 30, 2010
10.10    1995 Executive Equity Incentive Plan, as amended and restated as of June 1, 2007 (the “1995 Plan”) *    Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009 (the “2008 Form 10-K”)
10.11    1992 Incentive Bonus Plan, as amended and restated as of February 3, 2007 *    Appendix B to the Company’s Proxy Statement dated April 4, 2007
10.12    1994 Stock Incentive Plan, as amended and restated as of June 1, 2007 *    Exhibit 10.13 to the 2008 Form 10-K
10.13    Form of Indemnification Agreement *    Exhibit 10.14 to the Form 10
10.14    Employment Agreement, dated as of March 8, 2007, between Terry J. Lundgren and the Company (the “Lundgren Employment Agreement”) *    Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 9, 2007
10.14.1    Amendment to Employment Agreement, dated March 19, 2010, between Terry J. Lundgren and the Company    Exhibit 10.5 to the March 25, 2010 Form 8-K (the “March 25, 2010 Form 8-K”) *

 

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Exhibit

Number

  

Description

  

Document if Incorporated by Reference

10.15    Employment Agreement, dated as of April 21, 2008, between Thomas L. Cole and Macy’s Corporate Services, Inc. *    Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 22, 2008 (the “April 22, 2008 Form 8-K”)
10.16    Employment Agreement, dated as of April 21, 2008, between Janet Grove and Macy’s Merchandising Group, Inc. *    Exhibit 10.2 to the April 22, 2008 Form 8-K
10.17    Employment Agreement, dated as of April 21, 2008, between Karen M. Hoguet and Macy’s Corporate Services, Inc. *    Exhibit 10.3 to the April 22, 2008 Form 8-K
10. 18    Form of Employment Agreement for Executives and Key Employees *    Exhibit 10.31 the Company’s Annual Report on Form 10-K (File No. 001-10951) for fiscal year ended January 29, 1994
10.19    Executive Severance Plan, effective November 1, 2009 *    Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on December 7, 2009 (the “December 7, 2009 Form 10-Q”)
10.20    Form of Non-Qualified Stock Option Agreement for the 1995 Plan (for Executives and Key Employees) *    Exhibit 10.2 to the Company’s Current Report on Form 8-K dated March 25, 2005
10.20.1    Form of Non-Qualified Stock Option Agreement for the 1995 Plan (for Executives and Key Employees), as amended *    Exhibit 10.33.1 to the 2005 Form 10-K
10.20.2    Form of Non-Qualified Stock Option Agreement for the 1994 Stock Incentive Plan *    Exhibit 10.7 to the Current Report on From 8-K (File No. 001-00079) filed on March 23, 2005 by May Delaware (the “March 23, 2005 Form 8-K”)
10.20.3    Form of Nonqualified Stock Option Agreement under the 2009 Omnibus Incentive Compensation Plan (for Executives and Key Employees) *   
10.21    Nonqualified Stock Option Agreement, dated as of October 26, 2007, by and between the Company and Terry Lundgren *    Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 1, 2007
10.22    Form of Restricted Stock Agreement for the 1994 Stock Incentive Plan *    Exhibit 10.4 to the March 23, 2005 Form 8-K
10.22.1    Form of Time-Based Restricted Stock Agreement under the 2009 Omnibus Incentive Compensation Plan *    Exhibit 10.3 to the March 25, 2010 Form 8-K
10.23    Form of Performance-Based Restricted Stock Unit Agreement under the 2009 Omnibus Incentive Compensation Plan *   
10.24    Form of Performance-Based Restricted Stock Unit Agreement under the 2009 Omnibus Incentive Compensation Plan (Founders Award) *    Exhibit 10.1 to the Company’s Quarterly Report on Form 8-K dated March 24, 2009
10.25    Form of Time-Based Restricted Stock Unit Agreement under the 2009 Omnibus Incentive Compensation Plan *    Exhibit 10.4 to the March 25, 2010 Form 8-K
10.26    Supplementary Executive Retirement Plan *    Exhibit 10.29 to the 2008 Form 10-K

 

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Exhibit

Number

  

Description

  

Document if Incorporated by Reference

10.27    Executive Deferred Compensation Plan *    Exhibit 10.30 to the 2008 Form 10-K
10.28    Macy’s, Inc. Profit Sharing 401(k) Investment Plan (the “Plan”) (amending and restating the Macy’s, Inc. Profit Sharing 401(k) Investment Plan and The May Department Stores Company Profit Sharing Plan), effective as of September 1, 2008 *    Exhibit 10.31 to the 2008 Form 10-K
10.28.1    First Amendment to the Plan regarding matching rate with respect to the Plan’s 2009 plan year, effective as of January 1, 2009 *   
10.28.2    Second Amendment to the Plan regarding certain rollover requirements added by the Pension Protection Act of 2006, restated effective as of January 1, 2008 *   
10.28.3    Third Amendment to the Plan regarding matching rate with respect to the Plan’s 2010 plan year, effective January 1, 2010 *   
10.28.4    Fourth Amendment to the Plan regarding deferral percentage and average actual contribution limits, effective January 1, 2010 *   
10.28.5    Fifth Amendment to the Plan regarding the Heroes Earnings Assistance and Relief Tax Act of 2008, effective as of January 1, 2008 *   
10.28.6    Sixth Amendment to the Plan regarding matching rate with respect to the Plan’s plan year on or after January 1, 2011, effective as of January 1, 2011 *   
10.28.7    Seventh Amendment to the Plan regarding name change of the Plan effective as of April 1, 2011 *   
10.29    Director Deferred Compensation Plan *    Exhibit 10.33 to the 2008 Form 10-K
10.30    Stock Credit Plan for 2006 – 2007 of Federated Department Stores, Inc. *    Exhibit 10.43 to the 2005 Form 10-K
10.30.1    Stock Credit Plan for 2008 – 2009 of Macy’s, Inc. (as amended as of August 22, 2008) *    Exhibit 10.1 to the August 2, 2008 Form 10-Q
10.31    Macy’s, Inc. 2009 Omnibus Incentive Compensation Plan *    Appendix B to the Company’s Proxy Statement dated April 1, 2009
10.32    Change in Control Plan, effective November 1, 2009 *    Exhibit 10.2 to the December 7, 2009 Form 10-Q
10.33    Time Sharing Agreement between Macy’s, Inc. and Terry J. Lundgren, dated March 25, 2011 *   
21    Subsidiaries   
23    Consent of KPMG LLP   
24    Powers of Attorney   
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)   

 

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Table of Contents

Exhibit

Number

 

Description

  

Document if Incorporated by Reference

31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a)   
32.1   Certifications by Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act   
32.2   Certifications by Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act   
101**   The following financial statements from Macy’s, Inc.’s Annual Report on Form 10-K for the year ended January 29, 2011, filed on March 30, 2011, formatted in XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.   

 

+ Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The confidential portions have been provided to the SEC.
* Constitutes a compensatory plan or arrangement.
** As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MACY’S, INC.
By:  

/s/    DENNIS J. BRODERICK        

 

Dennis J. Broderick

Executive Vice President, General Counsel and

Secretary

 

Date: March 30, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 30, 2011.

 

Signature

  

Title

*

Terry J. Lundgren

   Chairman of the Board, President and Chief Executive Officer (principal executive officer) and Director

*

Karen M. Hoguet

   Chief Financial Officer (principal financial officer)

*

Joel A. Belsky

   Executive Vice President and Controller (principal accounting officer)

*

Stephen F. Bollenbach

   Director

*

Deirdre Connelly

   Director

*

Meyer Feldberg

   Director

*

Sara Levinson

   Director

*

Joseph Neubauer

   Director

*

Joseph A. Pichler

   Director

*

Joyce M. Roché

   Director

*

Craig E. Weatherup

   Director

*

Marna C. Whittington

   Director

 

* The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K pursuant to the Powers of Attorney executed by the above-named officers and directors and filed herewith.
By:  

/s/    DENNIS J. BRODERICK        

   

Dennis J. Broderick

Attorney-in-Fact

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Management

     F-2   

Report of Independent Registered Public Accounting Firm

     F-3   

Consolidated Statements of Operations for the fiscal years ended
January 29, 2011, January  30, 2010, and January 31, 2009

     F-4   

Consolidated Balance Sheets at January 29, 2011 and January 30, 2010

     F-5   

Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended
January 29, 2011, January 30, 2010, and January 31, 2009

     F-6   

Consolidated Statements of Cash Flows for the fiscal years ended
January 29, 2011, January  30, 2010, and January 31, 2009

     F-7   

Notes to Consolidated Financial Statements

     F-8   

 

F-1


Table of Contents

REPORT OF MANAGEMENT

To the Shareholders of

Macy’s, Inc.:

The integrity and consistency of the Consolidated Financial Statements of Macy’s, Inc. and subsidiaries, which were prepared in accordance with accounting principles generally accepted in the United States of America, are the responsibility of management and properly include some amounts that are based upon estimates and judgments.

The Company maintains a system of internal accounting controls, which is supported by a program of internal audits with appropriate management follow-up action, to provide reasonable assurance, at appropriate cost, that the Company’s assets are protected and transactions are properly recorded. Additionally, the integrity of the financial accounting system is based on careful selection and training of qualified personnel, organizational arrangements which provide for appropriate division of responsibilities and communication of established written policies and procedures.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) and has issued Management’s Report on Internal Control over Financial Reporting.

The Consolidated Financial Statements of the Company have been audited by KPMG LLP. Their report expresses their opinion as to the fair presentation, in all material respects, of the financial statements and is based upon their independent audits.

The Audit Committee, composed solely of outside directors, meets periodically with KPMG LLP, the internal auditors and representatives of management to discuss auditing and financial reporting matters. In addition, KPMG LLP and the Company’s internal auditors meet periodically with the Audit Committee without management representatives present and have free access to the Audit Committee at any time. The Audit Committee is responsible for recommending to the Board of Directors the engagement of the independent registered public accounting firm, which is subject to shareholder approval, and the general oversight review of management’s discharge of its responsibilities with respect to the matters referred to above.

Terry J. Lundgren

Chairman, President and Chief Executive Officer

Karen M. Hoguet

Chief Financial Officer

Joel A. Belsky

Executive Vice President and Controller

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Macy’s, Inc.:

We have audited the accompanying consolidated balance sheets of Macy’s, Inc. and subsidiaries as of January 29, 2011 and January 30, 2010, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended January 29, 2011. We also have audited Macy’s, Inc.’s internal control over financial reporting as of January 29, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Macy’s, Inc.’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A(b), “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Macy’s, Inc. and subsidiaries as of January 29, 2011 and January 30, 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended January 29, 2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Macy’s, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 29, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ KPMG LLP

Cincinnati, Ohio

March 30, 2011

 

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MACY’S, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(millions, except per share data)

 

 

 

 

     2010     2009     2008  

Net sales

   $ 25,003      $ 23,489      $ 24,892   

Cost of sales

     (14,824     (13,973     (15,009
                        

Gross margin

     10,179        9,516        9,883   

Selling, general and administrative expenses

     (8,260     (8,062     (8,481

Impairments, store closing costs and division consolidation costs

     (25     (391     (398

Goodwill impairment charges

     0        0        (5,382
                        

Operating income (loss)

     1,894        1,063        (4,378

Interest expense

     (579     (562     (588

Interest income

     5        6        28   
                        

Income (loss) before income taxes

     1,320        507        (4,938

Federal, state and local income tax benefit (expense)

     (473     (178     163   
                        

Net income (loss)

   $ 847      $ 329      $ (4,775
                        

Basic earnings (loss) per share

   $ 2.00      $ .78      $ (11.34
                        

Diluted earnings (loss) per share

   $ 1.98      $ .78      $ (11.34
                        

 

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

 

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Table of Contents

MACY’S, INC.

CONSOLIDATED BALANCE SHEETS

(millions)

 

 

 

 

     January 29, 2011     January 30, 2010  
ASSETS     

Current Assets:

    

Cash and cash equivalents

   $ 1,464      $ 1,686   

Receivables

     392        358   

Merchandise inventories

     4,758        4,615   

Prepaid expenses and other current assets

     285        223   
                

Total Current Assets

     6,899        6,882   

Property and Equipment – net

     8,813        9,507   

Goodwill

     3,743        3,743   

Other Intangible Assets – net

     637        678   

Other Assets

     539        490   
                

Total Assets

   $ 20,631      $ 21,300   
                
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current Liabilities:

    

Short-term debt

   $ 454      $ 242   

Merchandise accounts payable

     1,421        1,312   

Accounts payable and accrued liabilities

     2,644        2,626   

Income taxes

     182        68   

Deferred income taxes

     364        214   
                

Total Current Liabilities

     5,065        4,462   

Long-Term Debt

     6,971        8,456   

Deferred Income Taxes

     1,245        1,132   

Other Liabilities

     1,820        2,597   

Shareholders’ Equity:

    

Common stock (423.3 and 420.8 shares outstanding)

     5        5   

Additional paid-in capital

     5,696        5,689   

Accumulated equity

     2,990        2,227   

Treasury stock

     (2,431     (2,515

Accumulated other comprehensive loss

     (730     (753
                

Total Shareholders’ Equity

     5,530        4,653   
                

Total Liabilities and Shareholders’ Equity

   $ 20,631      $ 21,300   
                

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

 

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MACY’S, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(millions)

 

 

 

 

     Common
Stock
     Additional
Paid-In
Capital
    Accumulated
Equity
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
 

Balance at February 2, 2008

   $ 5       $ 5,609      $ 7,032      $ (2,557   $ (182   $ 9,907   

Cumulative effect of change in methodology of deferred state income taxes

          (54         (54
                                                 

Balance at February 2, 2008, as revised

     5         5,609        6,978        (2,557     (182     9,853   

Net loss

          (4,775         (4,775

Actuarial loss on post employment and postretirement
benefit plans, net of income tax effect of $183 million

              (294     (294

Unrealized loss on marketable securities, net of income
tax effect of $11 million

              (17     (17

Reclassifications to net loss:

             

Realized loss on marketable securities, net of income
tax effect of $5 million

              7        7   

Net actuarial loss on post employment and postretirement benefit plans, net of income tax
effect of $1 million

              1        1   

Prior service credit on post employment and postretirement benefit plans, net of income tax
effect of $1 million

              (1     (1
                   

Total comprehensive loss

                (5,079

Common stock dividends ($.5275 per share)

          (221         (221

Stock repurchases

            (1       (1

Stock-based compensation expense

        61              61   

Stock issued under stock plans

        (7       13          6   

Deferred compensation plan distributions

            1          1   
                                                 

Balance at January 31, 2009

     5         5,663        1,982        (2,544     (486     4,620   

Net income

          329            329   

Actuarial loss on post employment and postretirement
benefit plans, net of income tax effect of $166 million

              (266     (266

Unrealized gain on marketable securities, net of income
tax effect of $3 million

              5        5   

Reclassifications to net income:

             

Net actuarial gain on postretirement benefit plans,
net of income tax effect of $3 million

              (4     (4

Prior service credit on post employment benefit plans,
net of income tax effect of $1 million

              (2     (2
                   

Total comprehensive income

                62   

Common stock dividends ($.20 per share)

          (84         (84

Stock repurchases

            (1       (1

Stock-based compensation expense

        50              50   

Stock issued under stock plans

        (24       29          5   

Deferred compensation plan distributions

            1          1   
                                                 

Balance at January 30, 2010

     5         5,689        2,227        (2,515     (753     4,653   

Net income

          847            847   

Actuarial loss on post employment and postretirement
benefit plans, net of income tax effect of $4 million

              (17     (17

Unrealized gain on marketable securities, net of income
tax effect of $3 million

              5        5   

Reclassifications to net income:

             

Net actuarial loss on postretirement benefit plans,
net of income tax effect of $23 million

              36        36   

Prior service credit on post employment benefit plans,
net of income tax effect of $1 million

              (1     (1
                   

Total comprehensive income

                870   

Common stock dividends ($.20 per share)

          (84         (84

Stock repurchases

            (1       (1

Stock-based compensation expense

        47              47   

Stock issued under stock plans

        (40       82          42   

Deferred compensation plan distributions

            3          3   
                                                 

Balance at January 29, 2011

   $ 5       $ 5,696      $ 2,990      $ (2,431   $ (730   $ 5,530   
                                                 

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

 

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MACY’S, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(millions)

 

 

 

 

     2010     2009     2008  

Cash flows from operating activities:

      

Net income (loss)

   $ 847      $ 329      $ (4,775

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

      

Impairments, store closing costs and division consolidation costs

     25        391        398   

Goodwill impairment charges

     0        0        5,382   

Depreciation and amortization

     1,150        1,210        1,278   

Stock-based compensation expense

     66        76        43   

Amortization of financing costs and premium on acquired debt

     (25     (23     (27

Changes in assets and liabilities:

      

(Increase) decrease in receivables

     (51     7        (1

(Increase) decrease in merchandise inventories

     (143     154        291   

(Increase) decrease in supplies and prepaid expenses

     (10     3        (7

(Increase) decrease in other assets not separately identified

     2        (16     1   

Increase (decrease) in merchandise accounts payable

     91        29        (90

Decrease in accounts payable and accrued liabilities not separately identified

     (45     (201     (228

Increase (decrease) in current income taxes

     115        40        (146

Increase (decrease) in deferred income taxes

     241        123        (315

Increase (decrease) in other liabilities not separately identified

     (757     (372     62   
                        

Net cash provided by operating activities

     1,506        1,750        1,866   
                        

Cash flows from investing activities:

      

Purchase of property and equipment

     (339     (355     (761

Capitalized software

     (166     (105     (136

Proceeds from property insurance claims

     6        26        68   

Disposition of property and equipment

     74        60        38   

Other, net

     (40     (3     (1
                        

Net cash used by investing activities

     (465     (377     (792
                        

Cash flows from financing activities:

      

Debt issued

     0        0        650   

Financing costs

     0        0        (18

Debt repaid

     (1,245     (966     (666

Dividends paid

     (84     (84     (221

Increase (decrease) in outstanding checks

     24        (29     (116

Acquisition of treasury stock

     (1     (1     (1

Issuance of common stock

     43        8        7   
                        

Net cash used by financing activities

     (1,263     (1,072     (365
                        

Net increase (decrease) in cash and cash equivalents

     (222     301        709   

Cash and cash equivalents beginning of period

     1,686        1,385        676   
                        

Cash and cash equivalents end of period

   $ 1,464      $ 1,686      $ 1,385   
                        

Supplemental cash flow information:

      

Interest paid

   $ 627      $ 601      $ 642   

Interest received

     5        9        26   

Income taxes paid (net of refunds received)

     108        35        323   

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

 

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Table of Contents

MACY’S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

1. Organization and Summary of Significant Accounting Policies

Macy’s, Inc. and subsidiaries (the “Company”) is a retail organization operating retail stores and Internet websites under two brands (Macy’s and Bloomingdale’s) that sell a wide range of merchandise, including men’s, women’s and children’s apparel and accessories, cosmetics, home furnishings and other consumer goods in 45 states, the District of Columbia, Guam and Puerto Rico. As of January 29, 2011, the Company’s operations were conducted through Macy’s, macys.com, Bloomingdale’s, bloomingdales.com and Bloomingdale’s Outlet, which are aggregated into one reporting segment in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting.” The metrics used by management to assess the performance of the Company’s operating divisions include sales trends, gross margin rates, expense rates, and rates of earnings before interest and taxes (“EBIT”) and earnings before interest, taxes, depreciation and amortization (“EBITDA”). The Company’s operating divisions have historically had similar economic characteristics and are expected to have similar economic characteristics and long-term financial performance in future periods.

For 2010, 2009 and 2008, the following merchandise constituted the following percentages of sales:

 

     2010     2009     2008  

Feminine Accessories, Intimate Apparel, Shoes and Cosmetics

     36     36     36

Feminine Apparel

     26        26        27   

Men’s and Children’s

     23        22        22   

Home/Miscellaneous

     15        16        15   
                        
     100     100     100
                        

The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years 2010, 2009 and 2008 ended on January 29, 2011, January 30, 2010 and January 31, 2009, respectively. References to years in the Consolidated Financial Statements relate to fiscal years rather than calendar years.

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. The Company from time to time invests in companies engaged in complementary businesses. Investments in companies in which the Company has the ability to exercise significant influence, but not control, are accounted for by the equity method. All marketable equity and debt securities held by the Company are accounted for under ASC Topic 320, “Investments – Debt and Equity Securities,” with unrealized gains and losses on available-for-sale securities being included as a separate component of accumulated other comprehensive income, net of income tax effect. All other investments are carried at cost. All significant intercompany transactions have been eliminated.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions are subject to inherent uncertainties, which may result in actual amounts differing from reported amounts.

Certain reclassifications were made to prior years’ amounts to conform with the classifications of such amounts for the most recent year.

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

Net sales include merchandise sales, leased department income and shipping and handling fees. In 2010, the Company began including sales of private brand goods directly to third party retailers and sales of excess inventory to third parties in net sales. These items were previously reported, net of the related cost of sales, in selling, general and administrative expenses (“SG&A”). This change in presentation had an immaterial impact on reported net sales, does not impact comparable store sales, net income (loss) or diluted earnings (loss) per share, and was not applied retroactively to annual periods prior to fiscal 2010. The Company licenses third parties to operate certain departments in its stores. The Company receives commissions from these licensed departments based on a percentage of net sales. Commissions are recognized as income at the time merchandise is sold to customers. Sales taxes collected from customers are not considered revenue and are included in accounts payable and accrued liabilities until remitted to the taxing authorities. Cost of sales consists of the cost of merchandise, including inbound freight, and shipping and handling costs. Sales of merchandise are recorded at the time of delivery and reported net of merchandise returns. An estimated allowance for future sales returns is recorded and cost of sales is adjusted accordingly.

Cash and cash equivalents include cash and liquid investments with original maturities of three months or less. Cash and cash equivalents also includes credit card sales transactions that are settled early in the following period and amounted to $104 million at January 29, 2011 and $98 million at January 30, 2010.

In connection with the sale of the Company’s credit assets, the Company and Citibank, N.A. entered into a long-term marketing and servicing alliance pursuant to the terms of a Credit Card Program Agreement (the “Program Agreement”) (see Note 4, “Receivables”). Income earned under the Program Agreement is treated as a reduction of SG&A expenses on the Consolidated Statements of Operations. Under the Program Agreement, Citibank offers proprietary and non-proprietary credit to the Company’s customers through previously existing and newly opened accounts.

The Company maintains customer loyalty programs in which customers are awarded certificates based on their spending. Upon reaching certain levels of qualified spending, customers automatically receive certificates to apply toward future purchases. The Company recognizes the estimated net amount of the certificates that will be earned and redeemed as a reduction to net sales.

Merchandise inventories are valued at lower of cost or market using the last-in, first-out (LIFO) retail inventory method. Under the retail inventory method, inventory is segregated into departments of merchandise having similar characteristics, and is stated at its current retail selling value. Inventory retail values are converted to a cost basis by applying specific average cost factors for each merchandise department. Cost factors represent the average cost-to-retail ratio for each merchandise department based on beginning inventory and the fiscal year purchase activity. The retail inventory method inherently requires management judgments and estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation as well as gross margins.

Permanent markdowns designated for clearance activity are recorded when the utility of the inventory has diminished. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise and fashion trends. When a decision is made to permanently mark down merchandise, the resulting gross margin reduction is recognized in the period the markdown is recorded.

Physical inventories are generally taken within each merchandise department annually, and inventory records are adjusted accordingly, resulting in the recording of actual shrinkage. While it is not possible to quantify the impact from each cause of shrinkage, the Company has loss prevention programs and policies that

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

are intended to minimize shrinkage. Physical inventories are taken at all store locations for substantially all merchandise categories approximately three weeks before the end of the fiscal year. Shrinkage is estimated as a percentage of sales at interim periods and for this approximate three-week period, based on historical shrinkage rates.

The Company receives certain allowances from various vendors in support of the merchandise it purchases for resale. The Company receives certain allowances as reimbursement for markdowns taken and/or to support the gross margins earned in connection with the sales of merchandise. These allowances are generally credited to cost of sales at the time the merchandise is sold in accordance with ASC Subtopic 605-50, “Customer Payments and Incentives.” The Company also receives advertising allowances from more than 1,000 of its merchandise vendors pursuant to cooperative advertising programs, with some vendors participating in multiple programs. These allowances represent reimbursements by vendors of costs incurred by the Company to promote the vendors’ merchandise and are netted against advertising and promotional costs when the related costs are incurred in accordance with ASC Subtopic 605-50. Advertising allowances in excess of costs incurred are recorded as a reduction of merchandise costs and, ultimately, through cost of sales when the merchandise is sold.

Advertising and promotional costs, net of cooperative advertising allowances, amounted to $1,072 million for 2010, $1,087 million for 2009 and $1,239 million for 2008. Cooperative advertising allowances that offset advertising and promotional costs were approximately $345 million for 2010, $298 million for 2009 and $372 million for 2008. Department store non-direct response advertising and promotional costs are expensed either as incurred or the first time the advertising occurs. Direct response advertising and promotional costs are deferred and expensed over the period during which the sales are expected to occur, generally one to four months.

The arrangements pursuant to which the Company’s vendors provide allowances, while binding, are generally informal in nature and one year or less in duration. The terms and conditions of these arrangements vary significantly from vendor to vendor and are influenced by, among other things, the type of merchandise to be supported.

Depreciation of owned properties is provided primarily on a straight-line basis over the estimated asset lives, which range from fifteen to fifty years for buildings and building equipment and three to fifteen years for fixtures and equipment. Real estate taxes and interest on construction in progress and land under development are capitalized. Amounts capitalized are amortized over the estimated lives of the related depreciable assets. The Company receives contributions from developers and merchandise vendors to fund building improvement and the construction of vendor shops. Such contributions are netted against the capital expenditures.

Buildings on leased land and leasehold improvements are amortized over the shorter of their economic lives or the lease term, beginning on the date the asset is put into use. The Company receives contributions from landlords to fund buildings and leasehold improvements. Such contributions are recorded as deferred rent and amortized as reductions to lease expense over the lease term.

The Company recognizes operating lease minimum rentals on a straight-line basis over the lease term. Executory costs such as real estate taxes and maintenance, and contingent rentals such as those based on a percentage of sales are recognized as incurred.

The lease term, which includes all renewal periods that are considered to be reasonably assured, begins on the date the Company has access to the leased property.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

The carrying value of long-lived assets is periodically reviewed by the Company whenever events or changes in circumstances indicate that a potential impairment has occurred. For long-lived assets held for use, a potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of those assets in operations. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long-lived asset exceeds its fair value. The Company believes its estimated cash flows are sufficient to support the carrying value of its long-lived assets. If estimated cash flows significantly differ in the future, the Company may be required to record asset impairment write-downs.

If the Company commits to a plan to dispose of a long-lived asset before the end of its previously estimated useful life, estimated cash flows are revised accordingly, and the Company may be required to record an asset impairment write-down. Additionally, related liabilities arise such as severance, contractual obligations and other accruals associated with store closings from decisions to dispose of assets. The Company estimates these liabilities based on the facts and circumstances in existence for each restructuring decision. The amounts the Company will ultimately realize or disburse could differ from the amounts assumed in arriving at the asset impairment and restructuring charge recorded.

The Company classifies certain long-lived assets as held for disposal by sale and ceases depreciation when the particular criteria for such classification are met, including the probable sale within one year. For long-lived assets to be disposed of by sale, an impairment charge is recorded if the carrying amount of the asset exceeds its fair value less costs to sell. Such valuations include estimations of fair values and incremental direct costs to transact a sale.

The carrying value of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment in accordance with ASC Subtopic 350-20 “Goodwill.” Goodwill and other intangible assets with indefinite lives have been assigned to reporting units for purposes of impairment testing. The reporting units are the Company’s retail operating divisions. Goodwill and other intangible assets with indefinite lives are tested for impairment annually at the end of the fiscal month of May. The Company estimates fair value based on discounted cash flows. The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting unit’s fair value to its carrying value. The reporting unit’s discounted cash flows require significant management judgment with respect to sales, gross margin and SG&A rates, capital expenditures and the selection and use of an appropriate discount rate. The projected sales, gross margin and SG&A expense rate assumptions and capital expenditures are based on the Company’s annual business plan or other forecasted results. Discount rates reflect market-based estimates of the risks associated with the projected cash flows directly resulting from the use of those assets in operations. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment. If the carrying value of a reporting unit exceeds its estimated fair value in the first step, a second step is performed, in which the reporting unit’s goodwill is written down to its implied fair value. The second step requires the Company to allocate the fair value of the reporting unit derived in the first step to the fair value of the reporting unit’s net assets, with any fair value in excess of amounts allocated to such net assets representing the implied fair value of goodwill for that reporting unit. If the carrying value of an individual indefinite-lived intangible asset exceeds its fair value, such individual indefinite-lived intangible asset is written down by an amount equal to such excess.

The Company capitalizes purchased and internally developed software and amortizes such costs to expense on a straight-line basis over two to five years. Capitalized software is included in other assets on the Consolidated Balance Sheets.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

Historically, the Company offered both expiring and non-expiring gift cards to its customers. At the time gift cards are sold, no revenue is recognized; rather, the Company records an accrued liability to customers. The liability is relieved and revenue is recognized equal to the amount redeemed at the time gift cards are redeemed for merchandise. The Company records income from unredeemed gift cards (breakage) as a reduction of SG&A expenses. For expiring gift cards, income is recorded at the end of two years (expiration date) when there is no longer a legal obligation. For non-expiring gift cards, income is recorded in proportion and over the time period gift cards are actually redeemed. At least three years of historical data, updated annually, is used to determine actual redemption patterns. Since February 2, 2008, the Company sells only non-expiring gift cards.

The Company, through its insurance subsidiaries, is self-insured for workers compensation and general liability claims up to certain maximum liability amounts. Although the amounts accrued are actuarially determined based on analysis of historical trends of losses, settlements, litigation costs and other factors, the amounts the Company will ultimately disburse could differ from such accrued amounts.

The Company, through its actuaries, utilizes assumptions when estimating the liabilities for pension and other employee benefit plans. These assumptions, where applicable, include the discount rates used to determine the actuarial present value of projected benefit obligations, the rate of increase in future compensation levels, the long-term rate of return on assets and the growth in health care costs. The cost of these benefits is recognized in the Consolidated Financial Statements over an employee’s term of service with the Company, and the accrued benefits are reported in accounts payable and accrued liabilities and other liabilities on the Consolidated Balance Sheets, as appropriate.

Financing costs are amortized using the effective interest method over the life of the related debt.

Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the Consolidated Statements of Operations in the period that includes the enactment date. Deferred income tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred income tax assets will not be realized.

The Company changed its methodology for recording deferred state income taxes from a blended rate basis to a separate entity basis, and has reflected the effects of such change to 2010 and all prior periods. Even though the Company considers the change to have had only an immaterial impact on its financial condition, results of operations and cash flows for the periods presented, the financial condition, results of operations and cash flows for the prior periods as previously reported have been adjusted to reflect the change.

The Company records derivative transactions according to the provisions of ASC Topic 815 “Derivatives and Hedging,” which establishes accounting and reporting standards for derivative instruments and hedging activities and requires recognition of all derivatives as either assets or liabilities and measurement of those instruments at fair value. The Company makes limited use of derivative financial instruments. The Company does not use financial instruments for trading or other speculative purposes and is not a party to any leveraged financial instruments. On the date that the Company enters into a derivative contract, the Company designates the derivative instrument as either a fair value hedge, a cash flow hedge or as a free-standing derivative instrument, each of which would receive different accounting treatment. Prior to entering into a hedge transaction, the

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

Company formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. Derivative instruments that the Company may use as part of its interest rate risk management strategy include interest rate swap and interest rate cap agreements and Treasury lock agreements. At January 29, 2011, the Company was not a party to any derivative financial instruments.

The Company records stock-based compensation expense according to the provisions of ASC Topic 718, “Compensation – Stock Compensation.” ASC Topic 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Under the provisions of ASC Topic 718, the Company must determine the appropriate fair value model to be used for valuing share-based payments and the amortization method for compensation cost. See Note 13, “Stock Based Compensation,” for further information.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, which provides amendments and requires new disclosures relating to ASC Topic 820, “Fair Value Measurements and Disclosures,” and also conforming amendments to guidance relating to ASC Topic 715, “Compensation – Retirement Benefits.” The Company adopted this guidance on January 31, 2010, except for the disclosure requirement regarding purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which the Company adopted on January 30, 2011. This guidance is limited to the form and content of disclosures, and the portion thereof that has been adopted did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. The Company does not anticipate that the full adoption of this guidance will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In July 2010, the FASB issued Accounting Standard Update No. 2010-20, which amends various sections of ASC Topic 310, “Receivables,” relating to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendment requires companies to provide disaggregated levels of disclosure by portfolio segment and class of financing receivable to enable users of the financial statements to understand the nature of credit risk, how the risk is analyzed in determining the related allowance for credit losses and changes to the allowance during the reporting period. The Company adopted this guidance as of January 29, 2011, except as it relates to disclosures regarding activities during a reporting period, which is effective for interim and annual periods beginning on or after December 31, 2010. This guidance is limited to the form and content of disclosures. The initial adoption did not have, and the full adoption is not expected to have, an impact on the Company’s consolidated financial position, results of operations or cash flows.

In December 2010, the FASB issued Accounting Standard Update No. 2010-28, which amends ASC Topic 350, “Goodwill and Other,” relating to the goodwill impairment test of a reporting unit with zero or negative carrying amounts. This guidance is effective for interim and annual periods beginning after December 15, 2010. The Company does not anticipate that the adoption of this guidance will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

2. Impairments, Store Closing Costs and Division Consolidation Costs

Impairments, store closing costs, and division consolidation costs consist of the following:

 

     2010      2009      2008  
     (millions)  

Impairments:

        

Properties held and used

   $ 18       $ 115       $ 136   

Acquired indefinite-lived private brand tradenames

     0         0         63   

Marketable securities

     0         0         12   

Store closing costs:

        

Severance

     1         2         4   

Other

     6         4         7   

Division consolidation costs

     0         270         176   
                          
   $ 25       $ 391       $ 398   
                          

Long-lived assets held for use are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability of long-lived assets is based on an estimate of undiscounted future cash flows resulting from the use of those assets in operation. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value. As a result of the Company’s projected undiscounted future cash flows related to certain store locations being less than the carrying value of those assets, the Company recorded the impairment charges reflected in the table above relating to properties held and used, including properties that were the subject of announced store closings. The fair values of these locations were calculated based on the projected cash flows and an estimated risk-adjusted rate of return that would be used by market participants in valuing these assets or based on prices of similar assets.

During January 2011, the Company announced the closure of three underperforming Macy’s stores; during January 2010, the Company announced the closure of five underperforming Macy’s stores; and during January 2009, the Company announced the closure of eleven underperforming Macy’s stores. In connection with these announcements and the plans to dispose of these locations, the Company incurred severance costs and other costs related to lease obligations and other store liabilities. For 2010, these costs also included a loss on the sale of one property to be disposed.

The following table shows for 2010, 2009 and 2008, the beginning and ending balance of, and the activity associated with, the severance accruals established in connection with announced store closings:

 

     2010     2009     2008  
     (millions)  

Balance, beginning of year

   $ 2      $ 4      $   0   

Charged to store closing costs

     1        2        4   

Payments

     (2     (4     0   
                        

Balance, end of year

   $ 1      $ 2      $   4   
                        

The Company expects to pay out the 2010 accrued severance costs, which are included in accounts payable and accrued liabilities on the Consolidated Balance Sheets, prior to April 30, 2011.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

In February 2008, the Company began a localization initiative called “My Macy’s.” This initiative was intended to strengthen local market focus and enhance selling service in an effort to both accelerate same-store sales growth and reduce expenses. To maximize the results from My Macy’s, the Company took action, initially in selected markets, that: concentrated more management talent in local markets, effectively reducing the “span of control” over local stores; created new positions in the field to work with planning and buying executives in helping to understand and act on the merchandise needs of local customers; and empowered locally based executives to make more and better decisions. In combination with the localization initiative, the Company consolidated the Minneapolis-based Macy’s North organization into New York-based Macy’s East, the St. Louis-based Macy’s Midwest organization into Atlanta-based Macy’s South and the Seattle-based Macy’s Northwest organization into San Francisco based Macy’s West. The Atlanta-based division was renamed Macy’s Central.

In February 2009, the Company announced the expansion of the My Macy’s localization initiative across the country. As My Macy’s was rolled out nationally to new local markets in 2009, the Company’s Macy’s branded stores were reorganized into a unified operating structure, through division consolidations, to support the Macy’s business. Division central office organizations were eliminated in New York-based Macy’s East, San Francisco-based Macy’s West, Atlanta-based Macy’s Central and Miami-based Macy’s Florida. The New York-based Macy’s Home Store and Macy’s Corporate Marketing divisions no longer exist as separate entities. Home Store functions were integrated into the Macy’s national merchandising, merchandise planning, stores and marketing organizations. Macy’s Corporate Marketing was integrated into the new unified marketing organization. The New York-based Macy’s Merchandising Group was refocused solely on the design, development and marketing of the Macy’s family of private brands.

The costs and expenses associated with the division consolidations and localization initiatives consisted primarily of severance costs and other human resource-related costs.

The following table shows for 2010, 2009 and 2008, the beginning and ending balance of, and the activity associated with, the severance accruals established in connection with the division consolidations and localization initiatives:

 

     2010     2009     2008  
     (millions)  

Balance, beginning of year

   $ 69      $ 30      $ 0   

Charged to division consolidation costs

     0        166        99   

Payments

     (69     (127     (69
                        

Balance, end of year

   $ 0      $ 69      $ 30   
                        

The Company performed both an annual and an interim impairment test of goodwill and indefinite-lived intangible assets during 2008 (see Note 3, “Goodwill Impairment Charges”). As a result of the then-current economic environment and expectations regarding future operating performance of the Karen Scott, John Ashford and Frango private brand tradenames, it was determined that the carrying values exceeded the estimated fair values, which were based on discounted cash flows, and management concluded that asset impairment charges were required.

The Company accounts for its investment in available-for-sale marketable equity securities with unrealized gains and losses being included as a separate component of accumulated other comprehensive income. During 2008, based on the then-current economic environment, it was determined that the carrying value of certain marketable equity securities exceeded the current fair value on an “other-than-temporary” basis, and the previously unrecognized losses in accumulated other comprehensive income were reclassified into the Consolidated Statements of Operations.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

3. Goodwill Impairment Charges

The Company reviews the carrying value of its goodwill and other intangible assets with indefinite lives at least annually for possible impairment in accordance with ASC Topic 350, “Intangibles – Goodwill and Other.” Goodwill and other intangible assets with indefinite lives have been assigned to reporting units for purposes of impairment testing. The reporting units are the Company’s retail operating divisions. Goodwill and other intangible assets with indefinite lives are tested for impairment annually at the end of the fiscal month of May. The goodwill impairment test involves a two-step process. The first step involves estimating the fair value of each reporting unit based on its estimated discounted cash flows and comparing the estimated fair value of each reporting unit to its carrying value. If this comparison indicates that a reporting unit’s estimated fair value is less than its carrying value, a second step is required. If applicable, the second step requires the Company to allocate the fair value of the reporting unit to the estimated fair value of the reporting unit’s net assets, with any fair value in excess of amounts allocated to such net assets representing the implied fair value of goodwill for that reporting unit. If the carrying value of an individual indefinite-lived intangible asset exceeds its fair value, such individual indefinite-lived intangible asset is written down by an amount equal to such excess.

The Company uses judgment in assessing whether assets may have become impaired between annual impairment tests. The occurrence of a change in circumstances, such as continued adverse business conditions or other economic factors, would determine the need for impairment testing between annual impairment tests. Due to deterioration in the general economic environment in 2008 (and the impact thereof on the Company’s then-most recently completed annual business plan) and the resultant decline in the Company’s market capitalization, the Company believed that an additional goodwill impairment test was required as of January 31, 2009. In performing the first step of this impairment test, the Company estimated the fair value of its reporting units by discounting their projected future cash flows to present value, and reconciling the aggregate estimated fair value of the Company’s reporting units to the trading value of the Company’s common stock (together with an implied control premium). The Company believes that this reconciliation process represents a market participant approach to valuation. Based on this analysis, the Company determined that the carrying value of each of the Company’s reporting units exceeded its fair value at January 31, 2009, which resulted in all of the Company’s reporting units failing the first step of the goodwill impairment test. The Company then undertook the second step of the goodwill impairment test, which involved, among other things, obtaining third-party appraisals of substantially all of the Company’s tangible and intangible assets. Based on the results of its goodwill impairment testing as of January 31, 2009, the Company recorded a pre-tax goodwill impairment charge of $5,382 million ($5,083 million after income taxes) in the fourth quarter of 2008. As a result of the 2008 goodwill impairment charge, Macy’s is the only retail operating division with goodwill.

Based on the results of the most recent annual impairment test of goodwill and indefinite-lived intangible assets completed during the second quarter of 2010, the Company determined that goodwill and indefinite-lived intangible assets were not impaired as of May 29, 2010 and the estimated fair value of the Macy’s reporting unit substantially exceeded its carrying value.

The goodwill impairment testing process involves the use of significant assumptions, estimates and judgments by management, and is subject to inherent uncertainties and subjectivity. Estimating a reporting unit’s discounted cash flows involves the use of significant assumptions, estimates and judgments with respect to a variety of factors, including sales, gross margin and SG&A rates, capital expenditures, cash flows and the selection and use of an appropriate discount rate. Projected sales, gross margin and expense rate assumptions and capital expenditures are based on the Company’s business plan or other forecasted results. Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting unit directly resulting from the use of its assets in its operations. The allocation of the estimated fair value of the Company’s reporting units to the estimated fair value of their net assets also involves the use of significant assumptions,

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

estimates and judgments. Both the estimates of the fair value of the Company’s reporting units and the allocation of the estimated fair value of the reporting units to their net assets are based on the best information available to the Company’s management as of the date of the assessment.

The use of different assumptions, estimates or judgments in either step of the goodwill impairment testing process, including with respect to the estimated future cash flows of the Company’s reporting units, the discount rate used to discount such estimated cash flows to their net present value, the reasonableness of the resultant implied control premium relative to the Company’s market capitalization, and the appraised fair value of the reporting units’ tangible and intangible assets and liabilities, could materially increase or decrease the fair value of the reporting unit and/or its net assets and, accordingly, could materially increase or decrease any related impairment charge.

 

4. Receivables

Receivables were $392 million at January 29, 2011, compared to $358 million at January 30, 2010.

In connection with the sales of credit card accounts and related receivable balances, the Company and Citibank entered into a long-term marketing and servicing alliance pursuant to the terms of a Credit Card Program Agreement (the “Program Agreement”) with an initial term of 10 years expiring on July 17, 2016 and, unless terminated by either party as of the expiration of the initial term, an additional renewal term of three years. The Program Agreement provides for, among other things, (i) the ownership by Citibank of the accounts purchased by Citibank, (ii) the ownership by Citibank of new accounts opened by the Company’s customers, (iii) the provision of credit by Citibank to the holders of the credit cards associated with the foregoing accounts, (iv) the servicing of the foregoing accounts, and (v) the allocation between Citibank and the Company of the economic benefits and burdens associated with the foregoing and other aspects of the alliance.

Pursuant to the Program Agreement, the Company continues to provide certain servicing functions related to the accounts and related receivables owned by Citibank and receives compensation from Citibank for these services. The amounts earned under the Program Agreement related to the servicing functions are deemed adequate compensation and, accordingly, no servicing asset or liability has been recorded on the Consolidated Balance Sheets.

Amounts received under the Program Agreement were $528 million for 2010, $525 million for 2009 and $594 million for 2008, and are treated as reductions of SG&A expenses on the Consolidated Statements of Operations. The Company’s earnings from credit operations, net of servicing expenses, were $332 million for 2010, $323 million for 2009, and $372 million for 2008.

 

5. Inventories

Merchandise inventories were $4,758 million at January 29, 2011, compared to $4,615 million at January 30, 2010. At these dates, the cost of inventories using the LIFO method approximated the cost of such inventories using the FIFO method. The application of the LIFO method did not impact cost of sales for 2010, 2009 or 2008.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

6. Properties and Leases

 

     January 29,
2011
     January 30,
2010
 
   (millions)  

Land

   $ 1,702       $ 1,719   

Buildings on owned land

     5,148         5,160   

Buildings on leased land and leasehold improvements

     2,227         2,232   

Fixtures and equipment

     5,752         6,129   

Leased properties under capitalized leases

     33         49   
                 
     14,862         15,289   

Less accumulated depreciation and amortization

     6,049         5,782   
                 
   $ 8,813       $ 9,507   
                 

In connection with various shopping center agreements, the Company is obligated to operate certain stores within the centers for periods of up to twenty years. Some of these agreements require that the stores be operated under a particular name.

The Company leases a portion of the real estate and personal property used in its operations. Most leases require the Company to pay real estate taxes, maintenance and other executory 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 significant numbers of years and provide for rental rates that increase or decrease over time. In addition, certain of these leases contain covenants that restrict the ability of the tenant (typically a subsidiary of the Company) to take specified actions (including the payment of dividends or other amounts on account of its capital stock) unless the tenant satisfies certain financial tests.

Minimum rental commitments (excluding executory costs) at January 29, 2011, for noncancellable leases are:

 

     Capitalized
Leases
     Operating
Leases
     Total  
   (millions)  

Fiscal year:

        

2011

   $ 6       $ 245       $ 251   

2012

     6         233         239   

2013

     4         213         217   

2014

     4         190         194   

2015

     3         150         153   

After 2015

     35         1,581         1,616   
                          

Total minimum lease payments

     58       $ 2,612       $ 2,670   
                    

Less amount representing interest

     25         
              

Present value of net minimum capitalized lease payments

   $ 33         
              

Capitalized leases are included in the Consolidated Balance Sheets as property and equipment while the related obligation is included in short-term ($3 million) and long-term ($30 million) debt. Amortization of assets subject to capitalized leases is included in depreciation and amortization expense. Total minimum lease payments shown above have not been reduced by minimum sublease rentals of approximately $80 million on operating leases.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

The Company is a guarantor with respect to certain lease obligations associated with The May Department Stores Company and previously disposed subsidiaries or businesses. The leases, one of which includes potential extensions to 2070, have future minimum lease payments aggregating approximately $389 million and are offset by payments from existing tenants and subtenants. In addition, the Company is liable for other expenses related to the above leases, such as property taxes and common area maintenance, which are also payable by existing tenants and subtenants. Potential liabilities related to these guarantees are subject to certain defenses by the Company. The Company believes that the risk of significant loss from the guarantees of these lease obligations is remote.

Rental expense consists of:

 

     2010     2009     2008  
   (millions)  

Real estate (excluding executory costs)

      

Capitalized leases –

      

Contingent rentals

   $ 0      $ 0      $ 1   

Operating leases –

      

Minimum rentals

     234        230        230   

Contingent rentals

     16        15        16   
                        
     250        245        247   
                        

Less income from subleases –

      

Operating leases

     (15     (16     (15
                        
   $ 235      $ 229      $ 232   
                        

Personal property – Operating leases

   $ 10      $ 12      $ 19   
                        

Included as a reduction to the expense above is deferred rent amortization of $7 million, $7 million and $6 million for 2010, 2009 and 2008, respectively, related to contributions received from landlords.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

7. Goodwill and Other Intangible Assets

The following summarizes the Company’s goodwill and other intangible assets:

 

     January 29,
2011
    January 30,
2010
 
   (millions)  

Non-amortizing intangible assets

    

Goodwill

   $ 9,125      $ 9,125   

Accumulated impairment losses

     (5,382     (5,382
                
     3,743        3,743   

Tradenames

     414        414   
                
   $ 4,157      $ 4,157   
                

Amortizing intangible assets

    

Favorable leases

   $ 250      $ 256   

Customer relationships

     188        188   
                
     438        444   
                

Accumulated amortization

    

Favorable leases

     (113     (97

Customer relationships

     (102     (83
                
     (215     (180
                
   $ 223      $ 264   
                

During 2008, the Company recorded a goodwill impairment charge based on the results of goodwill impairment testing as of January 31, 2009. See Note 3, “Goodwill Impairment Charges,” for further information. Also during 2008, the Company recorded an impairment charge associated with acquired indefinite-lived private brand tradenames. See Note 2, “Impairments, Store Closing Costs and Division Consolidation Costs,” for further information.

Intangible amortization expense amounted to $41 million for 2010, $41 million for 2009 and $42 million for 2008.

Future estimated intangible amortization expense is shown below:

 

     (millions)  

Fiscal year:

  

2011

   $ 39   

2012

     37   

2013

     34   

2014

     31   

2015

     21   

Favorable lease intangible assets are being amortized over their respective lease terms (weighted average life of approximately twelve years) and customer relationship intangible assets are being amortized over their estimated useful lives of ten years.

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

8. Financing

The Company’s debt is as follows:

 

     January 29,
2011
     January 30,
2010
 
   (millions)  

Short-term debt:

     

6.625% Senior notes due 2011

   $ 330       $ 0   

7.45% Senior debentures due 2011

     109         0   

10.625% Senior debentures due 2010

     0         150   

8.5% Senior notes due 2010

     0         76   

Capital lease and current portion of other long-term obligations

     15         16   
                 
   $ 454       $ 242   
                 

Long-term debt:

     

5.9% Senior notes due 2016

   $ 977       $ 1,100   

5.35% Senior notes due 2012

     616         1,100   

7.875% Senior notes due 2015 *

     612         650   

6.375% Senior notes due 2037

     500         500   

5.75% Senior notes due 2014

     453         500   

6.9% Senior debentures due 2029

     400         400   

6.7% Senior debentures due 2034

     400         400   

7.45% Senior debentures due 2017

     300         300   

6.65% Senior debentures due 2024

     300         300   

7.0% Senior debentures due 2028

     300         300   

5.875% Senior notes due 2013

     298         350   

6.9% Senior debentures due 2032

     250         250   

6.7% Senior debentures due 2028

     200         200   

8.0% Senior debentures due 2012

     173         200   

6.79% Senior debentures due 2027

     165         165   

7.45% Senior debentures due 2016

     123         125   

7.625% Senior debentures due 2013

     109         125   

7.875% Senior debentures due 2036

     108         108   

7.5% Senior debentures due 2015

     100         100   

8.125% Senior debentures due 2035

     76         76   

8.75% Senior debentures due 2029

     61         61   

9.5% amortizing debentures due 2021

     37         41   

8.5% Senior debentures due 2019

     36         36   

10.25% Senior debentures due 2021

     33         33   

7.6% Senior debentures due 2025

     24         24   

9.75% amortizing debentures due 2021

     20         22   

7.875% Senior debentures due 2030

     18         18   

6.625% Senior notes due 2011

     0         500   

7.45% Senior debentures due 2011

     0         150   

Premium on acquired debt, using an effective
interest yield of 4.854% to 6.165%

     239         275   

Capital lease and other long-term obligations

     43         47   
                 
   $ 6,971       $ 8,456   
                 

 

* The rate of interest payable in respect of these senior notes was increased by one percent per annum to 8.875% in April 2009 as a result of a downgrade of the notes by specified rating agencies and was decreased by 0.50 percent per annum to 8.375% effective in May 2010 as a result of an upgrade of the notes by specified rating agencies. The rate of interest payable in respect of these senior notes could increase by up to 1.50 percent per annum or decrease by up to 0.50 percent per annum from its current level in the event of one or more downgrades or upgrades of the notes by specified rating agencies.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

Interest expense is as follows:

 

     2010     2009     2008  
   (millions)  

Interest on debt

   $ 535      $ 587      $ 621   

Premium on early retirement of long-term debt

     66        0        0   

Amortization of debt premium

     (31     (33     (34

Amortization of financing costs

     11        10        7   

Interest on capitalized leases

     3        3        5   
                        
     584        567        599   

Less interest capitalized on construction

     5        5        11   
                        
   $ 579      $ 562      $ 588   
                        

Future maturities of long-term debt, other than capitalized leases and premium on acquired debt, are shown below:

 

     (millions)  

Fiscal year:

  

2012

   $ 1,098   

2013

     121   

2014

     461   

2015

     718   

2016

     1,105   

After 2016

     3,199   

During 2010, consistent with its strategy to reduce indebtedness, the Company used approximately $1,067 million of cash to repurchase approximately $1,000 million of indebtedness prior to maturity. In connection with these repurchases, the Company recognized additional interest expense of approximately $66 million in 2010 due to the expenses associated with the early retirement of this debt.

In 2009, the Company completed a cash tender offer pursuant to which it purchased approximately $680 million of its outstanding debt for aggregate consideration, including accrued and unpaid interest, of approximately $686 million.

On June 23, 2008, the Company issued $650 million aggregate principal amount of 7.875% senior notes due 2015. The net proceeds of the debt issuance were used for the repayment of amounts due on debt maturing in 2008.

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

The following table shows the detail of debt repayments:

 

     2010      2009      2008  
     (millions)  

10.625% Senior debentures due 2010

   $ 150       $ 0       $ 0   

8.5% Senior notes due 2010

     76         0         0   

6.625% Senior notes due 2011

     170         0         0   

7.45% Senior debentures due 2011

     41         0         0   

5.35% Senior notes due 2012

     484         0         0   

8.0% Senior debentures due 2012

     27         0         0   

5.875% Senior notes due 2013

     52         0         0   

7.625% Senior debentures due 2013

     16         0         0   

5.75% Senior notes due 2014

     47         0         0   

7.875% Senior notes due 2015

     38         0         0   

5.90% Senior notes due 2016

     123         0         0   

7.45% Senior debentures due 2016

     2         0         0   

4.8% Senior notes due 2009

     0         600         0   

6.3% Senior notes due 2009

     0         350         0   

6.625% Senior notes due 2008

     0         0         500   

5.95% Senior notes due 2008

     0         0         150   

9.5% amortizing debentures due 2021

     4         4         4   

9.75% amortizing debentures due 2021

     2         2         2   

Capital leases and other obligations

     13         10         10   
                          
   $ 1,245       $ 966       $ 666   
                          

The following summarizes certain components of the Company’s debt:

Bank Credit Agreement

The Company is a party to a credit agreement with certain financial institutions providing for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $2,000 million (which amount may be increased to $2,500 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing) outstanding at any particular time. This credit agreement is set to expire August 30, 2012.

As of January 29, 2011, and January 30, 2010, there were no revolving credit loans outstanding under the credit agreement. However, there were less than $1 million and approximately $52 million, respectively, of standby letters of credit outstanding at January 29, 2011 and January 30, 2010. There were no borrowings under this agreement throughout all of 2010 and 2009. Revolving loans under the credit agreement bear interest based on various published rates.

This agreement, which is an obligation of a wholly-owned subsidiary of Macy’s, Inc. (“Parent”), is not secured. However, Parent and each direct and indirect subsidiary of such wholly owned subsidiary of Macy’s, Inc. have fully and unconditionally guaranteed this obligation, subject to specified limitations.

The Company’s interest coverage ratio for 2010 was 5.64 and its leverage ratio at January 29, 2011 was 2.34, in each case as calculated in accordance with the credit agreement. The credit agreement requires the

 

F-23


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

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 4.50. The interest coverage ratio is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) over net interest expense and the leverage ratio is defined as debt over 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, non-recurring cash charges not to exceed in the aggregate $500 million from the date of the amended agreement and extraordinary losses less interest income and non-recurring or extraordinary gains. Debt and net interest are adjusted to exclude the premium on acquired debt and the resulting amortization, respectively.

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.

Commercial Paper

The Company is a party to a $2,000 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 described above. The issuance of commercial paper will have the effect, while such commercial paper is outstanding, of reducing the Company’s borrowing capacity under the bank credit agreement by an amount equal to the principal amount of such commercial paper. The Company had no commercial paper outstanding under its commercial paper program throughout all of 2010 and 2009.

This program, which is an obligation of a wholly-owned subsidiary of Macy’s, Inc., is not secured. However, Parent has fully and unconditionally guaranteed the obligations.

Senior Notes and Debentures

The senior notes and the senior debentures are unsecured obligations of a wholly-owned subsidiary of Macy’s, Inc. and Parent has fully and unconditionally guaranteed these obligations (see Note 18, “Condensed Consolidating Financial Information”).

Other Financing Arrangements

At January 29, 2011, the Company had dedicated approximately $52 million of cash, included in prepaid expenses and other current assets, which is used to collateralize the Company’s issuances of standby letters of credit. There were approximately $38 million of other standby letters of credit outstanding at January 29, 2011 and none outstanding at January 30, 2010.

 

F-24


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

9. Accounts Payable and Accrued Liabilities

 

     January 29,
2011
     January 30,
2010
 
   (millions)  

Accounts payable

   $ 559       $ 484   

Gift cards and customer award certificates

     654         594   

Accrued wages and vacation

     311         307   

Lease related liabilities

     271         265   

Taxes other than income taxes

     186         199   

Current portion of workers’ compensation and general liability reserves

     144         141   

Accrued interest

     98         122   

Current portion of post employment and postretirement benefits

     88         94   

Allowance for future sales returns

     67         65   

Severance and relocation

     1         71   

Other

     265         284   
                 
   $ 2,644       $ 2,626   
                 

Adjustments to the allowance for future sales returns, which amounted to a charge of $2 million for 2010, a charge of $6 million for 2009, and a credit of $14 million for 2008 are reflected in cost of sales.

Changes in workers’ compensation and general liability reserves, including the current portion, are as follows:

 

     2010     2009     2008  
   (millions)  

Balance, beginning of year

   $ 478      $ 495      $ 471   

Charged to costs and expenses

     148        124        164   

Payments, net of recoveries

     (138     (141     (140
                        

Balance, end of year

   $ 488      $ 478      $ 495   
                        

The non-current portion of workers’ compensation and general liability reserves is included in other liabilities on the Consolidated Balance Sheets. At January 29, 2011 and January 30, 2010, workers’ compensation and general liability reserves included $93 million and $90 million, respectively, of liabilities which are covered by deposits and receivables included in current assets on the Consolidated Balance Sheets.

 

10. Taxes

The Company changed its methodology for recording deferred state income taxes from a blended rate basis to a separate entity basis, and has reflected the effects of such change to 2010 and all prior periods. Even though the Company considers the change to have had only an immaterial impact on its financial condition, results of operations and cash flows for the periods presented, the financial condition, results of operations and cash flows for the prior periods as previously reported have been adjusted to reflect the change.

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

Income tax expense (benefit) is as follows:

 

     2010      2009      2008  
   Current      Deferred      Total      Current      Deferred      Total      Current      Deferred     Total  
                        (millions)                      

Federal

   $ 217       $ 234       $ 451       $ 48       $ 84       $ 132       $ 6       $ (109   $ (103

State and local

     12         10         22         9         37         46         8         (68     (60
                                                                               
   $ 229       $ 244       $ 473       $ 57       $ 121       $ 178       $ 14       $ (177   $ (163
                                                                               

The income tax expense (benefit) reported differs from the expected tax computed by applying the federal income tax statutory rate of 35% for 2010, 2009 and 2008 to income (loss) before income taxes. The reasons for this difference and their tax effects are as follows:

 

     2010     2009     2008  
   (millions)  

Expected tax

   $ 462      $ 177      $ (1,728

State and local income taxes, net of federal income tax benefit

     14        30        (40

Settlement of federal tax examinations

     0        (21     0   

Non-deductibility of goodwill impairment charges

     0        0        1,611   

Other

     (3     (8     (6
                        
   $ 473      $ 178      $ (163
                        

During the fourth quarter of 2009, the Company settled Internal Revenue Service (“IRS”) examinations for fiscal years 2008, 2007 and 2006. As a result of the settlement, the Company recognized previously unrecognized tax benefits and related accrued interest, primarily attributable to the disposition of former subsidiaries.

 

F-26


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:

 

     January 29,
2011
    January 30,
2010
 
   (millions)  

Deferred tax assets:

    

Post employment and postretirement benefits

   $ 473      $ 667   

Accrued liabilities accounted for on a cash basis for tax purposes

     195        316   

Long-term debt

     117        132   

Unrecognized state tax benefits and accrued interest

     91        91   

State operating loss carryforwards

     61        55   

Other

     144        114   

Valuation allowance

     (35     (33
                

Total deferred tax assets

     1,046        1,342   
                

Deferred tax liabilities:

    

Excess of book basis over tax basis of property and equipment

     (1,793     (1,919

Merchandise inventories

     (483     (456

Intangible assets

     (162     (129

Other

     (217     (184
                

Total deferred tax liabilities

     (2,655     (2,688
                

Net deferred tax liability

   $ (1,609   $ (1,346
                

The valuation allowance at January 29, 2011 and January 30, 2010 relates to net deferred tax assets for state net operating loss carryforwards. The net change in the valuation allowance amounted to an increase of $2 million for 2010 and no change for 2009.

As of January 29, 2011, the Company had no federal net operating loss carryforwards and state net operating loss carryforwards of approximately $1,301 million, which will expire between 2011 and 2031.

 

F-27


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

     January 29,
2011
    January 30,
2010
 
   (millions)  

Balance, beginning of period

   $ 207      $ 237   

Additions based on tax positions related to the current year

     19        23   

Additions for tax positions of prior years

     0        0   

Reductions for tax positions of prior years

     (8     (34

Settlements

     (4     (8

Statute expirations

     (9     (11
                

Balance, end of period

   $ 205      $ 207   
                

Amounts recognized in the Consolidated Balance Sheets at
January 29, 2011 and January 30, 2010

    

Other liabilities

   $ 170      $ 169   

Long-term deferred income taxes

     24        24   

Current income taxes

     11        14   
                
   $ 205      $ 207   
                

As of January 29, 2011 and January 30, 2010, the amount of unrecognized tax benefits, net of deferred tax assets, that, if recognized would affect the effective income tax rate, was $133 million and $135 million, respectively.

The Company classifies unrecognized tax benefits not expected to be settled within one year as other liabilities on the Consolidated Balance Sheets.

The Company classifies federal, state and local interest and penalties not expected to be settled within one year as other liabilities on the Consolidated Balance Sheets and follows a policy of recognizing all interest and penalties related to unrecognized tax benefits in income tax expense. During 2010, 2009 and 2008, the Company recognized charges of $5 million, $4 million and $16 million, respectively, in income tax expense for federal, state and local interest and penalties.

The Company had approximately $80 million and $78 million accrued for the payment of federal, state and local interest and penalties at January 29, 2011 and January 30, 2010, respectively. The accrued federal, state and local interest and penalties primarily relates to state tax issues and the amount of penalties paid in prior periods, and the amount of penalties accrued at January 29, 2011 and January 30, 2010 are insignificant. At January 29, 2011, approximately $76 million of federal, state and local interest and penalties is included in other liabilities and $4 million is included in current income taxes on the Consolidated Balance Sheets.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2007. With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for years before 2000. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been accrued for any adjustments that are expected to result from the years still subject to examination.

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

11. Retirement Plans

The Company has a funded defined benefit plan (“Pension Plan”) and a defined contribution plan (“Retirement Plan”) which cover substantially all employees who work 1,000 hours or more in a year. In addition, the Company has an unfunded defined benefit supplementary retirement plan (“SERP”), which provides benefits, for certain employees, in excess of qualified plan limitations.

Pension Plan

The following provides a reconciliation of benefit obligations, plan assets, and funded status of the Pension Plan as of January 29, 2011 and January 30, 2010:

 

     2010     2009  
   (millions)  

Change in projected benefit obligation

    

Projected benefit obligation, beginning of year

   $ 2,879      $ 2,444   

Service cost

     99        81   

Interest cost

     158        173   

Actuarial loss

     103        401   

Benefits paid

     (215     (220
                

Projected benefit obligation, end of year

   $ 3,024      $ 2,879   

Changes in plan assets

    

Fair value of plan assets, beginning of year

   $ 1,865      $ 1,438   

Actual return on plan assets

     329        277   

Company contributions

     825        370   

Benefits paid

     (215     (220
                

Fair value of plan assets, end of year

   $ 2,804      $ 1,865   
                

Funded status at end of year

   $ (220   $ (1,014
                

Amounts recognized in the Consolidated Balance Sheets at
January 29, 2011 and January 30, 2010

    

Other liabilities

   $ (220   $ (1,014
                

Amounts recognized in accumulated other comprehensive (income) loss at January 29, 2011 and January 30, 2010

    

Net actuarial loss

   $ 1,116      $ 1,186   

Prior service credit

     (2     (3
                
   $ 1,114      $ 1,183   
                

The accumulated benefit obligation for the Pension Plan was $2,791 million as of January 29, 2011 and $2,657 million as of January 30, 2010.

 

F-29


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

Net pension costs and other amounts recognized in other comprehensive income for the Pension Plan included the following actuarially determined components:

 

     2010     2009     2008  
   (millions)  

Net Periodic Pension Cost

  

Service cost

   $ 99      $ 81      $ 97   

Interest cost

     158        173        159   

Expected return on assets

     (218     (187     (192

Amortization of net actuarial loss

     61        0        5   

Amortization of prior service credit

     (1     (1     0   
                        
     99        66        69   

Other Changes in Plan Assets and Projected Benefit Obligation
Recognized in Other Comprehensive Income

      

Net actuarial (gain) loss

     (9     311        604   

Amortization of net actuarial loss

     (61     0        (5

Amortization of prior service credit

     1        1        0   
                        
     (69     312        599   
                        

Total recognized in net periodic pension cost and other comprehensive income

   $ 30