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

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

For the quarterly period ended April 30, 2016

OR

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

For the transition period from    to

Commission file number: 1-13536
 
 

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at May 28, 2016
Common Stock, $0.01 par value per share
 
308,395,235 shares
 



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

(millions, except per share figures)
 
 
 
 
 
 
13 Weeks Ended
 
April 30, 2016
 
May 2, 2015
Net sales
$
5,771

 
$
6,232

Cost of sales
(3,516
)
 
(3,800
)
Gross margin
2,255

 
2,432

Selling, general and administrative expenses
(1,966
)
 
(2,023
)
Settlement charges
(13
)
 

Operating income
276

 
409

Interest expense
(99
)
 
(95
)
Interest income
1

 

Income before income taxes
178

 
314

Federal, state and local income tax expense
(63
)
 
(121
)
Net income
115

 
193

Net loss attributable to noncontrolling interest
1

 

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

 
$
193

Basic earnings per share attributable to Macy's, Inc. shareholders
$
.37

 
$
.57

Diluted earnings per share attributable to Macy's, Inc. shareholders
$
.37

 
$
.56


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

2


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

(millions)

 
 
 
 
 
13 Weeks Ended
 
April 30, 2016
 
May 2, 2015
Net income
$
115

 
$
193

Other comprehensive income (loss):
 
 
 
Actuarial loss on postretirement benefit plans, before tax
(36
)
 

Settlement charges, before tax
13

 

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

 
13

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

 
(5
)
Total other comprehensive income (loss), net of tax effect
(8
)
 
8

Comprehensive income
107

 
201

Comprehensive loss attributable to noncontrolling interest
1

 

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

 
$
201


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


3


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

(millions)
 
 
 
 
 
 
 
 
April 30, 2016
 
January 30, 2016
 
May 2,
2015
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and cash equivalents
$
734

 
$
1,109

 
$
1,509

Receivables
436

 
558

 
259

Merchandise inventories
5,738

 
5,506

 
5,929

Income tax receivable
19

 

 

Prepaid expenses and other current assets
490

 
479

 
471

Total Current Assets
7,417

 
7,652

 
8,168

Property and Equipment - net of accumulated depreciation and
amortization of $5,500, $5,319 and $5,784
7,475

 
7,616

 
7,712

Goodwill
3,897

 
3,897

 
3,897

Other Intangible Assets – net
511

 
514

 
531

Other Assets
898

 
897

 
710

Total Assets
$
20,198

 
$
20,576

 
$
21,018

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
Short-term debt
$
642

 
$
642

 
$
76

Merchandise accounts payable
2,052

 
1,526

 
2,386

Accounts payable and accrued liabilities
2,690

 
3,333

 
2,411

Income taxes

 
227

 
74

Total Current Liabilities
5,384

 
5,728

 
4,947

Long-Term Debt
6,990

 
6,995

 
7,229

Deferred Income Taxes
1,536

 
1,477

 
1,456

Other Liabilities
2,134

 
2,123

 
2,179

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

 
4,250

 
5,207

Noncontrolling interest
6

 
3

 

Total Shareholders’ Equity
4,154

 
4,253

 
5,207

Total Liabilities and Shareholders’ Equity
$
20,198

 
$
20,576

 
$
21,018


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


4


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

(millions)
 
 
 
 
 
13 Weeks Ended
 
April 30, 2016
 
May 2, 2015
Cash flows from operating activities:
 
 
 
Net income
$
115

 
$
193

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Settlement charges
13

 

Depreciation and amortization
260

 
259

Stock-based compensation expense
16

 
18

Amortization of financing costs and premium on acquired debt
(1
)
 
(1
)
Changes in assets and liabilities:
 
 
 
 Decrease in receivables
122

 
167

 Increase in merchandise inventories
(232
)
 
(483
)
 Increase in prepaid expenses and other current assets
(22
)
 
(42
)
 Increase in other assets not separately identified

 

 Increase in merchandise accounts payable
461

 
691

 Decrease in accounts payable, accrued liabilities
and other items not separately identified
(513
)
 
(513
)
 Decrease in current income taxes
(246
)
 
(222
)
 Increase (decrease) in deferred income taxes
53

 
(6
)
 Decrease in other liabilities not separately identified
(18
)
 
(8
)
Net cash provided by operating activities
8

 
53

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(153
)
 
(180
)
Capitalized software
(75
)
 
(63
)
Acquisition of Bluemercury, Inc., net of cash acquired

 
(212
)
Disposition of property and equipment
16

 
4

Other, net
1

 
70

Net cash used by investing activities
(211
)
 
(381
)
Cash flows from financing activities:
 
 
 
Debt repaid
(3
)
 
(3
)
Dividends paid
(112
)
 
(106
)
Increase (decrease) in outstanding checks
43

 
(41
)
Acquisition of treasury stock
(130
)
 
(359
)
Issuance of common stock
26

 
100

Proceeds from noncontrolling interest
4

 

Net cash used by financing activities
(172
)
 
(409
)
 
 
 
 
Net decrease in cash and cash equivalents
(375
)
 
(737
)
Cash and cash equivalents beginning of period
1,109

 
2,246

Cash and cash equivalents end of period
$
734

 
$
1,509

Supplemental cash flow information:
 
 
 
Interest paid
$
80

 
$
81

Interest received
1

 

Income taxes paid (net of refunds received)
257

 
314

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

5


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

1.    Summary of Significant Accounting Policies
Nature of Operations
Macy's, Inc. and subsidiaries (the "Company") is an omnichannel retail organization operating stores, websites and mobile applications under three brands (Macy's, Bloomingdale's and Bluemercury) that sell a wide range of merchandise, including apparel and accessories (men's, women's and children's), cosmetics, home furnishings and other consumer goods. The Company's operations include approximately 870 Macy's, Macy's Backstage, Bloomingdale's, Bloomingdales Outlet and Bluemercury stores in 45 states, the District of Columbia, Guam and Puerto Rico, as well as macys.com, bloomingdales.com and bluemercury.com. In addition, Bloomingdale's in Dubai, United Arab Emirates is operated under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC.
In August 2015, the Company established a joint venture, Macy's China Limited, of which the Company holds a sixty-five percent ownership interest and Hong Kong-based Fung Retailing Limited holds the remaining thirty-five percent ownership interest. Macy's China Limited sells merchandise in China through an e-commerce presence on Alibaba Group's Tmall Global. The Consolidated Financial Statements include the accounts of Macy's, Inc. and its 100%-owned subsidiaries and the newly established majority-owned subsidiary, Macy's China Limited. The noncontrolling interest represents the Fung Retailing Limited's thirty-five percent proportionate share of the results of Macy's China Limited. All intercompany transactions and balances have been eliminated in consolidation.
A description of the Company's significant accounting policies is included in the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 2016 (the "2015 10-K"). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 2015 10-K.
Use of Estimates
The preparation of financial statements in conformity with 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.
The Consolidated Financial Statements for the 13 weeks ended April 30, 2016 and May 2, 2015, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly, in all material respects, the consolidated financial position and results of operations of the Company.
Seasonality
Because of the seasonal nature of the retail business, the results of operations for the 13 weeks ended April 30, 2016 and May 2, 2015 (which do not include the Christmas season) are not necessarily indicative of such results for the full fiscal year.
Reclassifications
Certain reclassifications were made to prior years’ amounts to conform with the classifications of such amounts for the most recent fiscal period.
Comprehensive Income
Total comprehensive income represents the change in equity during a period from sources other than transactions with shareholders and, as such, includes net income. For the Company, the only other components of total comprehensive income for the 13 weeks ended April 30, 2016 and May 2, 2015 relate to post employment and postretirement plan items. The settlement charges incurred are included as a separate component of operating expenses in the Consolidated Statements of Income. The amortization reclassifications out of accumulated other comprehensive loss are included in the computation of net periodic benefit cost (income) and are included in selling, general and administrative expenses on the Consolidated Statements of Income. See Note 4, "Benefit Plans," for further information.


6

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


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

 
13 Weeks Ended
 
April 30, 2016
 
May 2, 2015
 
Net
Income
 
 
 
Shares
 
Net
Income
 
 
 
Shares
 
(millions, except per share data)
Net income attributable to Macy's, Inc. shareholders and
average number of shares outstanding
$
116

 
 
 
309.7

 
$
193

 
 
 
339.8

Shares to be issued under deferred
compensation and other plans
 
 
 
 
0.9

 
 
 
 
 
0.9

 
$
116

 
 
 
310.6

 
$
193

 
 
 
340.7

Basic earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
.37

 
 
 
 
 
$
.57

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock and restricted stock units
 
 
 
 
2.9

 
 
 
 
 
5.8

 
$
116

 
 
 
313.5

 
$
193

 
 
 
346.5

Diluted earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
.37

 
 
 
 
 
$
.56

 
 

In addition to the stock options, restricted stock and restricted stock units reflected in the foregoing tables, stock options to purchase 11.2 million shares of common stock and restricted stock units relating to 1.0 million shares of common stock were outstanding at April 30, 2016, but were not included in the computation of diluted earnings per share for the 13 weeks ended April 30, 2016 because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.
In addition to the stock options, restricted stock and restricted stock units reflected in the foregoing tables, stock options to purchase 6.5 million shares of common stock and restricted stock units relating to 1.4 million shares of common stock were outstanding at May 2, 2015, but were not included in the computation of diluted earnings per share for the 13 weeks ended May 2, 2015 because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.


7

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


3.    Financing Activities
The following table shows the detail of debt repayments:
 
 
13 Weeks Ended
 
April 30, 2016
 
May 2, 2015
 
(millions)
9.5% amortizing debentures due 2021
$
2

 
$
2

9.75% amortizing debentures due 2021
1

 
1

 
$
3

 
$
3

During the 13 weeks ended April 30, 2016, the Company repurchased approximately 3.0 million shares of its common stock pursuant to existing stock purchase authorizations for a total of approximately $129 million. On February 26, 2016, the Company's Board of Directors approved an additional $1,500 million in authorization to purchase its common stock. As of April 30, 2016, the Company had $1,903 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.
The Company entered into a credit agreement with certain financial institutions on May 6, 2016 providing for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing) outstanding at any particular time. This agreement is set to expire May 6, 2021 and replaces the prior agreement which was set to expire May 10, 2018.

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

8

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


The defined contribution plan expense and actuarially determined components of the net periodic benefit cost (income) associated with the defined benefit plans are as follows:
 
13 Weeks Ended
 
April 30, 2016
 
May 2, 2015
 
(millions)
401(k) Defined Contribution Plan
$
24

 
$
23

 
 
 
 
Pension Plan
 
 
 
Service cost
$
1

 
$
2

Interest cost
28

 
34

Expected return on assets
(56
)
 
(59
)
Recognition of net actuarial loss
8

 
10

Amortization of prior service credit

 

 
$
(19
)
 
$
(13
)
Supplementary Retirement Plan
 
 
 
Service cost
$

 
$

Interest cost
6

 
8

Recognition of net actuarial loss
2

 
3

Amortization of prior service cost

 

 
$
8

 
$
11

 
 
 
 
Total Retirement Expense
$
13

 
$
21

 
 
 
 
Postretirement Obligations
 
 
 
Service cost
$

 
$

Interest cost
2

 
2

Recognition of net actuarial gain
(1
)
 

Amortization of prior service cost

 

 
$
1

 
$
2


During the 13 weeks ended April 30, 2016, the Company also incurred $13 million of non-cash settlement charges relating to the Company's defined benefit retirement plans. These charges resulted from an increase in lump sum distributions associated with store closings, a voluntary separation program and organizational restructuring, in addition to periodic distribution activity.

5.    Fair Value Measurements
The following table shows the Company's financial assets that are required to be measured at fair value on a recurring basis, by level within the hierarchy as defined by applicable accounting standards:
 
 
April 30, 2016
 
May 2, 2015
 
 
 
Fair Value Measurements
 
 
 
Fair Value Measurements
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(millions)
Marketable equity and debt securities
$
125

 
$

 
$
125

 
$

 
$
104

 
$

 
$
104

 
$



9

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


Other financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, receivables, short-term debt, merchandise accounts payable, accounts payable and accrued liabilities and long-term debt. With the exception of long-term debt, the carrying amount approximates fair value because of the short maturity of these instruments. The fair values of long-term debt, excluding capitalized leases, are generally estimated based on quoted market prices for identical or similar instruments, and are classified as Level 2 measurements within the hierarchy as defined by applicable accounting standards.
The following table shows the estimated fair value of the Company's long-term debt:
 
 
April 30, 2016
 
May 2, 2015
 
Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
(millions)
Long-term debt
$
6,870

 
$
6,962

 
$
7,113

 
$
7,088

 
$
7,200

 
$
8,020



6.    Condensed Consolidating Financial Information
Certain debt obligations of the Company, which constitute debt obligations of Macy's Retail Holdings, Inc. ("Subsidiary Issuer"), a 100%-owned subsidiary of Macy's, Inc. ("Parent"), are fully and unconditionally guaranteed by Parent. In the following condensed consolidating financial statements, "Other Subsidiaries" includes all other direct subsidiaries of Parent, including Bluemercury, Inc., FDS Bank, West 34th Street Insurance Company and its subsidiary West 34th Street Insurance Company New York, Macy's Merchandising Corporation, Macy's Merchandising Group, Inc. and its subsidiaries Macy's Merchandising Group (Hong Kong) Limited, Macy's Merchandising Group Procurement, LLC, Macy's Merchandising Group International, LLC, Macy's Merchandising Group International (Hong Kong) Limited, and its majority-owned subsidiary Macy's China Limited. "Subsidiary Issuer" includes operating divisions and non-guarantor subsidiaries of the Subsidiary Issuer on an equity basis. The assets and liabilities and results of operations of the non-guarantor subsidiaries of the Subsidiary Issuer are also reflected in "Other Subsidiaries."
Condensed Consolidating Balance Sheets as of April 30, 2016, May 2, 2015 and January 30, 2016, the related Condensed Consolidating Statements of Comprehensive Income for the 13 weeks ended April 30, 2016 and May 2, 2015, and the related Condensed Consolidating Statements of Cash Flows for the 13 weeks ended April 30, 2016 and May 2, 2015 are presented on the following pages.

10

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



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

 
$
112

 
$
335

 
$

 
$
734

Receivables

 
158

 
278

 

 
436

Merchandise inventories

 
2,707

 
3,031

 

 
5,738

Income tax receivable
66

 

 

 
(47
)
 
19

Prepaid expenses and other current assets

 
121

 
369

 

 
490

Total Current Assets
353

 
3,098

 
4,013

 
(47
)
 
7,417

Property and Equipment – net

 
3,840

 
3,635

 

 
7,475

Goodwill

 
3,315

 
582

 

 
3,897

Other Intangible Assets – net

 
50

 
461

 

 
511

Other Assets

 
154

 
744

 

 
898

Deferred Income Taxes
23

 

 

 
(23
)
 

Intercompany Receivable

 

 
3,433

 
(3,433
)
 

Investment in Subsidiaries
4,651

 
3,810

 

 
(8,461
)
 

Total Assets
$
5,027

 
$
14,267

 
$
12,868

 
$
(11,964
)
 
$
20,198

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

 
$
641

 
$
1

 
$

 
$
642

Merchandise accounts payable

 
872

 
1,180

 

 
2,052

Accounts payable and accrued liabilities
34

 
1,192

 
1,464

 

 
2,690

Income taxes

 
9

 
38

 
(47
)
 

Total Current Liabilities
34

 
2,714

 
2,683

 
(47
)
 
5,384

Long-Term Debt

 
6,971

 
19

 

 
6,990

Intercompany Payable
787

 
2,646

 

 
(3,433
)
 

Deferred Income Taxes

 
726

 
833

 
(23
)
 
1,536

Other Liabilities
58

 
547

 
1,529

 

 
2,134

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

 
663

 
7,798

 
(8,461
)
 
4,148

Noncontrolling Interest

 

 
6

 

 
6

Total Shareholders' Equity
4,148

 
663

 
7,804

 
(8,461
)
 
4,154

Total Liabilities and Shareholders' Equity
$
5,027

 
$
14,267

 
$
12,868

 
$
(11,964
)
 
$
20,198




11

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



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

 
$
2,454

 
$
5,374

 
$
(2,057
)
 
$
5,771

Cost of sales

 
(1,604
)
 
(3,969
)
 
2,057

 
(3,516
)
Gross margin

 
850

 
1,405

 

 
2,255

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

 
(1,966
)
Settlement charges

 
(3
)
 
(10
)
 

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

 

 
276

Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External
1

 
(99
)
 

 

 
(98
)
Intercompany

 
(58
)
 
58

 

 

Equity in earnings of subsidiaries
116

 
10

 

 
(126
)
 

Income (loss) before income taxes
116

 
(182
)
 
370

 
(126
)
 
178

Federal, state and local income
tax benefit (expense)

 
61

 
(124
)
 

 
(63
)
Net income (loss)
116

 
(121
)
 
246

 
(126
)
 
115

Net loss attributable to noncontrolling interest

 

 
1

 

 
1

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

 
$
(121
)
 
$
247

 
$
(126
)
 
$
116

Comprehensive income (loss)
$
108

 
$
(129
)
 
$
241

 
$
(113
)
 
$
107

Comprehensive loss attributable to
noncontrolling interest

 

 
1

 

 
1

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

 
$
(129
)
 
$
242

 
$
(113
)
 
$
108



12

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



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

 
$
(121
)
 
$
246

 
$
(126
)
 
$
115

Settlement charges

 
3

 
10

 

 
13

Equity in earnings of subsidiaries
(116
)
 
(10
)
 

 
126

 

Dividends received from subsidiaries
182

 

 

 
(182
)
 

Depreciation and amortization

 
102

 
158

 

 
260

(Increase) decrease in working capital
(34
)
 
55

 
(451
)
 

 
(430
)
Other, net
19

 
16

 
15

 

 
50

Net cash provided (used) by operating activities
167

 
45

 
(22
)
 
(182
)
 
8

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

 
(54
)
 
(158
)
 

 
(212
)
Other, net

 
(2
)
 
3

 

 
1

Net cash used by investing activities

 
(56
)
 
(155
)
 

 
(211
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Debt repaid

 
(3
)
 

 

 
(3
)
Dividends paid
(112
)
 

 
(182
)
 
182

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

 

 

 
(104
)
Proceeds from noncontrolling interest

 

 
4

 

 
4

Intercompany activity, net
(415
)
 
52

 
363

 

 

Other, net
10

 
(17
)
 
50

 

 
43

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

 
235

 
182

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

 
58

 

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

 
91

 
277

 

 
1,109

Cash and cash equivalents at end of period
$
287

 
$
112

 
$
335

 
$

 
$
734


13

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



Condensed Consolidating Balance Sheet
As of May 2, 2015
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,078

 
$
115

 
$
316

 
$

 
$
1,509

Receivables

 
48

 
211

 

 
259

Merchandise inventories

 
2,961

 
2,968

 

 
5,929

Income tax receivable
43

 

 

 
(43
)
 

Prepaid expenses and other current assets

 
101

 
370

 

 
471

Total Current Assets
1,121

 
3,225

 
3,865

 
(43
)
 
8,168

Property and Equipment – net

 
4,250

 
3,462

 

 
7,712

Goodwill

 
3,315

 
582

 

 
3,897

Other Intangible Assets – net

 
68

 
463

 

 
531

Other Assets
1

 
44

 
665

 

 
710

Deferred Income Taxes
22

 

 

 
(22
)
 

Intercompany Receivable

 

 
3,588

 
(3,588
)
 

Investment in Subsidiaries
4,701

 
3,549

 

 
(8,250
)
 

Total Assets
$
5,845

 
$
14,451

 
$
12,625

 
$
(11,903
)
 
$
21,018

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

 
$
75

 
$
1

 
$

 
$
76

Merchandise accounts payable

 
1,139

 
1,247

 

 
2,386

Accounts payable and accrued liabilities
13

 
1,043

 
1,355

 

 
2,411

Income taxes

 
10

 
107

 
(43
)
 
74

Total Current Liabilities
13

 
2,267

 
2,710

 
(43
)
 
4,947

Long-Term Debt

 
7,209

 
20

 

 
7,229

Intercompany Payable
564

 
3,024

 

 
(3,588
)
 

Deferred Income Taxes

 
744

 
734

 
(22
)
 
1,456

Other Liabilities
61

 
543

 
1,575

 

 
2,179

Shareholders' Equity:
 
 
 
 
 
 
 
 
 
Macy's, Inc.
5,207

 
664

 
7,586

 
(8,250
)
 
5,207

Noncontrolling Interest

 

 

 

 

Total Shareholders' Equity
5,207

 
664

 
7,586

 
(8,250
)
 
5,207

Total Liabilities and Shareholders' Equity
$
5,845

 
$
14,451

 
$
12,625

 
$
(11,903
)
 
$
21,018




14

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



Condensed Consolidating Statement of Comprehensive Income
For the 13 Weeks Ended May 2, 2015
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
2,776

 
$
5,691

 
$
(2,235
)
 
$
6,232

Cost of sales

 
(1,809
)
 
(4,226
)
 
2,235

 
(3,800
)
Gross margin


967

 
1,465

 

 
2,432

Selling, general and administrative expenses
(1
)
 
(980
)
 
(1,042
)
 

 
(2,023
)
Operating income (loss)
(1
)

(13
)
 
423

 

 
409

Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External

 
(95
)
 

 

 
(95
)
Intercompany

 
(58
)
 
58

 

 

Equity in earnings of subsidiaries
194

 
60

 

 
(254
)
 

Income (loss) before income taxes
193

 
(106
)
 
481

 
(254
)
 
314

Federal, state and local income
tax benefit (expense)

 
37

 
(158
)
 

 
(121
)
Net income (loss)
193

 
(69
)
 
323

 
(254
)
 
193

Net loss attributable to noncontrolling interest

 

 

 

 

Net income (loss) attributable to
Macy's, Inc. shareholders
$
193

 
$
(69
)
 
$
323

 
$
(254
)
 
$
193

Comprehensive income (loss)
$
201

 
$
(61
)
 
$
327

 
$
(266
)
 
$
201

Comprehensive loss attributable to
noncontrolling interest

 

 

 

 

Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$
201

 
$
(61
)
 
$
327

 
$
(266
)
 
$
201



15

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



Condensed Consolidating Statement of Cash Flows
For the 13 Weeks Ended May 2, 2015
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
193

 
$
(69
)
 
$
323

 
$
(254
)
 
$
193

Equity in earnings of subsidiaries
(194
)
 
(60
)
 

 
254

 

Dividends received from subsidiaries
191

 

 

 
(191
)
 

Depreciation and amortization

 
106

 
153

 

 
259

(Increase) decrease in working capital
43

 
16

 
(461
)
 

 
(402
)
Other, net
24

 
(6
)
 
(15
)
 

 
3

Net cash provided (used) by operating
activities
257

 
(13
)
 

 
(191
)
 
53

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

 
(69
)
 
(170
)
 

 
(239
)
Other, net

 
7

 
(149
)
 

 
(142
)
Net cash used by investing activities

 
(62
)
 
(319
)
 

 
(381
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Debt repaid

 
(3
)
 

 

 
(3
)
Dividends paid
(106
)
 

 
(191
)
 
191

 
(106
)
Common stock acquired, net of
issuance of common stock
(259
)
 

 

 

 
(259
)
Intercompany activity, net
(669
)
 
146

 
523

 

 

Other, net
(53
)
 
(47
)
 
59

 

 
(41
)
Net cash provided (used) by
financing activities
(1,087
)
 
96

 
391

 
191

 
(409
)
Net increase (decrease) in cash and
cash equivalents
(830
)
 
21

 
72

 

 
(737
)
Cash and cash equivalents at beginning of period
1,908

 
94

 
244

 

 
2,246

Cash and cash equivalents at end of period
$
1,078

 
$
115

 
$
316

 
$

 
$
1,509


16

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



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

 
$
91

 
$
277

 
$

 
$
1,109

Receivables

 
217

 
341

 

 
558

Merchandise inventories

 
2,702

 
2,804

 

 
5,506

Income tax receivable
44

 

 

 
(44
)
 

Prepaid expenses and other current assets

 
135

 
344

 

 
479

Total Current Assets
785

 
3,145

 
3,766

 
(44
)
 
7,652

Property and Equipment – net

 
3,925

 
3,691

 

 
7,616

Goodwill

 
3,315

 
582

 

 
3,897

Other Intangible Assets – net

 
52

 
462

 

 
514

Other Assets

 
154

 
743

 

 
897

Deferred Income Taxes
14

 

 

 
(14
)
 

Intercompany Receivable

 

 
3,800

 
(3,800
)
 

Investment in Subsidiaries
4,725

 
3,804

 

 
(8,529
)
 

Total Assets
$
5,524

 
$
14,395

 
$
13,044

 
$
(12,387
)
 
$
20,576

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

 
$
641

 
$
1

 
$

 
$
642

Merchandise accounts payable

 
667

 
859

 

 
1,526

Accounts payable and accrued liabilities
35

 
1,439

 
1,859

 

 
3,333

Income taxes

 
41

 
230

 
(44
)
 
227

Total Current Liabilities
35

 
2,788

 
2,949

 
(44
)
 
5,728

Long-Term Debt

 
6,976

 
19

 

 
6,995

Intercompany Payable
1,218

 
2,582

 

 
(3,800
)
 

Deferred Income Taxes

 
693

 
798

 
(14
)
 
1,477

Other Liabilities
21

 
558

 
1,544

 

 
2,123

Shareholders' Equity:
 
 
 
 
 
 
 
 
 
Macy's, Inc.
4,250

 
798

 
7,731

 
(8,529
)
 
4,250

Noncontrolling Interest

 

 
3

 

 
3

Total Shareholders' Equity
4,250

 
798

 
7,734

 
(8,529
)
 
4,253

Total Liabilities and Shareholders' Equity
$
5,524

 
$
14,395

 
$
13,044

 
$
(12,387
)
 
$
20,576





17


MACY'S, INC.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

For purposes of the following discussion, all references to "first quarter of 2016" and "first quarter of 2015" are to the Company's 13-week fiscal periods ended April 30, 2016 and May 2, 2015, respectively.
The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes included elsewhere in this report, as well as the financial and other information included in the 2015 10-K. The following discussion contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed below and elsewhere in this report (particularly in "Forward-Looking Statements") and in the 2015 10-K (particularly in "Risk Factors" and in "Forward-Looking Statements"). This discussion includes non-GAAP financial measures. For information about these measures, see the disclosure under the caption "Important Information Regarding Non-GAAP Financial Measures" on page 22.
Overview
The Company is an omnichannel retail organization operating stores, websites and mobile applications under three brands (Macy's, Bloomingdale's and Bluemercury) that sell a wide range of merchandise, including apparel and accessories (men's, women's and children's), cosmetics, home furnishings and other consumer goods. The Company's operations include approximately 870 Macy's, Macy's Backstage, Bloomingdale's, Bloomingdales Outlet and Bluemercury stores in 45 states, the District of Columbia, Guam and Puerto Rico, as well as macys.com, bloomingdales.com and bluemercury.com. In addition, Bloomingdale's in Dubai, United Arab Emirates is operated under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC.
The Company continues to be focused on three key strategies for growth in sales, earnings and cash flow in the years ahead: (i) maximizing the My Macy's localization initiative; (ii) driving the omnichannel business; and (iii) embracing customer centricity, including engaging customers on the selling floor through the Magic Selling program. These strategies have evolved and the Company has developed specific initiatives to acquire new customers and strengthen loyalty, deliver distinctive merchandise, expand the digital frontier and new formats and to create signature customer experiences.
Through the My Macy's localization initiative, the Company has invested in talent, technology and marketing which ensures 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 provided for more local decision-making in every Macy's community, and involves tailoring merchandise assortments, space allocations, service levels, visual merchandising and special events on a store-by-store basis. The focus on localization is now evolving to one of personalization.
The Company's omnichannel strategy allows customers to shop seamlessly in stores and online, via desktops, laptops or mobile devices. A pivotal part of the omnichannel strategy is the Company's ability to allow associates in any store to sell a product that may be unavailable locally by shipping merchandise from other stores or customer fulfillment centers to the customer's door. Likewise, the Company's customer fulfillment centers can draw on store inventories nationwide to fill orders that originate online. Nearly all Macy's and Bloomingdale's stores are fulfilling orders from other stores and/or online for shipment and fulfilling orders for store pick-up related to online purchases, and the Company operates same-day delivery in 17 markets.
Macy's Magic Selling program is an approach to customer engagement that helps Macy's to better understand the needs of customers, as well as to provide options and advice. This comprehensive ongoing training and coaching program is designed to improve the in-store shopping experience and all other customer interactions. Magic Selling is shifting focus in 2016 to new technologies for building Magic connections with customers.
In January 2016, the Company announced a series of cost-efficiency and process improvement measures to be implemented beginning in early 2016 that will reduce selling, general and administrative ("SG&A") expenses by approximately $400 million to help fund investment in growth strategies, particularly in omnichannel capabilities at Macy's and Bloomingdale's.

18


MACY'S, INC.

The Company is focused on improving the recent business trend through a series of organic and new business initiatives. The initiatives include a focus on fine jewelry and watches, expansion of Macy's Backstage (including freestanding locations and inside existing Macy's stores), "Last Act" - a simplified pricing approach to clearance merchandise in Macy's stores, a focus on the "Top 150" store locations (including product presentation, customer service and special events), a focus on the beauty business including the expansion of Bluemercury freestanding locations and inside existing Macy's stores and a focus on enhancements to mobile technology. The Company is planning to offer customers greater newness and more exclusive merchandise through an array of new and exclusive product launches. The Company is also pursuing additional opportunities to moderate spending through intensified expense reduction efforts, while still investing in key areas of customer service including front-line support and technology at Macy's and Bloomingdale's.
In March 2015, the Company completed its acquisition of Bluemercury, Inc., a luxury beauty products and spa retailer. The Company is focused on accelerating the growth of sales in freestanding Bluemercury stores in urban and suburban markets, enhancing its online capabilities and adding Bluemercury products and boutiques to Macy's stores.
In May 2015, in conjunction with American Express, the Company helped launch Plenti, the coalition loyalty program that brings powerful brands together to give customers the chance to earn and redeem points where they choose. The loyalty program is free to join and members earn points on virtually all purchases at Macy's and other businesses that have joined as Plenti partners.
Additionally, in 2015, the Company opened the first six pilot stores in Macy's new off-price business, Macy's Backstage, in the New York City metro area. The Macy's Backstage locations average about 30,000 square feet and sell an assortment of women's, men's and children's apparel, shoes, fashion accessories, housewares, home textiles, intimate apparel and jewelry.
In August 2015, the Company established a joint venture, Macy's China Limited, of which the Company holds a sixty-five percent ownership interest and Hong Kong-based Fung Retailing Limited holds the remaining thirty-five percent ownership interest. Macy's China Limited began selling merchandise in China in the fourth quarter of 2015 through an e-commerce presence on Alibaba Group's Tmall Global. The Company's periodic reporting now includes the consolidated results of operations of Macy's China Limited, with the thirty-five percent ownership reported as a noncontrolling interest.
In January 2016, the Company completed a $270 million real estate transaction that will enable a re-creation of Macy's Brooklyn store. The Company will continue to own and operate the first four floors and lower level of its existing nine-story retail store, which will be configured and remodeled. Tishman Speyer purchased the remaining portion of the site, which it will develop into approximately ten floors of office space. In addition, Tishman Speyer purchased a nearby parking facility, which could be used for a mixed-use development. As a result of this transaction, the Company will recognize a gain of approximately $250 million of which, under the percentage of completion method of accounting, $84 was recognized in fiscal 2015 and $4 million was recognized in the first quarter of 2016. The remaining gain is anticipated to be recognized over the next two years.
Also in 2015, the Company launched the marketing of potential partnership and joint venture transactions for certain of its real estate. This includes the owned mall-based properties, as well as Macy's flagship real estate assets in Manhattan (Herald Square), San Francisco (Union Square), Chicago (State Street) and Minneapolis (downtown Nicollet Mall). In addition, the Company will also continue to pursue selected real estate dispositions and monetize assets in instances where the business is simultaneously enhanced or where the value of real estate significantly outweighs the value of the retail business.
During the first quarter of 2016, the Company opened seven new freestanding Bluemercury stores. In fiscal 2016, the Company intends to open one new Macy's store, 42 additional Bluemercury locations (24 freestanding and 18 inside Macy's), 16 Macy's Backstage locations (one freestanding and 15 inside Macy's) and one new Bloomingdale's Outlet.
The Company's operations are impacted by competitive pressures from department stores, specialty stores, mass merchandisers, online retailers and all other retail channels. The Company's operations are also impacted by general consumer spending levels, including the impact of general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, the costs of basic necessities and other goods and the effects of weather or natural disasters and other factors over which the Company has little or no control.
In recent years, consumer spending levels have been affected to varying degrees by a number of factors, including modest economic growth, uncertainty regarding governmental spending and tax policies, unemployment levels, tightened consumer credit, an improving housing market and a fluctuating stock market. In addition, consumer spending levels of international customers are impacted by the strength of the U.S. dollar relative to foreign currencies. These factors have affected to varying degrees the amount of funds that consumers are willing and able to spend for discretionary purchases, including purchases of some of the merchandise offered by the Company.

19


MACY'S, INC.

All economic conditions ultimately affect the Company's overall operations. However, the effects of economic conditions can be experienced differently and at different times, in the various geographic regions in which the Company operates, in relation to the different types of merchandise that the Company offers for sale, or in relation to each of the Company's branded operations.
Based on its assessment of current and anticipated market conditions and its recent performance, the Company now expects comparable sales on an owned plus licensed basis for fiscal 2016 to decrease in the range of 3% to 4% from 2015 levels, with comparable sales on an owned basis approximately 50 basis points lower. The Company currently expects that its earnings per share attributable to Macy's, Inc. in fiscal 2016 will be in the range of $3.15 to $3.40, excluding the impact of non-cash settlement charges of approximately $135 million relating to the Company's defined benefit retirement plans.

Results of Operations
Comparison of the First Quarter of 2016 and the First Quarter of 2015
 
 
First Quarter of 2016
 
 
First Quarter of 2015
 
 
 
 
Amount
 
% to Sales
 
 
Amount
 
% to Sales
 
 
 
 
(dollars in millions, except per share figures)
Net sales
 
$
5,771

 
 
 
 
$
6,232

 
 
 
 
Decrease in sales
 
(7.4
)
%
 
 
(0.7
)
%
 
 
Decrease in comparable sales
 
(6.1
)
%
 
 
(0.7
)
%
 
 
Cost of sales
 
(3,516
)
 
(60.9
)
%
(3,800
)
 
(61.0
)
%
Gross margin
 
2,255

 
39.1

%
2,432

 
39.0

%
Selling, general and administrative expenses
 
(1,966
)
 
(34.1
)
%
(2,023
)
 
(32.4
)
%
Settlement charges
 
(13
)
 
(0.2
)
%

 

%
Operating income
 
276

 
4.8

%
409

 
6.6

%
Interest expense - net
 
(98
)
 
 
 
 
(95
)
 
 
 
 
Income before income taxes
 
178

 
 
 
 
314

 
 
 
 
Federal, state and local income tax expense
 
(63
)
 
 
 
 
(121
)
 
 
 
 
Net income
 
115

 
 
 
193

 
 
 
Net loss attributable to noncontrolling interest
 
1

 
 
 
 

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

 
2.0

%
$
193

 
3.1

%