Macy's, Inc 10-Q for FY2021 Q1
Macy's, Inc. (M)
10-Q
2020-07-02
For: 2020-05-02
View Original
Added on
April 04, 2026
About this 10-Q
Macy's, Inc filed this 10-Q on July 2, 2020, covering the quarter ended May 2, 2020 (FY2021 Q1).
Headline figures
Quarter ended May 2, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $3.02B
- down 45.2% from $5.5B a year earlier
- Net loss
- $3.58B
- compared with net income of $136M a year earlier
- Diluted EPS
- -$11.53
- compared with $0.44 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended May 2, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to
Commission file number: 1-13536
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of Principal Executive Offices, including Zip Code)
(513 ) 579-7780
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at May 30, 2020 | |
Common Stock, $.01 par value per share | ||
EXPLANATORY NOTE
Macy's, Inc. is filing this quarterly report on Form 10-Q after the June 11, 2020 (the “Original Due Date”) deadline applicable to it for the filing of a Form 10-Q for the quarter ended May 2, 2020 (the “Quarterly Report”) in reliance on the 45-day extension provided by an order issued by the SEC under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies dated March 25, 2020 (Release No. 34-88465) (the "Order").
On May 7, 2020, Macy's, Inc. filed a Current Report on Form 8-K to indicate its intention to rely on the Order for such extension. Consistent with its statements made in the Current Report on Form 8-K, Macy's, Inc. was unable to file the Quarterly Report by the Original Due Date, and therefore relied on the Order. The Quarterly Report is hereby filed before the extended due date permitted under the Order, i.e., 45 days after the Original Due Date, or July 27, 2020.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MACY’S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(millions, except per share figures)
13 Weeks Ended | |||||||
May 2, 2020 | May 4, 2019 | ||||||
Net sales | $ | $ | |||||
Credit card revenues, net | |||||||
Cost of sales | ( | ) | ( | ) | |||
Selling, general and administrative expenses | ( | ) | ( | ) | |||
Gains on sale of real estate | |||||||
Impairment, restructuring and other costs | ( | ) | ( | ) | |||
Operating income (loss) | ( | ) | |||||
Benefit plan income, net | |||||||
Interest expense | ( | ) | ( | ) | |||
Interest income | |||||||
Income (loss) before income taxes | ( | ) | |||||
Federal, state and local income tax benefit (expense) | ( | ) | |||||
Net income (loss) | $ | ( | ) | $ | |||
Basic earnings (loss) per share | $ | ( | ) | $ | |||
Diluted earnings (loss) per share | $ | ( | ) | $ | |||
The accompanying notes are an integral part of these Consolidated Financial Statements.
3
MACY’S, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(millions)
13 Weeks Ended | |||||||
May 2, 2020 | May 4, 2019 | ||||||
Net income (loss) | $ | ( | ) | $ | |||
Reclassifications to net income (loss): | |||||||
Amortization of net actuarial loss and prior service credit on post employment and postretirement benefit plans included in net income, before tax | |||||||
Tax effect related to items of other comprehensive income | ( | ) | ( | ) | |||
Total other comprehensive income, net of tax effect | |||||||
Comprehensive income (loss) | $ | ( | ) | $ | |||
The accompanying notes are an integral part of these Consolidated Financial Statements.
4
MACY’S, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(millions)
May 2, 2020 | February 1, 2020 | May 4, 2019 | |||||||||
ASSETS | |||||||||||
Current Assets: | |||||||||||
Cash and cash equivalents | $ | $ | $ | ||||||||
Receivables | |||||||||||
Merchandise inventories | |||||||||||
Prepaid expenses and other current assets | |||||||||||
Total Current Assets | |||||||||||
Property and Equipment - net of accumulated depreciation and amortization of $4,560, $4,392 and $4,621 | |||||||||||
Right of Use Assets | |||||||||||
Goodwill | |||||||||||
Other Intangible Assets – net | |||||||||||
Other Assets | |||||||||||
Total Assets | $ | $ | $ | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
Current Liabilities: | |||||||||||
Short-term debt | $ | $ | $ | ||||||||
Merchandise accounts payable | |||||||||||
Accounts payable and accrued liabilities | |||||||||||
Income taxes | |||||||||||
Total Current Liabilities | |||||||||||
Long-Term Debt | |||||||||||
Long-Term Lease Liabilities | |||||||||||
Deferred Income Taxes | |||||||||||
Other Liabilities | |||||||||||
Shareholders' Equity | |||||||||||
Total Liabilities and Shareholders’ Equity | $ | $ | $ | ||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
5
MACY’S, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(millions)
Common Stock | Additional Paid-In Capital | Accumulated Equity | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Shareholders' Equity | ||||||||||||||||||
Balance at February 1, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
Net loss | ( | ) | ( | ) | |||||||||||||||||||
Other comprehensive income | |||||||||||||||||||||||
Common stock dividends ($0.3775 per share) | ( | ) | ( | ) | |||||||||||||||||||
Stock-based compensation expense | |||||||||||||||||||||||
Stock issued under stock plans | ( | ) | ( | ) | |||||||||||||||||||
Other | |||||||||||||||||||||||
Balance at May 2, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
Common Stock | Additional Paid-In Capital | Accumulated Equity | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Shareholders' Equity | ||||||||||||||||||
Balance at February 2, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
Cumulative-effect adjustment (a) | (158 | ) | (158 | ) | |||||||||||||||||||
Net income | |||||||||||||||||||||||
Other comprehensive income | |||||||||||||||||||||||
Common stock dividends ($0.3775 per share) | ( | ) | ( | ) | |||||||||||||||||||
Stock-based compensation expense | |||||||||||||||||||||||
Stock issued under stock plans | ( | ) | |||||||||||||||||||||
Balance at May 4, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
(a) Represents the cumulative-effect adjustment to retained earnings for the adoption of Accounting Standards Update 2016-02 (ASU-2016-02), Leases (Topic 842), on February 3, 2019.
The accompanying notes are an integral part of these Consolidated Financial Statements.
6
MACY’S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(millions)
13 Weeks Ended | |||||||
May 2, 2020 | May 4, 2019 | ||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | ( | ) | $ | |||
Adjustments to reconcile net income (loss) to net cash used by operating activities: | |||||||
Impairment, restructuring and other costs | |||||||
Depreciation and amortization | |||||||
Stock-based compensation expense | |||||||
Gains on sale of real estate | ( | ) | ( | ) | |||
Benefit plans | |||||||
Deferred income taxes | ( | ) | |||||
Changes in assets and liabilities: | |||||||
Decrease in receivables | |||||||
(Increase) decrease in merchandise inventories | ( | ) | |||||
(Increase) decrease in prepaid expenses and other current assets | ( | ) | |||||
Increase in merchandise accounts payable | |||||||
Decrease in accounts payable and accrued liabilities | ( | ) | ( | ) | |||
Increase (decrease) in current income taxes | ( | ) | |||||
Change in other assets and liabilities | ( | ) | ( | ) | |||
Net cash used by operating activities | ( | ) | ( | ) | |||
Cash flows from investing activities: | |||||||
Purchase of property and equipment | ( | ) | ( | ) | |||
Capitalized software | ( | ) | ( | ) | |||
Disposition of property and equipment | |||||||
Other, net | ( | ) | |||||
Net cash used by investing activities | ( | ) | ( | ) | |||
Cash flows from financing activities: | |||||||
Debt issued | |||||||
Debt repaid | ( | ) | ( | ) | |||
Dividends paid | ( | ) | ( | ) | |||
Decrease in outstanding checks | ( | ) | ( | ) | |||
Issuance of common stock | |||||||
Net cash provided (used) by financing activities | ( | ) | |||||
Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ) | |||||
Cash, cash equivalents and restricted cash beginning of period | |||||||
Cash, cash equivalents and restricted cash end of period | $ | $ | |||||
Supplemental cash flow information: | |||||||
Interest paid | $ | $ | |||||
Interest received | |||||||
Income taxes paid (net of refunds received) | |||||||
Note: Restricted cash of $79 million and $78 million have been included with cash and cash equivalents for the 13 weeks ended May 2, 2020 and May 4, 2019, respectively.
The accompanying notes are an integral part of these Consolidated Financial Statements.
7
MACY’S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Summary of Significant Accounting Policies
Nature of Operations
Macy's, Inc. and subsidiaries (the "Company") is an omnichannel retail organization operating stores, websites and mobile applications under three brands (Macy's, Bloomingdale's and bluemercury) that sell a wide range of merchandise, including apparel and accessories (men's, women's and kids'), cosmetics, home furnishings and other consumer goods. The Company has stores in 43 states, the District of Columbia, Guam and Puerto Rico. As of May 2, 2020, the Company's operations were conducted through Macy's, Bloomingdale's, Bloomingdale's The Outlet, Macy's Backstage and bluemercury.
Bloomingdale's in Dubai, United Arab Emirates and Al Zahra, Kuwait are operated under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC.
A description of the Company's significant accounting policies is included in the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2020 (the "2019 10-K"). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 2019 10-K.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company considered the novel coronavirus ("COVID-19") related impacts to its estimates, as appropriate, within its Consolidated Financial Statements and there may be changes to those estimates in future periods. The Company believes that the accounting estimates are appropriate after giving consideration to the increased uncertainties surrounding the severity and duration of the COVID-19 pandemic. 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 May 2, 2020 and May 4, 2019, 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 May 2, 2020 and May 4, 2019 (which do not include the Christmas season) are not necessarily indicative of such results for the full fiscal year.
Comprehensive Income (Loss)
Total comprehensive income (loss) represents the change in equity during a period from sources other than transactions with shareholders and, as such, includes net income (loss). For the Company, the only other components of total comprehensive income (loss) for the 13 weeks ended May 2, 2020 and May 4, 2019 relate to post employment and postretirement plan items. Settlement charges incurred are included as a separate component of income (loss) before income taxes in the Consolidated Statements of Operations. Amortization reclassifications out of accumulated other comprehensive loss are included in the computation of net periodic benefit cost (income) and are included in benefit plan income, net on the Consolidated Statements of Operations. See Note 8, "Benefit Plans," for further information.
8
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
2. Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States. The COVID-19 pandemic has had a negative impact on the Company's fiscal 2020 operations and financial results to date, and the full financial impact of the pandemic cannot be reasonably estimated at this time due to uncertainty as to the severity and duration of the pandemic. The following summarizes the actions taken and impacts from the COVID-19 pandemic during and subsequent to the 13 weeks ended May 2, 2020.
• | The Company temporarily closed all stores on March 18, 2020, which included all Macy’s, Bloomingdale’s, Bluemercury, Macy’s Backstage, Bloomingdales the Outlet and Market by Macy’s stores. The first tranche of stores began reopening on May 4, 2020 and nearly all the Company's stores have been reopened. |
As a result of store closures, the Company recognized an approximate $300 million inventory write-down, primarily on fashion merchandise, during the 13 weeks ended May 2, 2020.
• | In an effort to increase liquidity, the Company fully drew on its $ |
• | To improve the Company's current cash position and reduce its cash expenditures during this uncertain time, the Company's Board of Directors and Chief Executive Officer did not receive compensation from the beginning of the COVID-19 crisis through June 30, 2020. In addition, the Company deferred cash expenditures where possible and temporarily implemented a furlough for the majority of its employee population that will end at the beginning of July 2020. Certain executives not impacted by the furlough took a temporary reduction of their pay through June 30, 2020. |
In the first quarter of 2020, the Company deferred rent payments for a significant number of its stores. The Company has elected to treat the COVID-19 pandemic-related rent deferrals as accrued liabilities. The Company will continue to recognize expense during the deferral periods.
In June 2020, the Company announced a restructuring that will align its cost base with anticipated near-term sales as the business recovers from the impact of the COVID-19 pandemic. The Company will reduce corporate and management headcount by approximately 3,900 . Additionally, the Company has reduced staffing across its stores portfolio, supply chain and customer support network, which it will adjust as sales recover. For fiscal 2020, the Company expects pre-tax costs of approximately $180 million for these restructuring activities, the majority of which will be recorded in the second quarter of 2020 and all of which will be in cash.
During the 13 weeks ended May 2, 2020, the Company incurred non-cash impairment charges on long-lived tangible and right of use assets to adjust the carrying value of certain store locations to their estimated fair value. The Company also incurred a non-cash impairment charge on goodwill as a result of the sustained decline in the Company's market capitalization and decline in projected cash flows primarily as a result of the COVID-19 pandemic. See Note 3, "Impairment, Restructuring and Other Costs" and Note 4, "Goodwill and Indefinite Lived Intangible Assets", respectively, for further discussion of these charges.
• | On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act") was signed into law, providing payroll tax credits for employee retention, deferral of payroll taxes, and several income tax provisions including modifications to the net interest deduction limitation, changes to certain property depreciation and allows for carryback of certain operating losses. |
The impacts of the CARES Act have been included in the estimation of the Company's annual effective tax rate and the income tax benefit recognized during the 13 weeks ended May 2, 2020. Specifically, the Company has estimated an annual net operating loss that will be available for carryback at a 35 % federal income tax rate rather than the current 21 % federal income tax rate. The resultant benefit of this rate differential was offset by the impact of the non-tax deductible component of the goodwill impairment charge and additional income tax expense associated with deferred
9
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
tax remeasurement during the first quarter of 2020. The net impact of these items is the primary driver of the effective tax rate decrease when compared to the same period in 2019. As of May 2, 2020, the Company recognized a $351 million income tax receivable, which is included within Other Assets on the Consolidated Balance Sheets.
In addition, during the 13 weeks ended May 2, 2020, the Company recognized $42 million in employee retention payroll tax credits and elected to defer payment of the employer portion of social security taxes.
3. Impairment, Restructuring and Other Costs
13 Weeks Ended | |||||||
May 2, 2020 | May 4, 2019 | ||||||
(millions) | |||||||
Impairments | $ | $ | |||||
Restructuring | |||||||
Other | |||||||
Total | $ | $ | |||||
During the 13 weeks ended May 2, 2020, primarily as a result of the COVID-19 pandemic, the Company incurred non-cash impairment charges totaling $3,150 million consisting of:
• | $ |
• | $ |
A summary of the restructuring and other cash activity for the 13 weeks ended May 2, 2020 related to the Polaris strategy, which was announced in February 2020 and are included within accounts payable and accrued liabilities, is as follows:
Severance and other benefits | Professional fees and other related charges | Total | |||||||||
(millions) | |||||||||||
Balance at February 1, 2020 | $ | $ | $ | ||||||||
Additions charged to expense | |||||||||||
Cash payments | ( | ) | ( | ) | ( | ) | |||||
Balance at May 2, 2020 | $ | $ | $ | ||||||||
10
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
4. Goodwill and Indefinite Lived Intangible Assets
May 2, 2020 | February 1, 2020 | May 4, 2019 | |||||||||
(millions) | |||||||||||
Non-amortizing intangible assets | |||||||||||
Goodwill | $ | $ | $ | ||||||||
Accumulated impairment losses | ( | ) | ( | ) | ( | ) | |||||
Tradenames | |||||||||||
$ | $ | $ | |||||||||
As a result of the sustained decline in the Company's market capitalization and changes in the Company's long-term projections driven largely by the impacts of the COVID-19 pandemic, the Company determined a triggering event had occurred that required an interim impairment assessment for all of its reporting units and indefinite lived intangible assets. The Company determined the fair value of each of its reporting units using a market approach, an income approach, or a combination of both, where appropriate. Relative to the prior assessment, as part of this current assessment, it was determined that an increase in the discount rate applied in the valuation was required to align with market-based assumptions and company-specific risk. This higher discount rate, in conjunction with revised long-term projections, resulted in lower fair values of the reporting units. As a result the Company recognized $2,972 million and $98 million of goodwill impairment for the Macy's and bluemercury reporting units, respectively, during the first quarter of 2020.
5. Earnings (Loss) Per Share
The following tables set forth the computation of basic and diluted earnings (loss) per share:
13 Weeks Ended | |||||||||||||||||||||
May 2, 2020 | May 4, 2019 | ||||||||||||||||||||
Net Loss | Shares | Net Income | Shares | ||||||||||||||||||
(millions, except per share data) | |||||||||||||||||||||
Net income (loss) | $ | ( | ) | $ | |||||||||||||||||
Shares to be issued under deferred compensation and other plans | |||||||||||||||||||||
$ | ( | ) | $ | ||||||||||||||||||
Basic earnings (loss) per share | $ | ( | ) | $ | |||||||||||||||||
Effect of dilutive securities: | |||||||||||||||||||||
Stock options and restricted stock units | |||||||||||||||||||||
$ | ( | ) | $ | ||||||||||||||||||
Diluted earnings (loss) per share | $ | ( | ) | $ | |||||||||||||||||
For the 13 weeks ended May 2, 2020, as a result of the net loss for the quarter, all options and restricted stock units have been excluded from the calculation of diluted earnings per share and, therefore, there was no difference in the weighted average number of common shares for basic and diluted loss per share as the effect of all potentially dilutive shares outstanding was anti-dilutive. Stock options to purchase 17.3 million shares of common stock and restricted stock units relating to 3.4 million shares of common stock outstanding at May 2, 2020 were excluded from the computation of diluted earnings per share.
In addition to the stock options and restricted stock units reflected in the foregoing tables, stock options to purchase 16.9 million shares of common stock and restricted stock units relating to 2.2 million shares of common stock were outstanding at May 4, 2019, but were not included in the computation of diluted earnings per share because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.
11
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
6. Revenue
Net sales
Revenue is recognized when customers obtain control of goods and services promised by the Company. The amount of revenue recognized is based on the amount that reflects the consideration that is expected to be received in exchange for those respective goods and services. The Company's revenue generating activities include the following:
Retail Sales
Retail sales include merchandise sales, inclusive of delivery income, licensed department income, sales of private brand goods directly to third party retailers and sales of excess inventory to third parties. Sales of merchandise are recorded at the time of shipment to the customer and are reported net of estimated merchandise returns and certain customer incentives. Commissions earned on sales generated by licensed departments are included as a component of total net sales and are recognized as revenue at the time merchandise is sold to customers. Service revenues (e.g., alteration and cosmetic services) are recorded at the time the customer receives the benefit of the service. The Company has elected to present sales taxes on a net basis and, as such, sales taxes are included in accounts payable and accrued liabilities until remitted to the taxing authorities.
For the 13 weeks ended May 2, 2020 and May 4, 2019, Macy's accounted for 87 % and 88 % of the Company's net sales, respectively. Disaggregation of the Company's net sales by family of business for the 13 weeks ended May 2, 2020 and May 4, 2019 were as follows:
13 Weeks Ended | |||||||
Net sales by family of business | May 2, 2020 | May 4, 2019 | |||||
(millions) | |||||||
Women's Accessories, Intimate Apparel, Shoes, Cosmetics and Fragrances | $ | $ | |||||
Women's Apparel | |||||||
Men's and Kids' | |||||||
Home/Other (a) | |||||||
Total | $ | $ | |||||
(a) Other primarily includes restaurant sales, allowance for merchandise returns adjustments and breakage income from unredeemed gift cards.
Merchandise Returns
The Company estimates merchandise returns using historical data and recognizes an allowance that reduces net sales and cost of sales. The liability for merchandise returns is included in accounts payable and accrued liabilities on the Company's Consolidated Balance Sheets and was $184 million, $269 million and $294 million as of May 2, 2020, February 1, 2020 and May 4, 2019, respectively. Included in prepaid expenses and other current assets is an asset totaling $130 million, $147 million and $200 million as of May 2, 2020, February 1, 2020 and May 4, 2019, respectively, for the recoverable cost of merchandise estimated to be returned by customers.
Gift Cards and Customer Loyalty Programs
The Company only offers no-fee, non-expiring gift cards to its customers. At the time gift cards are sold or issued, no revenue is recognized; rather, the Company records an accrued liability to customers. The liability is relieved and revenue is recognized equal to the amount redeemed at the time gift cards are redeemed for merchandise. The Company records revenue from unredeemed gift cards (breakage) in net sales on a pro-rata basis over the time period gift cards are actually redeemed. At least three years of historical data, updated annually, is used to determine actual redemption patterns.
The Company maintains customer loyalty programs in which customers earn points based on their purchases. Under the Macy’s brand, points are earned based on customers’ spending on Macy’s private label and co-branded credit cards as well as third-party credit cards. Under the Bloomingdale’s brand, the Company offers a tender-neutral points-based program. The Company recognizes the estimated net amount of the rewards that will be earned and redeemed as a reduction to net sales at the time of the initial transaction and as tender when the points are subsequently redeemed by a customer.
The liability for unredeemed gift cards and customer loyalty programs is included in accounts payable and accrued liabilities on the Company's Consolidated Balance Sheets and was $732 million, $839 million and $696 million as of May 2, 2020, February 1, 2020 and May 4, 2019, respectively.
12
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Credit Card Revenues, net
7. Financing Activities
The following table shows the detail of debt repayments:
13 Weeks Ended | |||||||
May 2, 2020 | May 4, 2019 | ||||||
(millions) | |||||||
9.5% Amortizing debentures due 2021 | $ | $ | |||||
9.75% Amortizing debentures due 2021 | |||||||
$ | $ | ||||||
As of May 2, 2020, the Company was party to a credit agreement with certain financial institutions. The credit agreement provided for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million. The credit agreement was scheduled to expire on May 9, 2024, subject to up to two one-year extensions that may be requested by the Company and agreed to by the lenders. On March 19, 2020, due to the impacts of the COVID-19 pandemic, the Company elected to draw on the full $1,500 million available under the agreement. This amount remained outstanding as of May 2, 2020.
June 2020 Financing Activities
Secured Debt Issuance
On June 8, 2020, the Company issued $1,300 million aggregate principal amount of 8.375 % senior secured notes due 2025 (the "Notes"). The Notes bear interest at a rate of 8.375 % per annum, which accrues from June 8, 2020 and is payable in arrears on June 15 and December 15 of each year, commencing on December 15, 2020. The Notes mature on June 15, 2025, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the related indenture. The Notes were issued by Macy’s, Inc. and are secured on a first-priority basis by (i) a first mortgage/deed of trust in certain real property of subsidiaries of Macy’s, Inc. that were transferred to Macy’s Propco Holdings, LLC, a newly created direct, wholly-owned subsidiary of Macy’s, Inc. (“Propco”), and (ii) a pledge by Propco of the equity interests in its subsidiaries that own such transferred real property. The Notes are, jointly and severally, unconditionally guaranteed on a secured basis by Propco and its subsidiaries and unconditionally guaranteed on an unsecured basis by Macy’s Retail Holdings, LLC (f/k/a Macy’s Retail Holdings, Inc.) (“MRH”), a direct, wholly owned subsidiary of Macy’s, Inc. The Company used the proceeds of the Notes offering, along with cash on hand, to repay the outstanding borrowings under the existing $1,500 million unsecured credit agreement.
Entry into Asset-Based Credit Facility
On June 8, 2020, Macy’s Inventory Funding LLC (the “ABL Borrower”), an indirect wholly owned subsidiary of the Company, and its parent, Macy’s Inventory Holdings LLC (the “ABL Parent”), entered into an asset-based credit agreement (the “ABL Credit Facility”) with Bank of America, N.A., as administrative agent and collateral agent, and the lenders party thereto. The ABL Credit Facility provides the ABL Borrower with (i) a $2,851 million revolving credit facility (the “Revolving ABL
13
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Facility”), including a swingline sub-facility and a letter of credit sub-facility, and (ii) a bridge revolving credit facility of up to $300 million (the “Bridge Facility”). The ABL Borrower may request increases in the size of the Revolving ABL Facility up to an additional aggregate principal amount of $750 million.
Additionally on June 8, 2020 and concurrently with closing the ABL Credit Facility, the ABL Borrower purchased all presently existing inventory, and assumed the liabilities in respect of all presently existing and outstanding trade payables owed to vendors in respect of such inventory, from MRH and certain wholly owned subsidiaries of MRH. The ABL Credit Facility is secured on a first priority basis (subject to customary exceptions) by (i) all assets of the ABL Borrower including all such inventory and the proceeds thereof and (ii) the equity of the ABL Borrower. The ABL Parent guaranteed the ABL Borrower’s obligations under the ABL Credit Facility. The Revolving ABL Facility matures on May 9, 2024, and the Bridge Facility matures on December 30, 2020.
The ABL Credit Facility contains customary borrowing conditions including a borrowing base equal to the sum of (a) 80 % (which shall automatically increase to 90 % upon the satisfaction of certain conditions, including the delivery of an initial appraisal of the inventory) of the net orderly liquidation percentage of eligible inventory, minus (b) customary reserves. Amounts borrowed under the ABL Credit Facility are subject to interest at a rate per annum equal to (i) prior to the Step Down Date (as defined in the ABL Credit Facility), at the ABL Borrower’s option, either (a) adjusted LIBOR plus a margin of 2.75 % to 3.00 % or (b) a base rate plus a margin of 1.75 % to 2.00 %, in each case depending on revolving line utilization and (ii) after the Step Down Date, at the ABL Borrower’s option, either (a) adjusted LIBOR plus a margin of 2.25 % to 2.50 % or (b) a base rate plus a margin of 1.25 % to 1.50 %, in each case depending on revolving line utilization. The ABL Credit Facility also contains customary covenants that provide for, among other things, limitations on indebtedness, liens, fundamental changes, restricted payments, cash hoarding, and prepayment of certain indebtedness as well as customary representations and warranties and events of default typical for credit facilities of this type.
The ABL Credit Facility also requires (1) the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the end of any fiscal quarter on or after April 30, 2021 if (a) certain events of default have occurred and are continuing or (b) Availability plus Suppressed Availability (each as defined in the ABL Credit Facility) is less than the greater of (x) 10 % of the Loan Cap (as defined in the ABL Credit Facility) and (y) $250 million, in each case, as of the end of such fiscal quarter and (2) prior to April 30, 2021, that the ABL Borrower not permit Availability plus Suppressed Availability to be lower than the greater of (x) 10 % of the Loan Cap and (y) $250 million.
Amendment to Existing Credit Agreement
The Company substantially reduced the credit commitments of its existing $1,500 million unsecured credit agreement which now provides the Company with unsecured revolving credit of up to $75 million. The unsecured revolving credit facility contains covenants that provide for, among other things, limitations on fundamental changes, use of proceeds, and maintenance of property, as well as customary representations and warranties and events of default.
Commencement of Exchange Offers and Consent Solicitations for Certain Outstanding Debt Securities of Macy’s Retail Holdings, LLC
In June 2020, MRH commenced offers to eligible holders to exchange (each, an “Exchange Offer” and, collectively, the “Exchange Offers”) (i) new 6.65 % Senior Secured Debentures due 2024 (“New 2024 Notes”) to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.65 % Senior Debentures due 2024 issued by MRH (“Old 2024 Notes”), (ii) new 6.7 % Senior Secured Debentures due 2028 (“New 2028 Notes”) to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.7 % Senior Debentures due 2028 issued by MRH (“Old 2028 Notes”), (iii) new 8.75 % Senior Secured Debentures due 2029 (“New 2029 Notes”) to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 8.75 % Senior Debentures due 2029 issued by MRH (“Old 2029 Notes”), (iv) new 7.875 % Senior Secured Debentures due 2030 (“New 2030 Notes”) to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 7.875 % Senior Debentures due 2030 issued by MRH (“Old 2030 Notes”), (v) new 6.9 % Senior Secured Debentures due 2032 (“New 2032 Notes”) to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.9 % Senior Debentures due 2032 issued by MRH (“Old 2032 Notes”), and (vi) new 6.7 % Senior Secured Debentures due 2034 (“New 2034 Notes” and, together with the New 2024 Notes, New 2028 Notes, New 2029 Notes, New 2030 Notes and New 2032 Notes, the “New Notes” and each series, a “series of New Notes”) to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.7 % Senior Debentures due 2034 issued by MRH (“Old 2034 Notes” and, together with the Old 2024 Notes, Old 2028 Notes, Old
14
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
2029 Notes, Old 2030 Notes and Old 2032 Notes, the “Old Notes” and each series, a “series of Old Notes”). Each New Note issued in the Exchange Offers for a validly tendered Old Note will have an interest rate and maturity date that is identical to the interest rate and maturity date of the tendered Old Note, as well as identical interest payment dates and optional redemption prices. The New Notes will be MRH’s and Macy’s general, senior obligations and will be secured by a second-priority lien on the same collateral securing the Notes.
In addition, MRH is soliciting consents from holders of each series of Old Notes (each, a “Consent Solicitation” and, collectively, the “Consent Solicitations”) pursuant to the separate Consent Solicitation Statement (as defined below) to adopt certain proposed amendments to the indenture governing the Old Notes (the “Existing Indenture”) to conform certain provisions in the negative pledge covenant in the Existing Indenture to the provisions of the negative pledge covenant in MRH’s most recent indenture (the “Proposed Amendments”).
8. Benefit Plans
The Company has defined contribution plans which cover substantially all employees who work 1,000 hours or more in a year. In addition, the Company has a funded defined benefit plan ("Pension Plan") and an unfunded defined benefit supplementary retirement plan ("SERP"), which provides benefits, for certain employees, in excess of qualified plan limitations. Effective January 1, 2012, the Pension Plan was closed to new participants, with limited exceptions, and effective January 2, 2012, the SERP was closed to new participants.
In February 2013, the Company announced changes to the Pension Plan and SERP whereby eligible employees no longer earn future pension service credits after December 31, 2013, with limited exceptions. All retirement benefits attributable to service in subsequent periods are provided through defined contribution plans.
In addition, certain retired employees currently are provided with specified health care and life insurance benefits ("Postretirement Obligations"). Eligibility requirements for such benefits vary, but generally state that benefits are available to eligible employees who were hired prior to a certain date and retire after a certain age with specified years of service. Certain employees are subject to having such benefits modified or terminated.
The defined contribution plan expense and actuarially determined components of the net periodic benefit cost (income) associated with the defined benefit plans are as follows:
15
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
13 Weeks Ended | |||||||
May 2, 2020 | May 4, 2019 | ||||||
(millions) | |||||||
401(k) Qualified Defined Contribution Plan | $ | $ | |||||
Non-Qualified Defined Contribution Plan | $ | $ | |||||
Pension Plan | |||||||
Service cost | $ | $ | |||||
Interest cost | |||||||
Expected return on assets | ( | ) | ( | ) | |||
Recognition of net actuarial loss | |||||||
Amortization of prior service credit | |||||||
$ | ( | ) | $ | ( | ) | ||
Supplementary Retirement Plan | |||||||
Service cost | $ | $ | |||||
Interest cost | |||||||
Recognition of net actuarial loss | |||||||
Amortization of prior service cost | |||||||
$ | $ | ||||||
Total Retirement Expense | $ | $ | |||||
Postretirement Obligations | |||||||
Service cost | $ | $ | |||||
Interest cost | |||||||
Recognition of net actuarial gain | ( | ) | ( | ) | |||
Amortization of prior service credit | |||||||
$ | $ | ||||||
16
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
9. 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:
Level 1: Quoted prices in active markets for identical assets
Level 2: Significant observable inputs for the assets
Level 3: Significant unobservable inputs for the assets
May 2, 2020 | May 4, 2019 | ||||||||||||||||||||||||||||||
Fair Value Measurements | Fair Value Measurements | ||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
(millions) | |||||||||||||||||||||||||||||||
Marketable equity and debt securities | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Other financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, receivables, certain short-term investments and other assets, short-term debt, merchandise accounts payable, accounts payable and accrued liabilities and long-term debt. With the exception of long-term debt, the carrying amount of these financial instruments approximates fair value because of the short maturity of these instruments. The fair values of long-term debt, excluding capitalized leases, are generally estimated based on quoted market prices for identical or similar instruments, and are classified as Level 2 measurements within the hierarchy as defined by applicable accounting standards.
Goodwill and other indefinite-lived intangible assets, are evaluated for impairment annually or more frequently if events or conditions indicate the carrying value of a reporting unit or an indefinite-lived intangible asset may not be recoverable. Impairment testing compares the carrying amount of the reporting unit or other intangible assets with its fair value. During the 13 weeks ended May 2, 2020, the Company performed an interim impairment test for goodwill. The fair value was calculated using a guideline public company method, discounted cash flow or a combination of both for the reporting units. The fair value of goodwill is a Level 3 valuation based on certain unobservable inputs including projected cash flows and estimated risk-adjusted rates of return that would be utilized by market participants in valuing these assets or prices of similar assets.
During the 13 weeks ended May 2, 2020, long-lived and right of use assets were tested for impairment. The fair values of these assets is a Level 3 valuation based on certain unobservalbe inputs including projected cash flows and an estimated risk-adjusted rate of return that would be utilized by market participants in valuing these assets or prices of similar assets.
The following table shows the estimated fair value of the Company's long-term debt:
May 2, 2020 | May 4, 2019 | ||||||||||||||||||||||
Notional Amount | Carrying Amount | Fair Value | Notional Amount | Carrying Amount | Fair Value | ||||||||||||||||||
(millions) | |||||||||||||||||||||||
Long-term debt | $ | $ | $ | $ | $ | $ | |||||||||||||||||
10. Condensed Consolidating Financial Information
Certain debt obligations of the Company, which constitute debt obligations of Macy's Retail Holdings, Inc. ("Subsidiary Issuer"), a 100%-owned subsidiary of Macy's, Inc. ("Parent"), are fully and unconditionally guaranteed by Parent. In the following condensed consolidating financial statements, "Other Subsidiaries" includes all other direct subsidiaries of Parent, including Bluemercury, Inc., FDS Bank, West 34th Street Insurance Company New York, Macy's Merchandising Corporation, Macy's Merchandising Group, Inc. and its subsidiaries Macy's Merchandising Group (Hong Kong) Limited, Macy's Merchandising Group Procurement, LLC, Macy's Merchandising Group International, LLC, Macy's Merchandising Group International (Hong Kong) Limited, and Macy's China Limited. "Subsidiary Issuer" includes operating divisions and non-
17
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
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."
In June 2020, in conjunction with the financing discussed in Note 7, "Financing Activities," Macy's Retail Holdings, Inc. was converted into a limited liability company and in May 2020 direct, wholly-owned subsidiaries of the Parent, Macy’s Inventory Holdings LLC and Macy’s Propco Holdings, LLC, were created.
Condensed Consolidating Statements of Comprehensive Income for the 13 weeks ended May 2, 2020 and May 4, 2019, Condensed Consolidating Balance Sheets as of May 2, 2020, May 4, 2019 and February 1, 2020, and the related Condensed Consolidating Statements of Cash Flows for the 13 weeks ended May 2, 2020 and May 4, 2019 are presented on the following pages.
18
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Condensed Consolidating Statement of Comprehensive Income (Loss)
For the 13 Weeks Ended May 2, 2020
(millions)
Parent | Subsidiary Issuer | Other Subsidiaries | Consolidating Adjustments | Consolidated | |||||||||||||||
Net sales | $ | $ | $ | $ | ( | ) | $ | ||||||||||||
Credit card revenues (expense), net | ( | ) | |||||||||||||||||
Cost of sales | ( | ) | ( | ) | ( | ) | |||||||||||||
Selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | |||||||||||||
Gains on sale of real estate | |||||||||||||||||||
Impairment, restructuring and other costs | ( | ) | ( | ) | ( | ) | |||||||||||||
Operating loss | ( | ) | ( | ) | ( | ) | |||||||||||||
Benefit plan income, net | |||||||||||||||||||
Interest (expense) income, net: | |||||||||||||||||||
External | ( | ) | ( | ) | |||||||||||||||
Intercompany | ( | ) | |||||||||||||||||
Equity in loss of subsidiaries | ( | ) | ( | ) | |||||||||||||||
Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
Federal, state and local income tax benefit | |||||||||||||||||||
Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
19
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Condensed Consolidating Statement of Comprehensive Income
For the 13 Weeks Ended May 4, 2019
(millions)
Parent | Subsidiary Issuer | Other Subsidiaries | Consolidating Adjustments | Consolidated | |||||||||||||||
Net sales | $ | $ | $ | $ | ( | ) | $ | ||||||||||||
Credit card revenues, net | ( | ) | |||||||||||||||||
Cost of sales | ( | ) | ( | ) | ( | ) | |||||||||||||
Selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | |||||||||||||
Gains on sale of real estate | |||||||||||||||||||
Impairment and other costs | ( | ) | ( | ) | |||||||||||||||
Operating income | |||||||||||||||||||
Benefit plan income, net | |||||||||||||||||||
Interest (expense) income, net: | |||||||||||||||||||
External | ( | ) | ( | ) | |||||||||||||||
Intercompany | ( | ) | |||||||||||||||||
Equity in earnings (loss) of subsidiaries | ( | ) | ( | ) | |||||||||||||||
Income (loss) before income taxes | ( | ) | ( | ) | |||||||||||||||
Federal, state and local income tax benefit (expense) | ( | ) | ( | ) | ( | ) | |||||||||||||
Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||
Comprehensive income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||
20
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Condensed Consolidating Balance Sheet
As of May 2, 2020
(millions)
Parent | Subsidiary Issuer | Other Subsidiaries | Consolidating Adjustments | Consolidated | |||||||||||||||
ASSETS: | |||||||||||||||||||
Current Assets: | |||||||||||||||||||
Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||||
Receivables | |||||||||||||||||||
Merchandise inventories | |||||||||||||||||||
Income taxes | ( | ) | |||||||||||||||||
Prepaid expenses and other current assets | |||||||||||||||||||
Total Current Assets | ( | ) | |||||||||||||||||
Property and Equipment – net | |||||||||||||||||||
Right of Use Assets | |||||||||||||||||||
Goodwill | |||||||||||||||||||
Other Intangible Assets – net | |||||||||||||||||||
Other Assets | |||||||||||||||||||
Deferred Income Taxes | ( | ) | |||||||||||||||||
Intercompany Receivable | ( | ) | |||||||||||||||||
Investment in Subsidiaries | ( | ) | |||||||||||||||||
Total Assets | $ | $ | $ | $ | ( | ) | $ | ||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY: | |||||||||||||||||||
Current Liabilities: | |||||||||||||||||||
Short-term debt | $ | $ | $ | $ | $ | ||||||||||||||
Merchandise accounts payable | |||||||||||||||||||
Accounts payable and accrued liabilities | |||||||||||||||||||
Income taxes | ( | ) | |||||||||||||||||
Total Current Liabilities | ( | ) | |||||||||||||||||
Long-Term Debt | |||||||||||||||||||
Long-Term Lease Liabilities | |||||||||||||||||||
Intercompany Payable | ( | ) | |||||||||||||||||
Deferred Income Taxes | ( | ) | |||||||||||||||||
Other Liabilities | |||||||||||||||||||
Accumulated Losses from Subsidiaries | ( | ) | |||||||||||||||||
Shareholders' Equity (Deficit) | ( | ) | ( | ) | |||||||||||||||
Total Liabilities and Shareholders' Equity | $ | $ | $ | $ | ( | ) | $ | ||||||||||||
21
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Condensed Consolidating Balance Sheet
As of May 4, 2019
(millions)
Parent | Subsidiary Issuer | Other Subsidiaries | Consolidating Adjustments | Consolidated | |||||||||||||||
ASSETS: | |||||||||||||||||||
Current Assets: | |||||||||||||||||||
Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||||
Receivables | |||||||||||||||||||
Merchandise inventories | |||||||||||||||||||
Prepaid expenses and other current assets | |||||||||||||||||||
Total Current Assets | |||||||||||||||||||
Property and Equipment – net | |||||||||||||||||||
Right of Use Assets | |||||||||||||||||||
Goodwill | |||||||||||||||||||
Other Intangible Assets – net | |||||||||||||||||||
Other Assets | |||||||||||||||||||
Deferred Income Taxes | ( | ) | |||||||||||||||||
Intercompany Receivable | ( | ) | |||||||||||||||||
Investment in Subsidiaries | ( | ) | |||||||||||||||||
Total Assets | $ | $ | $ | $ | ( | ) | $ | ||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY: | |||||||||||||||||||
Current Liabilities: | |||||||||||||||||||
Short-term debt | $ | $ | $ | $ | $ | ||||||||||||||
Merchandise accounts payable | |||||||||||||||||||
Accounts payable and accrued liabilities | |||||||||||||||||||
Income taxes | |||||||||||||||||||
Total Current Liabilities | |||||||||||||||||||
Long-Term Debt | |||||||||||||||||||
Long-Term Lease Liabilities | |||||||||||||||||||
Intercompany Payable | ( | ) | |||||||||||||||||
Deferred Income Taxes | ( | ) | |||||||||||||||||
Other Liabilities | |||||||||||||||||||
Shareholders' Equity | ( | ) | |||||||||||||||||
Total Liabilities and Shareholders' Equity | $ | $ | $ | $ | ( | ) | $ | ||||||||||||
22
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Condensed Consolidating Balance Sheet
As of February 1, 2020
(millions)
Parent | Subsidiary Issuer | Other Subsidiaries | Consolidating Adjustments | Consolidated | |||||||||||||||
ASSETS: | |||||||||||||||||||
Current Assets: | |||||||||||||||||||
Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||||
Receivables | |||||||||||||||||||
Merchandise inventories | |||||||||||||||||||
Prepaid expenses and other current assets | |||||||||||||||||||
Total Current Assets | |||||||||||||||||||
Property and Equipment – net | |||||||||||||||||||
Right of Use Assets | |||||||||||||||||||
Goodwill | |||||||||||||||||||
Other Intangible Assets – net | |||||||||||||||||||
Other Assets | |||||||||||||||||||
Deferred Income Taxes | ( | ) | |||||||||||||||||
Intercompany Receivable | ( | ) | |||||||||||||||||
Investment in Subsidiaries | ( | ) | |||||||||||||||||
Total Assets | $ | $ | $ | $ | ( | ) | $ | ||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY: | |||||||||||||||||||
Current Liabilities: | |||||||||||||||||||
Short-term debt | $ | $ | $ | $ | $ | ||||||||||||||
Merchandise accounts payable | |||||||||||||||||||
Accounts payable and accrued liabilities | |||||||||||||||||||
Income taxes | |||||||||||||||||||
Total Current Liabilities | |||||||||||||||||||
Long-Term Debt | |||||||||||||||||||
Long-Term Lease Liabilities | |||||||||||||||||||
Intercompany Payable | ( | ) | |||||||||||||||||
Deferred Income Taxes | ( | ) | |||||||||||||||||
Other Liabilities | |||||||||||||||||||
Shareholders' Equity | ( | ) | |||||||||||||||||
Total Liabilities and Shareholders' Equity | $ | $ | $ | $ | ( | ) | $ | ||||||||||||
23
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the 13 Weeks Ended May 2, 2020
(millions)
Parent | Subsidiary Issuer | Other Subsidiaries | Consolidating Adjustments | Consolidated | |||||||||||||||
Cash flows from operating activities: | |||||||||||||||||||
Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
Impairment, restructuring and other costs | |||||||||||||||||||
Equity in loss of subsidiaries | ( | ) | |||||||||||||||||
Dividends received from subsidiaries | ( | ) | |||||||||||||||||
Depreciation and amortization | |||||||||||||||||||
Gains on sale of real estate | ( | ) | ( | ) | |||||||||||||||
Changes in assets, liabilities and other items not separately identified | ( | ) | |||||||||||||||||
Net cash provided (used) by operating activities | ( | ) | ( | ) | ( | ) | |||||||||||||
Cash flows from investing activities: | |||||||||||||||||||
Purchase of property and equipment and capitalized software, net of dispositions | ( | ) | ( | ) | ( | ) | |||||||||||||
Other, net | |||||||||||||||||||
Net cash used by investing activities | ( | ) | ( | ) | ( | ) | |||||||||||||
Cash flows from financing activities: | |||||||||||||||||||
Debt issued, net of debt repaid | ( | ) | |||||||||||||||||
Dividends paid | ( | ) | ( | ) | ( | ) | |||||||||||||
Intercompany activity, net | ( | ) | |||||||||||||||||
Other, net | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
Net cash provided (used) by financing activities | ( | ) | |||||||||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ) | |||||||||||||||||
Cash, cash equivalents and restricted cash at beginning of period | |||||||||||||||||||
Cash, cash equivalents and restricted cash at end of period | $ | $ | $ | $ | $ | ||||||||||||||
24
MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the 13 Weeks Ended May 4, 2019
(millions)
Parent | Subsidiary Issuer | Other Subsidiaries | Consolidating Adjustments | Consolidated | |||||||||||||||
Cash flows from operating activities: | |||||||||||||||||||
Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||
Impairment and other costs | |||||||||||||||||||
Equity in loss (earnings) of subsidiaries | ( | ) | |||||||||||||||||
Dividends received from subsidiaries | ( | ) | |||||||||||||||||
Depreciation and amortization | |||||||||||||||||||
Gains on sale of real estate | ( | ) | ( | ) | ( | ) | |||||||||||||
Changes in assets, liabilities and other items not separately identified | ( | ) | ( | ) | ( | ) | |||||||||||||
Net cash provided (used) by operating activities | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
Cash flows from investing activities: | |||||||||||||||||||
Purchase of property and equipment and capitalized software, net of dispositions | ( | ) | ( | ) | ( | ) | |||||||||||||
Other, net | ( | ) | ( | ) | |||||||||||||||
Net cash used by investing activities | ( | ) | ( | ) | ( | ) | |||||||||||||
Cash flows from financing activities: | |||||||||||||||||||
Debt repaid | ( | ) | ( | ) | |||||||||||||||
Dividends paid | ( | ) | ( | ) | ( | ) | |||||||||||||
Issuance of common stock | |||||||||||||||||||
Intercompany activity, net | ( | ) | |||||||||||||||||
Other, net | ( | ) | ( | ) | |||||||||||||||
Net cash provided (used) by financing activities | ( | ) | ( | ) | |||||||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ) | ( | ) | |||||||||||||||
Cash, cash equivalents and restricted cash at beginning of period | |||||||||||||||||||
Cash, cash equivalents and restricted cash at end of period | $ | $ | $ | $ | $ | ||||||||||||||
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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 2020" and "first quarter of 2019" are to the Company's 13-week fiscal periods ended May 2, 2020 and May 4, 2019, respectively. References to "2020" and "2019" are to the Company's 52-week periods ended January 30, 2021 and February 1, 2020, 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 2019 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 "Risk Factors" and in "Forward-Looking Statements") and in the 2019 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 32.
Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States. The COVID-19 pandemic has had a negative impact on the Company's fiscal 2020 operations and financial results to date, and the full financial impact of the pandemic cannot be reasonably estimated at this time due to uncertainty as to the severity and duration of the pandemic. The following summarizes the actions taken and impacts from the COVID-19 pandemic during and subsequent to the 13 weeks ended May 2, 2020.
• | The Company temporarily closed all stores on March 18, 2020, which included all Macy’s, Bloomingdale’s, Bluemercury, Macy’s Backstage, Bloomingdales the Outlet and Market by Macy’s stores. The first tranche of stores began reopening on May 4, 2020 and as of July 1, 2020, nearly all the Company's stores have been reopened. |
As a result of store closures, the Company recognized an approximate $300 million inventory write-down, primarily on fashion merchandise, during the 13 weeks ended May 2, 2020.
• | In an effort to increase liquidity, the Company fully drew on its $1,500 million credit facility, announced the suspension of quarterly cash dividends beginning in the second quarter of 2020 and took additional steps to reduce discretionary spending. The Company's Board of Directors rescinded its authorization of any unused amounts under the Company's share repurchase program. In June 2020, the Company completed financing activities of nearly $4.5 billion. See Note 7, "Financing Activities," for further discussion on these activities. |
• | To improve the Company's current cash position and reduce its cash expenditures during this uncertain time, the Company's Board of Directors and Chief Executive Officer did not receive compensation from the beginning of the COVID-19 crisis through June 30, 2020. In addition, the Company deferred cash expenditures where possible and temporarily implemented a furlough for the majority of its employee population that will end at the beginning of July 2020. Certain executives not impacted by the furlough took a temporary reduction of their pay through June 30, 2020. |
In the first quarter of 2020, the Company deferred rent payments for a significant number of its stores. The Company has elected to treat the COVID-19 pandemic-related rent deferrals as accrued liabilities. The Company will continue to recognize expense during the deferral periods.
In June 2020, the Company announced a restructuring that will align its cost base with anticipated near-term sales as the business recovers from the impact of the COVID-19 pandemic. The Company will reduce corporate and management headcount by approximately 3,900. Additionally, the Company has reduced staffing across its stores portfolio, supply chain and customer support network, which it will adjust as sales recover. The Company expects the actions announced to generate expense savings of approximately $365 million in fiscal 2020 and approximately $630 million on an annualized basis. These savings will be on top of the anticipated $1.5 billion in annual expense savings announced in February, which the Company expects to fully realize by year-end 2022. For fiscal 2020, the Company expects pre-tax costs of approximately $180 million for these restructuring activities, the majority of which will be recorded in the second quarter of 2020 and all of which will be in cash.
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• | During the 13 weeks ended May 2, 2020, the Company incurred non-cash impairment charges on long-lived tangible and right of use assets to adjust the carrying value of certain store locations to their estimated fair value. The Company also incurred a non-cash impairment charge on goodwill as a result of the sustained decline in the Company's market capitalization and decline in projected cash flows primarily as a result of the COVID-19 pandemic. See Note 3, "Impairment, Restructuring and Other Costs" and Note 4, "Goodwill and Indefinite Lived Intangible Assets", respectively, for further discussion of these charges. |
• | On March 27, 2020, the CARES Act was signed into law, providing payroll tax credits for employee retention, deferral of payroll taxes, and several income tax provisions including modifications to the net interest deduction limitation, changes to certain property depreciation and allows for carryback of certain operating losses. |
The COVID-19 pandemic continues to have a material adverse impact on the Company's operational performance, financial results and cash flows, although the full impact will depend on future developments, including the continued spread and duration of the outbreak and any related restrictions, all of which are highly uncertain and cannot be predicted. The Company continues to monitor the situation closely.
Polaris Strategy
On February 4, 2020, Macy’s, Inc. announced its Polaris strategy, a three-year plan designed to stabilize profitability and position the Company for sustainable, profitable growth. The five major components of the Polaris strategy are:
• | Strengthen Customer Relationships: The Company is focusing on building customer lifetime value and expanding the Macy's Star Rewards loyalty program with the launch of Loyalty 3.0 in early February 2020. Loyalty 3.0 allows every Star Rewards member to earn loyalty rewards on their purchases regardless of tender. |
• | Curate Quality Fashion: The Company is repositioning its merchandise category focus to drive sales and improve gross margin. |
• | Accelerate Digital Growth: The Company will continue to invest in its websites and mobile apps to deliver a superior fashion experience and accelerate growth. The Company will grow its customer franchise with a strong focus on personalization and continued innovation to deliver the best digital fashion experience to its customers. |
• | Optimize the Store Portfolio: The Company completed a rigorous evaluation of the Macy’s store portfolio. This included a store-level assessment of each store’s overall value to the fleet, including predicted profitability based on consumer trends and demographics. As a result, the Company plans to close approximately 125 of its least productive stores over the next three years, including approximately 30 stores that were announced for closure in the spring of 2020. |
• | Reset Cost Base: The Company is streamlining and right-sizing the organization and expense base to drive improvement in working capital and operating results. This includes reductions in corporate and support functions, campus consolidations and the consolidation of the Company's sole headquarters to New York City, New York. Additionally, the Company is further reshaping its supply chain to support omnichannel customer behavior and the Company’s new retail ecosystem. |
The impact of the COVID-19 pandemic has caused the Company to examine every aspect of the Polaris strategy to determine where the Company should accelerate, where the Company will continue but with an adjusted focus and where the Company will pause initiatives. The Company may incur significant additional charges in future periods as it more fully defines incremental Polaris strategy initiatives and moves into the execution phases of these projects. Since the scope of such efforts are not fully known at this time, the benefits of such initiatives, and any related charges or capital expenditures, are not currently quantifiable. Actions associated with the Polaris strategy are currently expected to continue through 2022.
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Results of Operations
Comparison of the First Quarter of 2020 and the First Quarter of 2019
First Quarter of 2020 | First Quarter of 2019 | ||||||||||||||||
Amount | % to Net Sales | Amount | % to Net Sales | ||||||||||||||
(dollars in millions, except per share figures) | |||||||||||||||||
Net sales | $ | 3,017 | $ | 5,504 | |||||||||||||
Credit card revenues, net | 131 | 4.3 | % | 172 | 3.1 | % | |||||||||||
Cost of sales | (2,501 | ) | (82.9 | ) | % | (3,403 | ) | (61.8 | ) | % | |||||||
Selling, general and administrative expenses | (1,598 | ) | (52.9 | ) | % | (2,112 | ) | (38.4 | ) | % | |||||||
Gains on sale of real estate | 16 | 0.5 | % | 43 | 0.8 | % | |||||||||||
Impairment, restructuring and other costs | (3,184 | ) | (105.5 | ) | % | (1 | ) | — | % | ||||||||
Operating income (loss) | (4,119 | ) | (136.5 | ) | % | 203 | 3.7 | % | |||||||||
Benefit plan income, net | 9 | 7 | |||||||||||||||
Interest expense, net | (47 | ) | (47 | ) | |||||||||||||
Income (loss) before income taxes | (4,157 | ) | 163 | ||||||||||||||
Federal, state and local income tax benefit (expense) | 576 | (27 | ) | ||||||||||||||
Net income (loss) | $ | (3,581 | ) | $ | 136 | ||||||||||||
Diluted earnings (loss) per share | $ | (11.53 | ) | $ | 0.44 | ||||||||||||
Supplemental Financial Measure | |||||||||||||||||
Gross margin (a) | $ | 516 | 17.1 | % | $ | 2,101 | 38.2 | % | |||||||||
Supplemental Non-GAAP Financial Measure | |||||||||||||||||
Diluted earnings (loss) per share, excluding the impact of certain items | $ | (2.03 | ) | $ | 0.44 | ||||||||||||
(a) Gross margin is defined as net sales less cost of sales.
Net Sales
Net sales for the first quarter of 2020 decreased $2,487 million, or 45.2%, compared to the first quarter of 2019. The Company's first quarter of 2020 sales were negatively impacted by the closure of all stores on March 18, 2020, resulting in stores sales being significantly down compared to first quarter of 2019. However, while digital sales also slowed during the first quarter of 2020, the decline in digital sales was in the low single digits versus the prior year quarter. The strongest performing categories during the first quarter of 2020 were home, fine jewelry, beauty, active wear, sleepwear and kids. Sales performance was weaker in women’s and men's apparel, including dresses and suits.
Credit Card Revenues, Net
Credit card revenues, net were $131 million in the first quarter of 2020, a decrease of $41 million, or 23.8%, compared to $172 million recognized in the first quarter of 2019 with credit penetration versus the first quarter of 2019 being approximately the same at 46%. New accounts were down significantly in the first quarter of 2020 versus the first quarter of 2019, which is primarily a reflection of stores not being open for the last six weeks of the quarter and drove the year-over-year decline.
Gross Margin
Gross margin was 17.1% in the first quarter of 2020 compared to 38.2% in the first quarter of 2019. The reason for the decline was due to increased net markdowns as compared to the first quarter of 2019 as well as the recognition of an approximate $300 million inventory write-down primarily on fashion merchandise during the 13 weeks ended May 2, 2020.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the first quarter of 2020 decreased $514 million from the first quarter of 2019. The decrease in SG&A expense dollars reflects the discretionary spending freeze implemented by the Company in response to the COVID-19 pandemic.
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Impairment, Restructuring and Other Costs
During the 13 weeks ended May 2, 2020, primarily as a result of the COVID-19 pandemic, the Company incurred non-cash impairment charges totaling $3,150 million consisting of:
• | $3,070 million of goodwill impairments, with $2,972 million attributable to the Macy's reporting unit and $98 million attributable to the Bluemercury reporting unit. See discussion at Note 4, "Goodwill and Indefinite Lived Intangible Assets." |
• | $80 million of impairments on long-lived tangible and right of use assets to adjust the carrying value of certain store locations to their estimated fair value. |
The first quarter of 2020 also included $34 million of restructuring and other costs related to severance activity and other costs associated with organizational restructuring, primarily associated with the Polaris strategy. See discussion at Note 3, "Impairment, Restructuring and Other Costs."
Effective Tax Rate
The Company's effective tax rate of 13.9% on the pretax loss for the first quarter of 2020 reflects the impact of the non-tax deductible component of the goodwill impairment charge offset partially by the carryback of net operating losses as permitted under the CARES Act. Additionally, the first quarter of 2019 effective tax rate of 16.6% was favorably impacted by the settlement of certain tax matters.
Diluted Earnings (Loss) Per Share
Diluted loss per share for the first quarter of 2020 decreased $11.97 compared to the first quarter of 2019, reflecting lower net income resulting from the impact of the COVID-19 pandemic.
Cash Flow, Liquidity and Capital Resources
The Company's principal sources of liquidity are cash from operations, cash on hand and the credit facility described below.
Because of the COVID-19 outbreak, there is significant uncertainty surrounding the potential impact on the Company's results of operations and cash flows. The Company has proactively taken steps to increase available cash on hand including, but not limited to, targeted reductions in discretionary operating expenses and capital expenditures, suspension of the Company's quarterly dividend, drawing the full $1,500 million available under the Company's credit agreement as of May 2, 2020, and executing additional financing transactions subsequent to the first quarter of 2020 as discussed in more detail below.
Operating Activities
Net cash used by operating activities in the first quarter of 2020 was $164 million, compared to $38 million in the first quarter of 2019. The difference in operating cash flows period over period is due to the net loss driven by the impact of the COVID-19 pandemic, primarily resulting from the temporary closure of the Company's physical store location partially offset by the cash management strategies including reduced spending and extension of payment terms during the COVID-19 pandemic.
Investing Activities
Net cash used by investing activities was $113 million in the first quarter of 2020, compared to $237 million in the first quarter of 2019. The decrease in the first quarter of 2020 is primarily due to a $104 million reduction in capital spending compared to the first quarter of 2019 as a result of the COVID-19 pandemic.
Financing Activities
Net cash provided by the Company for financing activities was $1,148 million for the first quarter of 2020, including debt issued of $1,500 million, partially offset by a decrease in outstanding checks of $231 million resulting from the Company's reduction in spending and $117 million of cash dividends. Net cash used by the Company for financing activities was $158 million for the first quarter of 2019, including payment of $116 million of cash dividends.
As of May 2, 2020, the Company was party to a credit agreement with certain financial institutions. The credit agreement provided for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million. The credit agreement was scheduled to expire on May 9, 2024, subject to up to two one-year extensions that may be requested by the Company and agreed to by the lenders. As of May 2, 2020, the Company had $1,500 million of borrowings outstanding under the credit agreement.
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The Company is party to a $1,500 million unsecured commercial paper program. The Company may issue and sell commercial paper in an aggregate amount outstanding at any particular time not to exceed its then-current combined borrowing availability under its bank credit agreement. As of May 2, 2020, the Company did not have any borrowings outstanding under its commercial paper program.
As of May 2, 2020, the Company was required under its credit agreement to maintain a specified interest coverage ratio for the latest four quarters of no less than 3.25 and a specified leverage ratio as of and for the latest four quarters of no more than 3.75. The Company's interest coverage ratio for the first quarter of 2020 was 6.55 and its leverage ratio at May 2, 2020 was 4.69, in each case as calculated in accordance with the credit agreement. On June 8, 2020, the Company amended the credit agreement in conjunction with the additional financing as discussed further below. The amendment of the credit agreement, discussed further below, removed the interest coverage and leverage ratio requirements.
June 2020 Financing Activities
Secured Debt Issuance
On June 8, 2020, the Company issued $1,300 million aggregate principal amount of 8.375% senior secured notes due 2025 (the "Notes"). The Notes bear interest at a rate of 8.375% per annum, which accrues from June 8, 2020 and is payable in arrears on June 15 and December 15 of each year, commencing on December 15, 2020. The Notes mature on June 15, 2025, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the related indenture. The Notes were issued by Macy’s, Inc. and are secured on a first-priority basis by (i) a first mortgage/deed of trust in certain real property of subsidiaries of Macy’s, Inc. that were transferred to Macy’s Propco Holdings, LLC, a newly created direct, wholly-owned subsidiary of Macy’s, Inc. (“Propco”), and (ii) a pledge by Propco of the equity interests in its subsidiaries that own such transferred real property. The Notes are, jointly and severally, unconditionally guaranteed on a secured basis by Propco and its subsidiaries and unconditionally guaranteed on an unsecured basis by Macy’s Retail Holdings, LLC. (f/k/a Macy’s Retail Holdings, Inc.) (“MRH”), a direct, wholly owned subsidiary of Macy’s, Inc. The Company used the proceeds of the Notes offering, along with cash on hand, to repay the outstanding borrowings under the existing $1,500 million unsecured credit agreement.
Entry into Asset-Based Credit Facility
On June 8, 2020, Macy’s Inventory Funding LLC (the “ABL Borrower”), an indirect wholly owned subsidiary of the Company, and its parent, Macy’s Inventory Holdings LLC (the “ABL Parent”), entered into an asset-based credit agreement (the “ABL Credit Facility”) with Bank of America, N.A., as administrative agent and collateral agent, and the lenders party thereto. The ABL Credit Facility provides the ABL Borrower with (i) a $2,851 million revolving credit facility (the “Revolving ABL Facility”), including a swingline sub-facility and a letter of credit sub-facility, and (ii) a bridge revolving credit facility of up to $300 million (the “Bridge Facility”). The ABL Borrower may request increases in the size of the Revolving ABL Facility up to an additional aggregate principal amount of $750 million.
Additionally on June 8, 2020 and concurrently with closing the ABL Credit Facility, the ABL Borrower purchased all presently existing inventory, and assumed the liabilities in respect of all presently existing and outstanding trade payables owed to vendors in respect of such inventory, from MRH and certain wholly owned subsidiaries of MRH. The ABL Credit Facility is secured on a first priority basis (subject to customary exceptions) by (i) all assets of the ABL Borrower including all such inventory and the proceeds thereof and (ii) the equity of the ABL Borrower. The ABL Parent guaranteed the ABL Borrower’s obligations under the ABL Credit Facility. The Revolving ABL Facility matures on May 9, 2024, and the Bridge Facility matures on December 30, 2020.
The ABL Credit Facility contains customary borrowing conditions including a borrowing base equal to the sum of (a) 80% (which shall automatically increase to 90% upon the satisfaction of certain conditions, including the delivery of an initial appraisal of the inventory) of the net orderly liquidation percentage of eligible inventory, minus (b) customary reserves. Amounts borrowed under the ABL Credit Facility are subject to interest at a rate per annum equal to (i) prior to the Step Down Date (as defined in the ABL Credit Facility), at the ABL Borrower’s option, either (a) adjusted LIBOR plus a margin of 2.75% to 3.00% or (b) a base rate plus a margin of 1.75% to 2.00%, in each case depending on revolving line utilization and (ii) after the Step Down Date, at the ABL Borrower’s option, either (a) adjusted LIBOR plus a margin of 2.25% to 2.50% or (b) a base rate plus a margin of 1.25% to 1.50%, in each case depending on revolving line utilization. The ABL Credit Facility also contains customary covenants that provide for, among other things, limitations on indebtedness, liens, fundamental changes, restricted payments, cash hoarding, and prepayment of certain indebtedness as well as customary representations and warranties and events of default typical for credit facilities of this type.
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The ABL Credit Facility also requires (1) the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the end of any fiscal quarter on or after April 30, 2021 if (a) certain events of default have occurred and are continuing or (b) Availability plus Suppressed Availability (each as defined in the ABL Credit Facility) is less than the greater of (x) 10% of the Loan Cap (as defined in the ABL Credit Facility) and (y) $250 million, in each case, as of the end of such fiscal quarter and (2) prior to April 30, 2021, that the ABL Borrower not permit Availability plus Suppressed Availability to be lower than the greater of (x) 10% of the Loan Cap and (y) $250 million.
Amendment to Existing Credit Agreement
The Company substantially reduced the credit commitments of its existing $1,500 million unsecured credit agreement which now provides the Company with unsecured revolving credit of up to $75 million. The unsecured revolving credit facility contains covenants that provide for, among other things, limitations on fundamental changes, use of proceeds, and maintenance of property, as well as customary representations and warranties and events of default. In conjunction with this amendment the interest coverage ratio and leverage ratio, as previously discussed, were eliminated as covenant requirements.
Commencement of Exchange Offers and Consent Solicitations for Certain Outstanding Debt Securities of Macy’s Retail Holdings, LLC
In June 2020, MRH commenced offers to eligible holders to exchange (each, an “Exchange Offer” and, collectively, the “Exchange Offers”) (i) new 6.65% Senior Secured Debentures due 2024 (“New 2024 Notes”) to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.65% Senior Debentures due 2024 issued by MRH (“Old 2024 Notes”), (ii) new 6.7% Senior Secured Debentures due 2028 (“New 2028 Notes”) to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.7% Senior Debentures due 2028 issued by MRH (“Old 2028 Notes”), (iii) new 8.75% Senior Secured Debentures due 2029 (“New 2029 Notes”) to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 8.75% Senior Debentures due 2029 issued by MRH (“Old 2029 Notes”), (iv) new 7.875% Senior Secured Debentures due 2030 (“New 2030 Notes”) to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 7.875% Senior Debentures due 2030 issued by MRH (“Old 2030 Notes”), (v) new 6.9% Senior Secured Debentures due 2032 (“New 2032 Notes”) to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.9% Senior Debentures due 2032 issued by MRH (“Old 2032 Notes”), and (vi) new 6.7% Senior Secured Debentures due 2034 (“New 2034 Notes” and, together with the New 2024 Notes, New 2028 Notes, New 2029 Notes, New 2030 Notes and New 2032 Notes, the “New Notes” and each series, a “series of New Notes”) to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.7% Senior Debentures due 2034 issued by MRH (“Old 2034 Notes” and, together with the Old 2024 Notes, Old 2028 Notes, Old 2029 Notes, Old 2030 Notes and Old 2032 Notes, the “Old Notes” and each series, a “series of Old Notes”). Each New Note issued in the Exchange Offers for a validly tendered Old Note will have an interest rate and maturity date that is identical to the interest rate and maturity date of the tendered Old Note, as well as identical interest payment dates and optional redemption prices. The New Notes will be MRH’s and Macy’s general, senior obligations and will be secured by a second-priority lien on the same collateral securing the Notes.
In addition, MRH is soliciting consents from holders of each series of Old Notes (each, a “Consent Solicitation” and, collectively, the “Consent Solicitations”) pursuant to the separate Consent Solicitation Statement (as defined below) to adopt certain proposed amendments to the indenture governing the Old Notes (the “Existing Indenture”) to conform certain provisions in the negative pledge covenant in the Existing Indenture to the provisions of the negative pledge covenant in MRH’s most recent indenture (the “Proposed Amendments”).
The Exchange Offers are scheduled to expire on July 24, 2020, with an early tender date of July 10, 2020. The Consent Solicitations also expire on July 10, 2020.
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Important Information Regarding Non-GAAP Financial Measures
The Company reports its financial results in accordance with U.S. GAAP. However, management believes that certain non-GAAP financial measures provide users of the Company's financial information with additional useful information in evaluating operating performance. Management believes that excluding certain items from net income (loss) and diluted earnings (loss) per share that are no longer associated with the Company’s core operations and that may vary substantially in frequency and magnitude period-to-period provides useful supplemental measures that assist in evaluating the Company's ability to generate earnings and leverage sales and to more readily compare these metrics between past and future periods.
Non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, the Company's financial results prepared in accordance with GAAP. Certain of the items that may be excluded or included in non-GAAP financial measures may be significant items that could impact the Company's financial position, results of operations or cash flows and should therefore be considered in assessing the Company's actual and future financial condition and performance. The methods used by the Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies.
Adjusted Net Income (Loss) and Adjusted Diluted Earnings (Loss) Per Share
The following is a tabular reconciliation of the non-GAAP financial measures of net income (loss) and diluted earnings (loss) per share, excluding certain items identified below, to GAAP net income (loss) and diluted earnings (loss) per share, which the Company believes to be the most directly comparable GAAP measures.
First Quarter of 2020 | First Quarter of 2019 | |||||||||||||||
Net Income (Loss) | Diluted Earnings (Loss) Per Share | Net Income | Diluted Earnings Per Share | |||||||||||||
As reported | $ | (3,581 | ) | $ | (11.53 | ) | $ | 136 | $ | 0.44 | ||||||
Impairment, restructuring and other costs | 3,184 | 10.25 | 1 | — | ||||||||||||
Income tax impact of certain items noted above | (233 | ) | (0.75 | ) | — | — | ||||||||||
As adjusted | $ | (630 | ) | $ | (2.03 | ) | $ | 137 | $ | 0.44 | ||||||
Critical Accounting Policies
Goodwill and Intangible Assets
The Company reviews the carrying value of its goodwill and other intangible assets with indefinite lives at least annually, as of the end of fiscal May, or more frequently if an event occurs or circumstances change, for possible impairment in accordance with ASC Topic 350, Intangibles - Goodwill and Other. For impairment testing, goodwill has been assigned to reporting units which consist of the Company's retail operating divisions. Macy's and bluemercury are the only reporting units with goodwill as of May 2, 2020, and 98% of the Company's goodwill is allocated to the Macy's reporting unit.
U.S. GAAP Accounting Methodologies
The Company may elect to evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit or fair value of indefinite lived intangible assets is less than its carrying value. If the qualitative evaluation indicates that it is more likely than not that the fair value of a reporting unit or indefinite lived intangible asset is less than its carrying amount, a quantitative impairment test is required. Alternatively, the Company may bypass the qualitative assessment for a reporting unit or indefinite lived intangible asset and directly perform the quantitative assessment. This determination can be made on an individual reporting unit or asset basis, and performance of the qualitative assessment may resume in a subsequent period.
The quantitative impairment test involves estimating the fair value of each reporting unit and indefinite lived intangible asset and comparing these estimated fair values with the respective reporting unit or indefinite lived intangible asset carrying value. If the carrying value of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to such excess, limited to the total amount of goodwill allocated to the 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.
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Estimating the fair values of reporting units and indefinite lived intangible assets 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 and market values and multiples of earnings and revenues of similar public companies. 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 or indefinite lived intangible asset.
The use of different assumptions, estimates or judgments in 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, and the reasonableness of the resultant implied control premium relative to the Company's market capitalization, 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.
First Quarter of 2020 Impairment Analysis
As a result of the sustained decline in the Company's market capitalization and changes in the Company's long-term projections driven largely by the impacts of the COVID-19 pandemic, the Company determined a triggering event had occurred that required an interim impairment assessment for all of its reporting units and indefinite lived intangible assets. The Company determined the fair value of each of its reporting units using a market approach, an income approach, or a combination of both, where appropriate. Relative to the prior assessment, as part of this current assessment, it was determined that an increase in the discount rate applied in the valuation was required to align with market-based assumptions and company-specific risk. This higher discount rate, in conjunction with revised long-term projection resulted in lower fair values of the reporting units. As a result, the Company recognized $2,972 million and $98 million of goodwill impairment for the Macy's and bluemercury reporting units during the first quarter of 2020.
As of May 2, 2020, the Company elected to perform a qualitative impairment test on its intangible assets with indefinite lives and concluded that it is more likely than not that the fair values exceeded the carrying values and the intangible assets with indefinite lives were not impaired.
The Company continues to monitor the key inputs to the fair values of its reporting units. A continued decline in market capitalization or future declines in macroeconomic factors or business conditions may result in additional impairment charges in future periods.
New Pronouncements
Accounting Pronouncements Recently Adopted
See Part I, Item 1, “Financial Statements — Note 1 — Organization and Summary of Significant Accounting Policies.”
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MACY'S, INC.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
There have been no material changes to the Company’s market risk as described in the Company's 2019 10-K. For a discussion of the Company’s exposure to market risk, refer to the Company’s market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of the 2019 10-K.
Item 4. | Controls and Procedures. |
The Company's Chief Executive Officer and Chief Financial Officer have carried out, as of May 2, 2020, 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 Securities and Exchange Act of 1934 (the "Exchange Act"). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of May 2, 2020, the Company's disclosure controls and procedures were 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 Securities and Exchange Commission (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.
From time to time adoption of new accounting pronouncements, major organizational restructuring and realignment occurs for which the Company reviews its internal control over financial reporting. As a result of this review, there were no changes in the Company's internal control 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.
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PART II - OTHER INFORMATION
Item 1. | Legal Proceedings. |
The Company and its subsidiaries are involved in various proceedings that are incidental to the normal course of their businesses. As of the date of this report, the Company does not expect that any of such proceedings will have a material adverse effect on the Company’s financial position or results of operations.
Retail Hazardous Waste Matter. The District Attorneys for ten counties in California and the City of Los Angeles are investigating alleged non-compliance with laws and regulations enacted or adopted regulating the storage, transportation and disposal of hazardous waste in California at Macy’s stores and distribution centers. The Company is cooperating with the offices and agencies involved, which are focused on disposal and return of cosmetic products, and is committed to adopting policies and procedures as may be appropriate depending on the outcome of its investigation into this matter. No administrative or judicial proceedings have been initiated nor has a penalty demand been made. However, it is possible that the Company will pay penalties in excess of $100,000 in connection with this matter. The Company has established a $1 million reserve against potential loss. Although the Company is currently unable to predict the outcome of this matter or the amount or range of any possible loss, the Company does not believe the resolution of this matter will have a material adverse impact on the consolidated results of operations, financial condition or cash flows.
Item 1A. | Risk Factors. |
Except as set forth below, there have been no material changes to the Risk Factors described in Part I, Item 1A."Risk Factors" in the Company's 2019 10-K.
The risk factor “The recent outbreak of COVID-19 may have a significant negative impact on the Company's business and financial results” is deleted and replaced as follows:
The recent outbreak of COVID-19 has had and will continue to have a significant negative impact on the Company’s business and financial results.
In December 2019, there was an outbreak of COVID-19 in China that has since spread to the other regions of the world. The outbreak was subsequently labeled as a global pandemic by the World Health Organization in March 2020. As the pandemic continues to spread throughout the United States, businesses as well as federal, state and local governments have implemented significant actions to attempt to mitigate this public health crisis. Although the ultimate severity of the COVID-19 outbreak is uncertain at this time, the pandemic has had and will continue to have adverse impacts on the Company’s financial condition and results of operations, including, but not limited to:
• | On March 18, 2020, the Company temporarily closed all of its stores and subsequently furloughed the majority of its workforce. As different states and localities have begun to ease the regulations imposed to slow the spread of COVID-19, the Company has, in turn, recently begun to open a portion of its stores and expects to continue to do so over the coming weeks and months. The decision to reopen a store is driven by evaluating whether such decision is safe for the Company’s customers and employees as well as an evaluation of guidance provided by the federal, state and local governments. The duration of the impact of the COVID-19 pandemic is highly uncertain. There may be further outbreaks which could require the Company to close recently reopened stores, or it may take longer than the Company expects for conditions to improve sufficiently to allow reopening of additional stores. As a result, there can be no assurance as to whether recently reopened stores can remain open, whether or when any additional stores will be reopened or whether further store closures may be required. The Company experienced, and expects to continue to experience, significant reductions and volatility in demand for its retail products as customers are not able to purchase merchandise due to illness, quarantine or government or self-imposed restrictions placed on the Company’s stores’ operations. Additionally, social distancing measures or changes in consumer spending behaviors due to COVID-19 may continue to impact traffic in stores after normal operations are resumed and such actions could result in a loss of sales and profit. In addition, the Company expects to be impacted by the deterioration in the economic conditions in North America, which could have an impact on discretionary consumer spending. Finally, a so-called second wave of the COVID-19 pandemic could further delay the reopening of any of the Company’s stores and could also lead to further store closures. While it is premature to accurately predict the ultimate impact of these developments, the Company expects its results of operations will be adversely impacted in a significant manner. |
• | The Company has experienced and will continue to experience temporary or long-term disruptions in its supply chain, as the outbreak has resulted in travel disruptions and has impacted manufacturing and distribution throughout the |
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world. The receipt of products or raw material sourced from impacted areas has been and will continue to be slowed or disrupted in the coming months which could impact the fulfillment of merchandise orders from the Company’s brand partners. Furthermore, transportation delays and cost increases, more extensive travel restrictions, closures or disruptions of businesses and facilities or social, economic, political or labor instability in the affected areas, have impacted and will continue to impact the Company, its suppliers’ operations and its customers.
• | The Company has been and may continue to be required to change its plan for inventory receipts, which could place financial pressure on its brand partners. Such actions may negatively impact relationships with brand partners or adversely impact their financial performance and position. If this occurs, current brand partners’ ability to meet their obligations to the Company may be impacted or the Company may also be required to identify new brand partner relationships. |
• | The Company’s liquidity has been negatively impacted by the store closures. While the Company has obtained additional financing, further actions may be required to improve the Company’s cash position, including but not limited to, monetizing Company assets, elongating employee furloughs, and foregoing capital expenditures and other discretionary expenses. Failure to obtain additional financing or enhance the Company’s liquidity could lead to default on its current financing arrangements and impact the Company’s ability to meet its obligations as they come due. |
The Company cannot foresee whether the outbreak of COVID-19 will be effectively contained, nor can it predict the severity and duration of its impact. As such, impacts of COVID-19 to the Company are highly uncertain and the Company will continue to assess the financial impacts. The disruption to the global economy and to the Company’s business may lead to triggering events that may indicate that the carrying value of certain assets, including inventories, long-lived assets, intangibles, and goodwill, may not be recoverable.
The extent of the impact of COVID-19 on the Company’s operations and financial results depends on future developments and is highly uncertain due to the unknown duration and severity of the outbreak. The situation is changing rapidly and future impacts may materialize that are not yet known.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
The following table provides information regarding the Company's purchases of Common Stock during the first quarter of 2020.
Total Number of Shares Purchased | Average Price Paid per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Dollar Value of Shares that may yet be Purchased Under the Plans or Programs (1)($) | ||||||||
(thousands) | (thousands) | (millions) | |||||||||
February 2, 2020 – February 29, 2020 | 41 | 13.39 | — | 1,716 | |||||||
March 1, 2020 – April 4, 2020 | — | — | — | — | |||||||
April 5, 2020 – May 2, 2020 | 1 | 5.63 | — | — | |||||||
42 | 19.02 | — | |||||||||
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(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 $18 billion of Common Stock . As of February 2, 2020, $1,716 million of authorization remained unused. On March 26, 2020, the Company's Board of Directors rescinded its authorization of the remaining unused amount. |
Item 5. | Other Information. |
Forward-Looking Statements
This report and other reports, statements and information previously or subsequently filed by the Company with the SEC contain or may contain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the management of the Company at the time such statements are made. The following are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (i) statements preceded by, followed by or that include the words "may," "will," "could," "should," "believe," "expect," "future," "potential," "anticipate," "intend," "plan," "think," "estimate" or "continue" or the negative or other variations thereof, and (ii) statements regarding matters that are not historical facts. Such forward-looking statements are subject to various risks and uncertainties, including risks and uncertainties relating to:
• | the effects of the weather, natural disasters, and health pandemics, including the COVID-19 pandemic, on the Company’s business, including the ability to open stores, customer demand and its supply chain, as well as its consolidated results of operations, financial position and cash flows; |
• | the possible invalidity of the underlying beliefs and assumptions; |
• | the Company’s ability to successfully implement its Polaris strategy, including the ability to realize the anticipated benefits within the expected time frame or at all; |
• | the success of the Company’s operational decisions, such as product sourcing, merchandise mix and pricing, and marketing, and strategic initiatives, such as Growth stores, Backstage on-mall off-price business, and vendor direct expansion; |
• | general consumer-spending levels, including the impact of changes in general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, and the costs of basic necessities and other goods; |
• | competitive pressures from department stores, specialty stores, general merchandise stores, manufacturers’ outlets, off-price and discount stores, and all other retail channels, including the Internet, catalogs and television; |
• | the Company’s ability to remain competitive and relevant as consumers’ shopping behaviors migrate to other shopping channels and to maintain its brand and reputation; |
• | possible systems failures and/or security breaches, including any security breach that results in the theft, transfer or unauthorized disclosure of customer, employee or company information, or the failure to comply with various laws applicable to the Company in the event of such a breach; |
• | the cost of employee benefits as well as attracting and retaining quality employees; |
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• | transactions and strategy involving the Company's real estate portfolio; |
• | the seasonal nature of the Company's business; |
• | conditions to, or changes in the timing of, proposed transactions, and changes in expected synergies, cost savings and non-recurring charges; |
• | the potential for the incurrence of charges in connection with the impairment of intangible assets, including goodwill; |
• | possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions; |
• | possible actions taken or omitted to be taken by third parties, including customers, suppliers, business partners, competitors and legislative, regulatory, judicial and other governmental authorities and officials; |
• | changes in relationships with vendors and other product and service providers; |
• | currency, interest and exchange rates and other capital market, economic and geo-political conditions; |
• | unstable political conditions, civil unrest, terrorist activities and armed conflicts; |
• | the possible inability of the Company's manufacturers or transporters to deliver products in a timely manner or meet the Company's quality standards; |
• | the Company’s reliance on foreign sources of production, including risks related to the disruption of imports by labor disputes, regional and global health pandemics, and regional political and economic conditions; and |
• | duties, taxes, other charges and quotas on imports. |
In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the statements in the immediately preceding sentence and the statements under captions such as "Risk Factors" in this report and 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.
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Item 6. | Exhibits. |
4.1 | ||
4.2 | ||
4.3 | ||
4.4 | ||
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4.6 | ||
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4.18 | ||
4.19 | ||
4.20 | ||
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101 | The following financial statements from Macy's, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 2, 2020, filed on July 2, 2020, are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Changes in Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
________
*Constitutes a compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements 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/ ELISA D. GARCIA | |
Elisa D. Garcia Executive Vice President, Chief Legal Officer and Secretary | ||
By: | /s/ PAUL GRISCOM | |
Paul Griscom Vice President, Financial Reporting and Interim Chief Accounting Officer | ||
Date: July 2, 2020
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