UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the Fiscal Year Ended January 28, 2017February 3, 2018
| | Commission File Number: 1-13536 |
7 West Seventh Street
Cincinnati, Ohio 45202
(513) 579-7000
and
151 West 34th Street
New York, New York 10001
(212) 494-1602
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| Incorporated in Delaware | | I.R.S. No. 13-3324058 |
Securities Registered Pursuant to Section 12(b) of the Act:
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| Title of Each Class | | Name of Each Exchange on Which Registered |
| Common Stock, par value $.01 per share | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ý | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o
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| | (Do not check if a smaller reporting company) | | Smaller reporting company o | | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter (July 30, 2016)29, 2017) was approximately $11,052,402,0007,288,096,032.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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| Class | | Outstanding at February 24, 2017March 3, 2018 |
| Common Stock, $0.01 par value per share | | 304,258,647305,322,583 shares |
DOCUMENTS INCORPORATED BY REFERENCE
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| Document | Parts Into Which Incorporated |
Proxy Statement for the Annual Meeting of Stockholders to be held May 19, 2017 (Proxy Statement)18, 2018 | Part III |
Unless the context requires otherwise, references to “Macy’s” or the “Company” are references to Macy’s and its subsidiaries and references to “2017,” “2016,” “2015,” “2014,”“2014” and “2013” and “2012” are references to the Company’s fiscal years ended February 3, 2018, January 28, 2017, January 30, 2016, January 31, 2015 and February 1, 2014, and February 2, 2013, respectively. Fiscal year 2017 included 53 weeks; fiscal years 2016, 2015, 2014 and 2013 included 52 weeks; fiscal year 2012 included 53 weeks.
Forward-Looking Statements
This report and other reports, statements and information previously or subsequently filed by the Company with the Securities and Exchange Commission (the “SEC”) contain or may contain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the management of the Company at the time such statements are made. The following are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (i) statements preceded by, followed by or that include the words “may,” “will,” “could,” “should,” “believe,” “expect,” “future,” “potential,” “anticipate,” “intend,” “plan,” “think,” “estimate” or “continue” or the negative or other variations thereof, and (ii) statements regarding matters that are not historical facts. Such forward-looking statements are subject to various risks and uncertainties, including risks and uncertainties relating to:
the possible invalidity of the underlying beliefs and assumptions;
competitive pressures from department and specialty stores, general merchandise stores, manufacturers’ outlets, off-price and discount stores, and all other retail channels, including the Internet, 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;
general consumer-spending levels, including the impact of general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, mall vacancy issues, the costs of basic necessities and other goods and the effects of the weather or natural disasters;
conditions to, or changes in the timing of, proposed transactions, including planned store closures, and changes in expected synergies, cost savings and non-recurring charges;
the success of the Company’s operational decisions (e.g., product curation and marketing programs) and strategic initiatives;
possible systems failures and/or security breaches, including, any security breach that results in the theft, transfer or unauthorized disclosure of customer, employee or company information, or the failure to comply with various laws applicable to the Company in the event of such a breach;
the cost of employee benefits as well as attracting and retaining quality employees;
transactions involving the Company'sour real estate portfolio;
the seasonal nature of the Company’s business;
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;
severe or unseasonable weather, possible outbreaks of epidemic or pandemic diseases and natural disasters;
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 health pandemics, and regional political and economic conditions; and
duties, taxes, other charges and quotas on imports; andimports
possible systems failures and/or security breaches, including, any security breach that results in the theft, transfer or unauthorized disclosure of customer, employee or company information, or the failure to comply with various laws applicable to the Company in the event of such a breach.
In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the statements in the immediately preceding sentence and the statements under captions such as “Risk Factors” 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.
General
The Company is a corporation organized under the laws of the State of Delaware in 1985. The Company and its predecessors have been operating department stores since 1830. The Company operates 829approximately 850 stores in 4544 states, the District of Columbia, Guam and Puerto Rico. As of January 28, 2017,February 3, 2018, the Company's operations were conducted through Macy's, Bloomingdale's, Bloomingdale’s The Outlet, Macy’s Backstage, Bluemercurybluemercury and Macy’s China Limited. In addition, Bloomingdale's in Dubai, United Arab Emirates and Al Zahra, Kuwait are operated under license agreements with Al Tayer Insignia, a company of Al Tayer Group, LLC.
The Company sells a wide range of merchandise, including apparel and accessories (men’s, women’s and children’s), cosmetics, home furnishings and other consumer goods. The specific assortments vary by size of store, merchandising assortments and character of customers in the trade areas. Most stores are located at urban or suburban sites, principally in densely populated areas across the United States.
For 20162017, 20152016 and 20142015, the following merchandise constituted the following percentages of sales:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Women’s Accessories, Intimate Apparel, Shoes, Cosmetics and Fragrances | 38 | % | | 38 | % | | 38 | % | 38 | % | | 38 | % | | 38 | % |
| Women’s Apparel | 23 |
| | 23 |
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| 23 |
| | 23 |
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| Men’s and Children’s | 23 |
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| 23 |
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| Home/Miscellaneous | 16 |
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| | 16 |
| 16 |
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| | 100 | % | | 100 | % | | 100 | % | 100 | % | | 100 | % | | 100 | % |
In 20162017, the Company’s subsidiaries provided various support functions to the Company’s retail operations on an integrated, company-wide basis.
The Company’s bank subsidiary, FDS Bank, provides credit processing, certain collections, customer service and credit marketing services in respect of all credit card accounts that are owned either by Department Stores National Bank (“DSNB”), a subsidiary of Citibank, N.A., or FDS Bank and that constitute a part of the credit programs of the Company’s retail operations.
Macy’s Systems and Technology, Inc. (“MST”), a wholly-owned indirect subsidiary of the Company, provides operational electronic data processing and management information services to all of the Company’s operations other than Bluemercurybluemercury and Macy's China Limited.
Macy’s Merchandising Group, Inc. (“MMG”), a wholly-owned direct subsidiary of the Company, and its subsidiary Macy's Merchandising Group International, LLC, are responsible for the design, development and marketing of Macy’s private label brands and certain licensed brands. Bloomingdale’s uses MMG for a small portion of its private label merchandise. The Company believes that its private label merchandise differentiates its merchandise assortments from those of its competitors and delivers exceptional value to its customers. MMG also offers its services, either directly or indirectly, to unrelated third parties.
Macy’s Logistics and Operations (“Macy’s Logistics”), a division of a wholly-owned indirect subsidiary of the Company, provides warehousing and merchandise distribution services for the Company’s operations and digital customer fulfillment.
The Company’s executive offices are located at 7 West 7th Street, Cincinnati, Ohio 45202, telephone number: (513) 579-7000 and 151 West 34th Street, New York, New York 10001, telephone number: (212) 494-1602.
Employees
As of January 28, 2017February 3, 2018, excluding seasonal employees, the Company had approximately 148,300130,000 employees, primarily including regular full-time and part-time employees.part-time. Because of the seasonal nature of the retail business, the number of employees peaks in the holiday season. Approximately 10%7% of the Company’s employees as of January 28, 2017were represented by unions.unions as of February 3, 2018.
Seasonality
The retail business is seasonal in nature with a high proportion of sales and operating income generated in the months of November and December. Working capital requirements fluctuate during the year, increasing in mid-summer in anticipation of the fall merchandising season and increasing substantially prior to the holiday season when the Company carries significantly higher inventory levels.
Purchasing
The Company purchases merchandise from many suppliers, no one of which accounted for more than 5% of the Company’s net purchases during 20162017. The Company has no material long-term purchase commitments with any of its suppliers, and believes that it is not dependent on any one supplier. The Company considers its relations with its suppliers to be good.
Private Label Brands and Related Trademarks
The principal private label brands currently offered by the Company include Alfani, American Rag, Aqua, Bar III, Belgique, Charter Club, Club Room, Epic Threads, first impressions, Giani Bernini, Greg Norman for Tasso Elba, Holiday Lane, Home Design, Hotel Collection, Hudson Park, Ideology, I-N-C, jenni, JM Collection, John Ashford, Karen Scott, lune+aster, M-61, Maison Jules, Martha Stewart Collection, Material Girl, Morgan Taylor, Oake, Sky, Style & Co., Sutton Studio, Tasso Elba, Thalia Sodi, the cellar, and Tools of the Trade.
The trademarks associated with the Company's aforementioned private label brands, other than American Rag, Greg Norman for Tasso Elba, Martha Stewart Collection, Material Girl and Thalia Sodi are owned by the Company. The American Rag, Greg Norman, Martha Stewart Collection, Material Girl and Thalia Sodi brands are owned by third parties, which license the trademarks associated with such brands to Macy’s pursuant to agreements which have renewal rights that extend through 2050, 2020, 2027,2025, 2030 and 2030, respectively.
Competition
The retailingretail industry is intensely competitive. The Company’s operations compete with many retailingretail formats, including department stores, specialty stores, general merchandise stores, off-price and discount stores, manufacturers’ outlets, online retailers, catalogs and television shopping, among others. The Company seeks to attract customers by offering most wanted selections, obvious value, and distinctive marketing in stores that are located in premier locations, and by providing an exciting shopping environment and superior service through an omnichannel experience. Other retailers may compete for customers on some or all of these bases, or on other bases, and may be perceived by some potential customers as being better aligned with their particular preferences.
Available Information
The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge through its internet website at http://www.macysinc.com as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. The public also may read and copy any of these filings at the SEC’s Public Reference Room, 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-732-0330. The SEC also maintains an Internet site that contains the Company’s filings; the address of that site is http://www.sec.gov. In addition, the Company has made the following available free of charge through its website at http://www.macysinc.com:
Charters of the Audit Committee, Charter,
Compensation and Management Development Committee, Charter,
Finance Committee, Charter,
and Nominating and Corporate Governance Committee, Charter,
Corporate Governance Principles,
Lead Independent Director Policy,
Non-Employee Director Code of Business Conduct and Ethics, and
Code of Conduct.Conduct,
Standards for Director Independence,
Related Party Transaction Policy, and
Method to Facilitate Receipt, Retention and Treatment of Communications.
Any of these items are also available in print to any shareholder who requests them. Requests should be sent to the Corporate Secretary of Macy’s, Inc. at 7 West 7th Street, Cincinnati, OH 45202.
Executive Officers of the Registrant
The following table sets forth certain information as of March 24, 201723, 2018 regarding the executive officers of the Company:
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| Name | | Age | | Position with the Company |
Terry J. LundgrenJeff Gennette | | 6556 |
| | Executive Chairman and Chairman of the Board; Director |
Jeff Gennette | | 55 |
| | President,Board and Chief Executive Officer; Director |
Timothy Baxter | | 47 |
| | Chief Merchandising Officer |
| Elisa D. Garcia | | 5960 |
| | Chief Legal Officer and Secretary |
Robert B. Harrison | | 53 |
| | Chief Omnichannel and Operations Officer |
| Karen M. Hoguet | | 6061 |
| | Chief Financial Officer |
Jeffrey A. KantorDanielle L. Kirgan | | 5842 |
| | Chief Stores and Human Resources Officer |
Molly LangensteinHarry A. Lawton III | | 5343 |
| | Chief Private Brands Officer |
Richard A. Lennox | | 51 |
| | Chief Marketing Officer |
Justin S. MacFarlane | | 44 |
| | Chief Strategy, Analytics and Innovation Officer |
Patti H. Ongman | | 61 |
| | Chief Merchandise Planning Officer |
Tony Spring | | 52 |
| | Chairman and Chief Executive Officer, Bloomingdale'sPresident |
| Felicia Williams | | 5152 |
| | Executive Vice President, Controller and Enterprise Risk Officer |
Chief Executive Officer ("CEO") Transition
The Company announced that Terry J. Lundgren, the Company’s CEO since 2003 and Chairman since 2004, transitioned the position of CEO to Jeff Gennette on March 23, 2017. The transition is part of the Board of Directors’ succession plan that included Mr. Gennette’s election as president of Macy’s, Inc. in 2014. Mr. Lundgren will continue as Executive Chairman and Chairman of the Board and work side-by-side with Mr. Gennette as President and CEO.
Mr. Gennette was named President of Macy’s, Inc. in March 2014 after serving as Macy’s Chief Merchandising Officer since February 2009. From February 2008 to February 2009, Mr. Gennette served as Chairman and CEO of Macy’s West in San Francisco. He began his retail career in 1983 as an executive trainee at Macy’s West. He held positions of increasing responsibilities, including Vice President and Division Merchandise Manager for men’s collection and Senior Vice President and General Merchandise Manager for men’s and children’s apparel. In 2004, Mr. Gennette was appointed Executive Vice President and Director of Stores at Macy’s Central in Atlanta. From February 2006 to February 2008, Mr. Gennette was Chairman and Chief Executive Officer of Seattle-based Macy’s Northwest. During his career, Mr. Gennette also served as a Store Manager for FAO Schwarz and Director of Stores for Broadway Stores, Inc. Mr. Gennette, a native of San Diego, is a graduate of Stanford University.
Executive Officer Biographies
Terry J. LundgrenJeff Gennette has been Chief Executive ChairmanOfficer of the Company since March 2017 and Chairman of the Board since January 2004;2018; prior thereto he was Chief Executive Officer of the CompanyPresident from February 2003March 2014 to March 2017.
Jeff Gennette has been Chief Executive Officer since MarchAugust 2017, and President of the Company since March 2014; prior thereto he was the Chief Merchandising Officer from February 2009 to March 2014.
Tim Baxter has been2014, Chairman and Chief MerchandisingExecutive Officer of the Company sinceMacy’s West in San Francisco from February 2015; prior thereto he was Executive Vice President GMM - Ready to Wear from March 20132008 to February 2015; as2009 and Chairman and Chief Executive Vice President - Fashion Office, Licensed Businesses and Multicultural Business DevelopmentOfficer of Seattle-based Macy’s Northwest from March 2012 to March 2013; as Senior Vice President - Ready to Wear from June 2011 to March 2012; as Group Vice President Ready to Wear - Bridge/Impulse/NC/Neo Collections Sportswear from August 2010 to June 2011; and as Group Vice President Fashion Jewelry, Watches, Sterling Silver from March 2009 to July 2010.February 2006 through February 2008.
Elisa D. Garcia has been Chief Legal Officer and Secretary of the Company since September 2016; prior thereto she served as Chief Legal Officer of Office Depot, Inc. from 2013 to September 2016, and as Executive Vice President, General Counsel and Secretary from 2007 to 2013.
Robert B. Harrison has been Chief Omnichannel and Operations Officer of the Company since February 2017; prior thereto he served as Chief Omnichannel Officer from January 2013 to February 2017; as Executive Vice President - Omnichannel Strategy from July 2012 to January 2013; as Executive Vice President - Finance from 2011 to July 2012 and as President - Stores from 2009 to 2011.
Karen M. Hoguet has been Chief Financial Officer of the Company since October 1997.
Jeffrey A. KantorDanielle L. Kirgan has been Chief Stores and Human Resources Officer of the Company since FebruaryOctober 2017; prior thereto he served as Chief Stores Officer from February 2015 to February 2017; as Chairman of macys.com from February 2012 to February 2015; as President - Merchandising for macys.com from August 2010 to February 2012; as President - Merchandising for Home from May 2009 to August 2010 and as President for furniture for Macy’s Home Store from February 2006 to May 2009.
Molly Langenstein has been Chief Private Brands Officer of the Company since February 2015; prior thereto she served as ExecutiveSenior Vice President, - Men’s and KidsPeople at Macy’s Private BrandsAmerican Airlines Group, Inc. from April 2014October 2016 to February 2015; as ExecutiveOctober 2017, Chief Human Resources Officer at Darden Restaurants, Inc. from 2010 to 2016, Vice President, GMM - Millennial from March 2012 to March 2014; as ExecutiveGlobal Human Resources at ACI Worldwide, Inc. in 2009, and Vice President, Fashion and New Business DevelopmentHuman Resources at Conagra Foods, Inc. from July 20102004 to March 2012 and as Group Vice President DMM Neo, Impulse and Bridge Sportswear from March 2009 to July 2010.2008.
RichardHarry (Hal) A. LennoxLawton III has been Chief Marketing OfficerPresident of the Company since September 2016;2017; prior thereto he served as Senior Vice President, and Chief Marketing Officer of Toys “R” UsNorth America at eBay, Inc. from mid-20142015 to September 2016;2017 and as Executive Vice President/Chief Marketing and E-Commerce Officerheld a number of leadership positions at Zale’s CorporationHome Depot, Inc. from August 20092005 to July 2014.
Justin MacFarlane has been Chief Strategy, Analytics and Innovation Officer since February 2016; prior thereto he served as2015, including Senior Vice President - Corporate Strategy for ANN, Inc., a women's multichannel fashion retailer, from July 2010 to August 2015of Merchandising and as Director, Global Retail for AlixPartners, a global restructuring consulting and financial advisory firm, from August 2006 to June 2010.
Patti H. Ongman has been Chief Merchandise Planning Officerhead of the Company since February 2015; prior thereto she served as Executive Vice President - Omnichannel Strategies from June 2014 - February 2015; as Executive Vice President GMM - Center Core from October 2010 to May 2014 and as Executive Vice President GPM - Cosmetics, Fragrances and Shoes from February 2009 to September 2010.
Tony Spring has been Chairman and Chief Executive Officer of Bloomingdale’s since February 2014; prior thereto he served as President and Chief Operating Officer from February 2008 to February 2014; as Senior Executive Vice President from July 2005 to January 2008; and as Executive Vice President from April 1998 to July 2005.Home Depot’s online business.
Felicia Williams has been Executive Vice President, Controller and Enterprise Risk Officer of the Company since June 2016; prior thereto she served as Senior Vice President, Finance and Risk Management from February 2011 to June 2016; as2016, Senior Vice President, Treasury and Risk Management from September 2009 to February 2011; as2011, Vice President, Finance and Risk Management from October 2008 to September 2009;2009, and as Vice President, Internal Audit from March 2004 to October 2008.
Recent Developments
On April 4, 2018, the Company issued a press release announcing that Karen M. Hoguet has decided to retire. At the Company’s request, Ms. Hoguet will remain with the Company until February 2019 to ensure a smooth transition.
In evaluating the Company,Macy's, the risks described below and the matters described in “Forward-Looking Statements” should be considered carefully. Such risks and matters are numerous and diverse, may be experienced continuously or intermittently, and may vary in intensity and effect. Any of such risks and matters, individually or in combination, could have a material adverse effect on the Company'sour business, prospects, financial condition, results of operations and cash flows, as well as on the attractiveness and value of an investment in the Company'sMacy's securities.
The Company faces significant competition in the retail industry
Strategic, Operational and depends on its ability to differentiate itself in retail's ever-changing environment.Competitive Risks
The Company conducts its retail merchandising business under highly competitive conditions. Although the Company is one of the nation’s largest retailers, it has numerous and varied competitors at the national and local levels, including department stores, specialty stores, general merchandise stores, off-price and discount stores, manufacturers’ outlets, online retailers, catalogs and television shopping, among others. Competition
Macy’s strategic initiatives may intensify as the Company’s competitors enter into business combinations or alliances. Competition is characterized by many factors, including assortment, advertising, price, quality, service, location, reputation and credit availability. Any failure by the Company to compete effectivelynot be successful, which could negatively affect our profitability and growth.
We are pursuing strategic initiatives to achieve our objective of accelerating profitable growth in our stores and our digital operations. This includes the Company's businessadoption of new technologies, merchandising strategies and resultscustomer service initiatives all designed to improve the shopping experience. Our ability to achieve profitable growth is subject to the successful implementation of operations.
As consumers continue to migrate online, the Company faces pressures toour strategic plans. If these investments or initiatives do not only compete from a price perspective with its competitors, some of whom sell the same products, but also must differentiate itself to stay relevant in retail's ever-changing industry. The Company continues to significantly invest in its omnichannel capabilities in order to provide a seamless shopping experience to its customers between the Company's brickperform as expected or create implementation or operational difficulties, we may incur impairment charges and mortar locations and its online and mobile environments. Insufficient, untimely or misguided investments in this area could significantly impact the Company'sour profitability and growth and affect the Company's ability to attract new customers as well as maintain its existing ones.could suffer.
The Company’sOur sales and operating results depend on consumer preferences and consumer spending.
The fashion and retail industries are subject to sudden shifts in consumer trends and consumer spending. The Company’sOur sales and operating results depend in part on itsour ability to predict or respond to changes in fashion trends and consumer preferences in a timely manner. The Company developsWe develop new retail concepts and continuously adjusts itsadjust our industry position in certain major and private-label brands and product categories in an effort to satisfy customers. Any sustained failure to anticipate, identify and respond to emerging trends in lifestyle and consumer preferences could negatively affect the Company’sour business and results of operations. The Company’s
Our sales are significantly affected by discretionary spending by consumers. Consumer spending may be affected by many factors outside of the Company’sour control, including general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt and consumer behaviors towards incurring and paying debt, the costs of basic necessities and other goods, the strength of the U.S. Dollar relative to foreign currencies and the effects of the weather or natural disasters. Any decline in discretionary spending by consumers could negatively affect the Company'sour business and results of operations.
As the Company relieswe rely on the ability of itsour physical retail locations to remain relevant, providing desirable and sought-out shopping experiences is paramount to the Company'sour financial success. Changes in consumer shopping habits, financial difficulties at other anchor tenants, significant mall vacancy issues, mall violence and new mall developments could each adversely impact the traffic at current retail locations and lead to a decline in the Company'sour financial condition or performance.
We may not be able to successfully execute our real estate strategy.
We continue to explore opportunities to monetize our real estate portfolio, including sales of stores as well as non-store real estate such as warehouses, outparcels and parking garages. We also continue to evaluate our real estate portfolio to identify opportunities where the redevelopment value of our real estate exceeds the value of non-strategic operating locations. This strategy is multi-pronged and may include transactions, strategic alliances or other arrangements with mall developers or unrelated third-parties. Due to the cyclical nature of real estate markets, the performance of our real estate strategy is inherently volatile and could have a significant impact on our results of operations or financial condition.
Macy’s revenues and cash requirements are affected by the seasonal nature of our business.
Our business is seasonal, with a high proportion of revenues and operating cash flows generated during the second half of the year, which includes the fall and holiday selling seasons. A disproportionate amount of our revenues fall in the fourth quarter, which coincides with the holiday season. We incur significant additional expenses in the period leading up to the months of November and December in anticipation of higher sales volume in those periods, including for additional inventory, advertising and employees.
We depend on our ability to attract and retain quality employees.
Our business is dependent upon attracting and retaining quality employees. Macy's has a large number of employees, many of whom are in entry level or part-time positions with historically high rates of turnover. Macy's ability to meet our labor needs while controlling the costs associated with hiring and training new employees is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics. In addition, as a large and complex enterprise operating in a highly competitive and challenging business environment, Macy's is highly dependent upon management personnel to develop and effectively execute successful business strategies and tactics. Any
circumstances that adversely impact our ability to attract, train, develop and retain quality employees throughout the organization could negatively affect our business and results of operations.
Macy's depends on the success of advertising and marketing programs.
Our business depends on effective marketing and high customer traffic. Macy's has many initiatives in this area, and we often change advertising and marketing programs. There can be no assurance as to our continued ability to effectively execute our advertising and marketing programs, and any failure to do so could negatively affect our business and results of operations.
If cash flows from our private label credit card decrease, our financial and operational results may be negatively impacted.
We sold most of our credit accounts and related receivables to Citibank. Following the sale, we share in the economic performance of the credit card program with Citibank. Deterioration in economic or political conditions could adversely affect the volume of new credit accounts, the amount of credit card program balances and the ability of credit card holders to pay their balances. These conditions could result in Macy’s receiving lower payments under the credit card program.
Credit card operations are subject to many federal and state laws that may impose certain requirements and limitations on credit card providers. Citibank and our subsidiary bank, FDS Bank, may be required to comply with regulations that may negatively impact the operation of our private label credit card. In turn, this negative impact may affect our revenue streams derived from the sale of such credit card accounts and negatively impact our financial results.
Gross margins could suffer if we are unable to effectively manage our inventory.
Our profitability depends on our ability to manage inventory levels and respond to shifts in consumer demand patterns. Overestimating customer demand for merchandise will likely result in the need to record inventory markdowns and sell excess inventory at clearance prices which would negatively impact our gross margins and operating results. Underestimating customer demand for merchandise can lead to inventory shortages, missed sales opportunities and negative customer experiences.
Our defined benefit plan funding requirements or plan settlement expense could impact our financial results and cash flow.
Significant changes in interest rates, decreases in the fair value of plan assets and benefit payments could affect the funded status of our plans and could increase future funding requirements of the plans. A significant increase in future funding requirements could have a negative impact on our cash flows, financial condition or results of operations.
As of February 3, 2018, we had unrecognized actuarial losses of $992 million for the funded defined benefit pension plan (the “Pension Plan”) and $244 million for the unfunded defined benefit supplementary retirement plan (the “SERP”). These plans allow eligible retiring employees to receive lump sum distributions of benefits earned. Under applicable accounting rules, if annual lump sum distributions exceed an actuarially determined threshold of the total of the annual service and interest costs, we would be required to recognize in the current period of operations a settlement expense of a portion of the unrecognized actuarial loss and could have a negative impact on our results of operations.
Increases in the cost of employee benefits could impact our financial results and cash flow.
Our expenses relating to employee health benefits are significant. Unfavorable changes in the cost of such benefits could negatively affect our financial results and cash flow. Healthcare costs have risen significantly in recent years, and recent legislative and private sector initiatives regarding healthcare reform have resulted and could continue to result in significant changes to the U.S. healthcare system. Due to uncertainty regarding legislative or regulatory changes, we are not able to fully determine the impact that future healthcare reform will have on our company-sponsored medical plans.
If our company’s reputation and brand are not maintained at a high level, our operations and financial results may suffer.
We believe our reputation and brand are partially based on the perception that we act equitably and honestly in dealing with our customers, employees, business partners and shareholders. Our reputation and brand may be deteriorated by any incident that erodes the trust or confidence of our customers or the general public, particularly if the incident results in significant adverse publicity or governmental inquiry. In addition, information concerning us, whether or not true, may be instantly and easily posted on social media platforms at any time, which information may be adverse to our reputation or brand. The Company’sharm may be immediate without affording us an opportunity for redress or correction. If our reputation or
brand is damaged, our customers may refuse to continue shopping with us, potential employees may be unwilling to work for us, business partners may be discouraged from seeking future business dealings with us and, as a result, our operations and financial results may suffer.
Macy's faces significant competition in the retail industry and we depend on our ability to differentiate Macy's in retail's ever-changing environment.
We conduct our retail merchandising business under highly competitive conditions. Although Macy's is one of the nation’s largest retailers, we have numerous and varied competitors at the national and local levels, including department stores, specialty stores, general merchandise stores, off-price and discount stores, manufacturers’ outlets, online retailers, catalogs and television shopping, among others. Competition may intensify as our competitors enter into business combinations or alliances. Competition is characterized by many factors, including assortment, advertising, price, quality, service, location, reputation and credit availability. Any failure by us to compete effectively could negatively affect our business and results of operations.
As consumers continue to migrate online, we face pressures to not only compete from a price perspective with our competitors, some of whom sell the same products, but also to differentiate Macy's to stay relevant in retail's ever-changing industry. We continue to significantly invest in our omnichannel capabilities in order to provide a seamless shopping experience to our customers between our brick and mortar locations and our online and mobile environments. Insufficient, untimely or misguided investments in this area could significantly impact our profitability and growth and affect our ability to attract new customers, as well as maintain our existing ones.
In addition, declining customer store traffic and migration of sales from brick and mortar stores to digital platforms could lead to store closures, restructuring and other costs that could adversely impact our results of operations and cash flows.
Our sales and operating results could be adversely affected by product safety concerns.
If Macy's merchandise offerings do not meet applicable safety standards or consumers' expectations regarding safety, we could experience decreased sales, increased costs and/or be exposed to legal and reputational risk. Events that give rise to actual, potential or perceived product safety concerns could expose Macy's to government enforcement action and/or private litigation. Reputational damage caused by real or perceived product safety concerns could negatively affect our business and results of operations.
Technology and Data Security Risks
A material disruption in our computer systems could adversely affect our business or results of operations.
We rely extensively on our computer systems to process transactions, summarize results and manage our business. Our computer systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyber-attack or other security breaches, catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes, acts of war or terrorism, and usage errors by our employees. If our computer systems are damaged or cease to function properly, including a material disruption in our ability to authorize and process transactions at our stores or on our online systems, we may have to make a significant investment to fix or replace them, and we may suffer loss of critical data and interruptions or delays in our operations. Any material interruption in our computer systems could negatively affect our business and results of operations.
If our technology-based e-commerce systems do not function properly, our operating results could be materially adversely affected.
Customers are increasingly using computers, tablets and smart phones to shop online and to do price and comparison shopping. We strive to anticipate and meet our customers’ changing expectations and are focused on building a seamless shopping experience across our omnichannel business. Any failure to provide user-friendly, secure e-commerce platforms that offer a variety of merchandise at competitive prices with low cost and quick delivery options that meet customers’ expectations could place us at a competitive disadvantage, result in the loss of e-commerce and other sales, harm our reputation with customers and have a material adverse impact on the growth of our business and our operating results.
A breach of information technology systems could adversely affect our reputation, business partner and customer relationships, operations and result in high costs.
Through our sales, marketing activities, and use of third-party information, we collect and store certain non-public personal information that customers provide to purchase products or services, enroll in promotional programs, register on websites, or otherwise communicate to us. This may include phone numbers, driver license numbers, contact preferences, personal information stored on electronic devices, and payment information, including credit and debit card data. We
gather and retain information about employees in the normal course of business. We may share information about such persons with vendors that assist with certain aspects of our business. In addition, our online operations depend upon the transmission of confidential information over the Internet, such as information permitting cashless payments.
We employ safeguards for the protection of this information and have made significant investments to secure access to our information technology network. For instance, we have implemented authentication protocols, installed firewalls and anti-virus/anti-malware software, conducted continuous risk assessments, and established data security breach preparedness and response plans. We also employ encryption and other methods to protect our data, promote security awareness with our associates and work with business partners in an effort to create secure and compliant systems.
However, these protections may be compromised as a result of third-party security breaches, burglaries, cyberattack, errors by employees or employees of third-party vendors, or contractors, misappropriation of data by employees, vendors or unaffiliated third-parties, or other irregularities that may result in persons obtaining unauthorized access to company data.
Retail data frequently targeted by cybercriminals is consumer credit card data, personally identifiable information, including social security numbers, and health care information. For retailers, point of sale and e-commerce websites are often attacked through compromised credentials, including those obtained through phishing, vishing and credential stuffing. Other methods of attack include advanced malware, the exploitation of software and operating vulnerabilities, and physical device tampering/skimming at card reader units and we believe these attack methods will continue to evolve.
Despite instituting controls for the protection of such information, no commercial or government entity can be entirely free of vulnerability to attack or compromise given that the techniques used to obtain unauthorized access, disable or degrade service change frequently. During the normal course of business, we have experienced and expect to continue to experience attempts to compromise our information systems. Unauthorized parties may attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deception to employees, contractors, vendors and temporary staff. We may be unable to protect the integrity of our systems or company data. An alleged or actual unauthorized access or unauthorized disclosure of non-public personal information could:
materially damage our reputation and brand, negatively affect customer satisfaction and loyalty, expose us to individual claims or consumer class actions, administrative, civil or criminal investigations or actions, and infringe on proprietary information; and
cause us to incur substantial costs, including costs associated with remediation of information technology systems, customer protection costs and incentive payments for the maintenance of business relationships, litigation costs, lost revenues resulting from negative changes in consumer shopping patterns, unauthorized use of proprietary information or the failure to retain or attract customers following an attack. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be unavailable or insufficient to cover all losses or all types of claims that may arise in the continually evolving area of cyber risk.
Supply Chain and Third Party Risks
Macy's depends upon designers, vendors and other sources of merchandise, goods and services. Our business could be affected by disruptions in, or other legal, regulatory, political or economic issues associated with, our supply network.
Our relationships with established and emerging designers have been a significant contributor to Macy's past success. Our ability to find qualified vendors and access products in a timely and efficient manner is often challenging, particularly with respect to goods sourced outside the United States. Our procurement of goods and services from outside the United States is subject to risks associated with political or financial instability, trade restrictions, tariffs, currency exchange rates, transport capacity and costs and other factors relating to foreign trade. We source the majority of our merchandise from manufacturers located outside of the U.S., primarily Asia, and any major changes in tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of unilateral tariffs on imported goods, could have a material adverse effect on our business, results of operations and liquidity. In addition, the procurement of all our goods and services are subject to the effects of price increases which we may or may not be able to pass through to our customers. All of these factors may affect our ability to access suitable merchandise on acceptable terms, are beyond our control and could negatively affect our business and results of operations
Disruption of global sourcing activities and Macy's own brands’ quality concerns could negatively impact brand reputation and earnings.
Economic and civil unrest in areas of the world where we source products, as well as shipping and dockage issues, could adversely impact the availability or cost of our products, or both. Most of Macy’s goods imported to the U.S. arrive from Asia through ports located on the U.S. west coast and are subject to potential disruption due to labor unrest, security issues or natural disasters affecting any or all of these ports. In addition, in recent years, we have substantially increased the number and types of merchandise that are sold under Macy’s proprietary brands. While we have focused on the quality of our proprietary branded products, we rely on third-parties to manufacture these products. Such third-party manufacturers may prove to be unreliable, the quality of our globally sourced products may vary from expectations and standards, the products may not meet applicable regulatory requirements which may require us to recall these products, or the products may infringe upon the intellectual property rights of other third-parties. As we seek indemnities from manufacturers of these products, the uncertainty of recovering on such indemnity and the lack of understanding of U.S. product liability laws in certain foreign jurisdictions make it more likely that we may have to respond to claims or complaints from customers.
Parties with whom Macy's does business may be subject to insolvency risks or may otherwise become unable or unwilling to perform on their obligations to us.
Macy's is a party to contracts, transactions and business relationships with various third parties, including, without limitation, vendors, suppliers, service providers, lenders and participants in joint ventures, strategic alliances and other joint commercial relationships, pursuant to which such third parties have performance, payment and other obligations to Macy's. In some cases, we depend upon such third parties to provide essential leaseholds, products, services or other benefits, including with respect to store and distribution center locations, merchandise, advertising, software development and support, logistics, other agreements for goods and services in order to operate our business in the ordinary course, extensions of credit, credit card accounts and related receivables, and other vital matters. Current economic, industry and market conditions could result in increased risks to Macy's associated with the potential financial distress or insolvency of such third parties. If any of these third parties were to become subject to bankruptcy, receivership or similar proceedings, the rights and benefits with respect to our contracts, transactions and business relationships with such third parties could be terminated, modified in a manner adverse to us, or otherwise impaired. We may be unable to arrange for alternate or replacement contracts, transactions or business relationships on terms as favorable as existing contracts, transactions or business relationships. Our inability to do so could negatively affect our cash flows, financial condition and results of operations.
Global, Legal and External Risks
Macy’s business is subject to unfavorable economic and political conditions and other related risks.
Unfavorable global, domestic or regional economic or political conditions and other developments and risks could negatively affect the Company’sour business and results of operations. For example, unfavorable changes related to interest rates, rates of economic growth, fiscal and monetary policies of governments, inflation, deflation, consumer credit availability, consumer debt levels, consumer debt payment behaviors, tax rates and policy, unemployment trends, energy prices, and other matters that influence the availability and cost of merchandise, consumer confidence, spending and tourism could negatively affect the Company’sour business and results of operations. These same conditions and related risks could affect the success of the Company's credit card program. Following the sale of most of the Company's credit accounts and related receivables to Citibank, the Company shares in the economic performance of the credit card program with CitiBank. Deterioration in economic or political conditions could adversely affect the volume of new credit accounts, the amount of credit card program balances and the ability of credit card holders to pay their balances. These conditions could result in the Company receiving lower payments under the credit card program. In addition, unstable political conditions, civil unrest, terrorist activities and armed conflicts may disrupt commerce and could negatively affect the Company’sour business and results of operations.
The Company'sOur effective tax rate is impacted by a number of factors, including changes in federal or state tax law, interpretation of existing laws and the ability to defend and support the tax positions taken on historical tax returns. Certain changes in any of these factors could materially impact the effective tax rate and the Company's net income.
The Company’s revenues and cash requirements are affected by the seasonal nature of its business.
The Company’s business is seasonal, with a high proportion of revenues and operating cash flows generated during the second half of the year, which includes the fall and holiday selling seasons. A disproportionate amount of the Company's revenues fall in the fourth quarter, which coincides with the holiday season. In addition, the Company incurs significant additional expenses in the period leading up to the months of November and December in anticipation of higher sales volume in those periods, including for additional inventory, advertising and employees.
The Company’sOur business could be affected by extreme weather conditions, regional or global health pandemics or natural disasters.
Extreme weather conditions in the areas in which the Company’sour stores are located could negatively affect the Company’sour business and results of operations. For example, frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather conditions over a prolonged period could make it difficult for the Company’sour customers to travel to itsour stores and thereby reduce the Company’sour sales and profitability. The Company’sOur business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could reduce demand for a portion of the Company’sour inventory and thereby reduce the Company'sour sales and profitability. In addition, extreme weather conditions could result in disruption or delay of production and delivery of materials and products in the Company'sour supply chain and cause staffing shortages in the Company'sour stores.
The Company'sOur business and results of operations could also be negatively affected if a regional or global health pandemic were to occur, depending upon its location, duration and severity. To halt or delay the spread of disease, local, regional or national governments might limit or ban public gatherings or customers might avoid public places, such as the Company'sour stores. A
regional or global health pandemic might also result in disruption or delay of production and delivery of materials and products in the Company'sour supply chain and cause staffing shortages in the Company'sour stores.
In addition, naturalNatural disasters such as hurricanes, tornadoes and earthquakes, or a combination of these or other factors, could damage or destroy the Company’sour facilities or make it difficult for customers to travel to itsour stores, thereby negatively affecting the Company’sour business and results of operations.
The Company’s defined benefit plan funding requirements or plan settlement expense could impact the Company’s financial results and cash flow.
Significant changes in interest rates, decreases in the fair value of plan assets and benefit payments could affect the funded status of the Company’s plans and could increase future funding requirements of the plans. A significant increase in future funding requirements could have a negative impact on the Company’s cash flows, financial condition or results of operations.
As of January 28, 2017, the Company had unrecognized actuarial losses of $1,232 million for the funded defined benefit pension plan (the “Pension Plan”) and $248 million for the unfunded defined benefit supplementary retirement plan (the “SERP”). These plans allow eligible retiring employees to receive lump sum distributions of benefits earned. Under applicable accounting rules, if annual lump sum distributions exceed an actuarially determined threshold of the total of the annual service and interest costs, the Company would be required to recognize in the current period of operations a settlement expense of a portion of the unrecognized actuarial loss and could have a negative impact on the Company’s results of operations.
Increases in the cost of employee benefits could impact the Company’s financial results and cash flow.
The Company’s expenses relating to employee health benefits are significant. Unfavorable changes in the cost of such benefits could negatively affect the Company’s financial results and cash flow. Healthcare costs have risen significantly in recent years, and recent legislative and private sector initiatives regarding healthcare reform have resulted and could continue to result in significant changes to the U.S. healthcare system. Due to uncertainty regarding legislative or regulatory changes to the Affordable Care Act and related legislation, the Company is not able at this time to fully determine the impact that future healthcare reform will have on Company-sponsored medical plans.
Inability to access capital markets could adversely affect the Company’s business or financial condition.
Changes in the credit and capital markets, including market disruptions, limited liquidity and interest rate fluctuations, may increase the cost of financing or restrict the Company’s access to this potential source of future liquidity. A decrease in the ratings that rating agencies assign to the Company’s short and long-term debt may negatively impact the Company’s access to the debt capital markets and increase the Company’s cost of borrowing. In addition, the Company’s bank credit agreements require the Company to maintain specified interest coverage and leverage ratios. The Company’s ability to comply with the ratios may be affected by events beyond its control, including prevailing economic, financial and industry conditions. If the Company’s results of operations or operating ratios deteriorate to a point where the Company is not in compliance with its debt covenants, and the Company is unable to obtain a waiver, much of the Company’s debt would be in default and could become due and payable immediately. The Company’s assets may not be sufficient to repay in full this indebtedness, resulting in a need for an alternate source of funding. The Company cannot make any assurances that it would be able to obtain such an alternate source of funding on satisfactory terms, if at all, and its inability to do so could cause the holders of its securities to experience a partial or total loss of their investments in the Company.
The Company depends on its ability to attract and retain quality employees.
The Company’s business is dependent upon attracting and retaining quality employees. The Company has a large number of employees, many of whom are in entry level or part-time positions with historically high rates of turnover. The Company’s ability to meet its labor needs while controlling the costs associated with hiring and training new employees is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics. In addition, as a large and complex enterprise operating in a highly competitive and challenging business environment, the Company is highly dependent upon management personnel to develop and effectively execute successful business strategies and tactics. Any circumstances that adversely impact the Company’s ability to attract, train, develop and retain quality employees throughout the organization could negatively affect the Company’s business and results of operations.
The Company depends upon designers, vendors and other sources of merchandise, goods and services. The Company's business could be affected by disruptions in, or other legal, regulatory, political or economic issues associated with, the Company's supply network.
The Company’s relationships with established and emerging designers have been a significant contributor to the Company’s past success. The Company’s ability to find qualified vendors and access products in a timely and efficient manner is often challenging, particularly with respect to goods sourced outside the United States. The Company’s procurement of goods and services from outside the United States is subject to risks associated with political or financial
instability, trade restrictions, tariffs, currency exchange rates, transport capacity and costs and other factors relating to foreign trade. The Company sources the majority of its merchandise from manufacturers located outside of the U.S., primarily Asia, and any major changes in tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of unilateral tariffs on imported goods, could have a material adverse effect on the Company's business, results of operations and liquidity. The Company is also subject to costs and uncertainties associated with efforts to identify and disclose sources of "conflict minerals" used in products that the Company causes to be manufactured and potential sell-through difficulties and reputational damage that may be associated with the inability of the Company to determine that such products are "DRC conflict-free." In addition, the Company’s procurement of all its goods and services is subject to the effects of price increases which the Company may or may not be able to pass through to its customers. All of these factors may affect the Company’s ability to access suitable merchandise on acceptable terms, are beyond the Company’s control and could negatively affect the Company’s business and results of operations
The Company's sales and operating results could be adversely affected by product safety concerns.
If the Company's merchandise offerings do not meet applicable safety standards or consumers' expectations regarding safety, the Company could experience decreased sales, increased costs and/or be exposed to legal and reputational risk. Events that give rise to actual, potential or perceived product safety concerns could expose the Company to government enforcement action and/or private litigation. Reputational damage caused by real or perceived product safety concerns could negatively affect the Company's business and results of operations.
The Company depends on the success of its advertising and marketing programs.
The Company’s business depends on effective marketing and high customer traffic. The Company has many initiatives in this area, and often changes its advertising and marketing programs. There can be no assurance as to the Company’s continued ability to effectively execute its advertising and marketing programs, and any failure to do so could negatively affect the Company’s business and results of operations.
Parties with whom the Company does business may be subject to insolvency risks or may otherwise become unable or unwilling to perform their obligations to the Company.
The Company is a party to contracts, transactions and business relationships with various third parties, including, without limitation, vendors, suppliers, service providers, lenders and participants in joint ventures, strategic alliances and other joint commercial relationships, pursuant to which such third parties have performance, payment and other obligations to the Company. In some cases, the Company depends upon such third parties to provide essential leaseholds, products, services or other benefits, including with respect to store and distribution center locations, merchandise, advertising, software development and support, logistics, other agreements for goods and services in order to operate the Company’s business in the ordinary course, extensions of credit, credit card accounts and related receivables, and other vital matters. Current economic, industry and market conditions could result in increased risks to the Company associated with the potential financial distress or insolvency of such third parties. If any of these third parties were to become subject to bankruptcy, receivership or similar proceedings, the rights and benefits of the Company in relation to its contracts, transactions and business relationships with such third parties could be terminated, modified in a manner adverse to the Company, or otherwise impaired. The Company cannot make any assurances that it would be able to arrange for alternate or replacement contracts, transactions or business relationships on terms as favorable as the Company’s existing contracts, transactions or business relationships, if at all. Any inability on the part of the Company to do so could negatively affect the Company’s cash flows, financial condition and results of operations.
A material disruption in the Company’s computer systems could adversely affect the Company’s business or results of operations.
The Company relies extensively on its computer systems to process transactions, summarize results and manage its business. The Company’s computer systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyber-attack or other security breaches, catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes, acts of war or terrorism, and usage errors by the Company’s employees. If the Company’s computer systems are damaged or cease to function properly, the Company may have to make a significant investment to fix or replace them, and the Company may suffer loss of critical data and interruptions or delays in its operations. Any material interruption in the Company’s computer systems could negatively affect its business and results of operations.
A breach of information technology systems could adversely affect the Company's reputation, business partner and customer relationships, operations and result in high costs.
Through the Company's sales, marketing activities, and use of third-party information, the Company collects and stores certain non-public personal information that customers provide to purchase products or services, enroll in promotional programs, register on websites, or otherwise communicate to the Company. This may include, but is not limited to, phone numbers, driver license numbers, contact preferences, personal information stored on electronic devices, and payment information, including credit and debit card data. The Company also gathers and retains information about employees in the normal course of business. The Company may share information about such persons with vendors that assist with certain aspects of the Company's business. In addition, the Company's online operations depend upon the transmission of confidential information over the Internet, such as information permitting cashless payments.
The Company employs safeguards for the protection of such information. These protections may be compromised as a result of third-party security breaches, burglaries, cyberattack, errors by employees or employees of third-party vendors, or contractors, misappropriation of data by employees, vendors or unaffiliated third-parties, or other irregularities that may result in persons obtaining unauthorized access to company data. Despite instituting controls for the protection of such information, no commercial or government entity can be entirely free of vulnerability to attack or compromise given that the techniques used to obtain unauthorized access, disable or degrade service change frequently. During the normal course of business, the Company has experienced and expects to continue to experience attempts to compromise information systems security. Unauthorized parties may attempt to gain access to the Company's systems or facilities, or those of third parties with whom the Company does business, through fraud, trickery, or other forms of deception to employees, contractors, vendors and temporary staff. The Company may be unable to protect the integrity of systems or company data. Moreover, an alleged or actual unauthorized access or unauthorized disclosure of non-public personal information could:
materially damage the Company's reputation and brand, negatively affect customer satisfaction and loyalty, expose the Company to individual claims or consumer class actions, administrative, civil or criminal investigations or actions, and infringe on proprietary information; and
cause the Company to incur substantial costs, including but not limited to, costs associated with remediation of information technology systems, customer protection costs and incentive payments for the maintenance of business relationships, litigation costs, lost revenues resulting from negative changes in consumer shopping patterns, unauthorized use of proprietary information or the failure to retain or attract customers following an attack. While the Company maintains insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be unavailable or insufficient to cover all losses or all types of claims that may arise in the continually evolving area of cyber risk.
Disruption of global sourcing activities and the Company's own brands' quality concerns could negatively impact brand reputation and earnings
Economic and civil unrest in areas of the world where the Company source products, as well as shipping and dockage issues, could adversely impact the availability or cost of the Company’s products, or both. Most of the Company’s goods imported to the U.S. arrive from Asia through ports located on the U.S. west coast and are, therefore, subject to potential disruption due to labor unrest, security issues or natural disasters affecting any or all of these ports. In addition, in recent years, the Company has substantially increased the number and types of merchandise that are sold under the Company’s proprietary brands. While the Company has focused on the quality of its proprietary branded products, the Company relies on third-parties to manufacture these products. Such third-party manufacturers may prove to be unreliable, the quality of the Company’s globally sourced products may vary from the Company’s expectations and standards, such products may not meet applicable regulatory requirements which may require the Company to recall these products, or such products may infringe upon the intellectual propriety rights of other third-parties. Moreover, as the Company seeks indemnities from manufactures of these products, the uncertainty of realization of any such indemnity and the lack of understanding of U.S. product liability laws in certain foreign jurisdictions make it more likely that the Company may have to respond to claims or complaints from customers.
Litigation, legislation or regulatory developments could adversely affect the Company’sour business and results of operations.
The Company isWe are subject to various federal, state and local laws, rules, regulations, inquiries and initiatives in connection with both itsour core business operations and itsour credit card and other ancillary operations (including the Credit Card Act of 2009 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”))2010).
Recent and future developments relating to such matters could increase the Company'sour compliance costs and adversely affect the profitability of itsour credit card and other operations. The Company isWe are also subject to anti-bribery, customs, child labor, truth-in-advertising and other laws, including consumer protection regulations and zoning and occupancy ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise and the operation of retail stores and warehouse facilities. Although the Company undertakeswe undertake to monitor changes in these laws, if these laws change without the Company'sour knowledge, or are violated by importers, designers, manufacturers, distributors or agents, the Companywe could experience delays in shipments and receipt of goods or be subject to fines or other penalties under the controlling regulations, any of which could negatively affect the Company'sour business and results of operations. In addition, the Company iswe are regularly involved in various litigation matters that arise in the ordinary course of itsour business. Adverse outcomes in current or future litigation could negatively affect the Company’sour financial condition, results of operations and cash flows.
The CompanyFinancial Risks
Inability to access capital markets could adversely affect our business or financial condition.
Changes in the credit and capital markets, including market disruptions, limited liquidity and interest rate fluctuations, may not be ableincrease the cost of financing or restrict our access to successfully execute its real estate strategy.
The Company continuesthis potential source of future liquidity. A decrease in the ratings that rating agencies assign to explore opportunities to monetize its real estate portfolioMacy’s short and is focused on opportunities for sale transactions and, in some cases, redevelopment of assets. This strategy is multi-pronged andlong-term debt may include transactions, strategic alliances or other arrangements with mall developers or unrelated third-parties. Duenegatively impact our access to the cyclical naturedebt capital markets and increase our cost of real estate markets,borrowing. In addition, our bank credit agreements require us to maintain specified interest coverage and leverage ratios. Our ability to comply with the performance of the Company's real estate strategy is inherently volatileratios may be affected by events beyond our control, including prevailing economic, financial and could have a significant impact on the Company’sindustry conditions. If our results of operations or financial condition.operating ratios deteriorate to a point where we are not in compliance with our debt covenants, and we are unable to obtain a waiver, much of our debt would be in default and could become due and payable immediately. Our assets may not be sufficient to repay in full this indebtedness, resulting in a need for an alternate source of funding. We cannot make any assurances that we would be able to obtain such an alternate source of funding on satisfactory terms, if at all, and our inability to do so could cause the holders of our securities to experience a partial or total loss of their investments in Macy's.
Factors beyond the Company’sour control could affect the Company’sMacy's stock price.
The Company’sMacy’s stock price, like that of other retail companies, is subject to significant volatility because of many factors, including factors beyond the control of the Company.our control. These factors may include:
general economic, stock, credit and real estate market conditions;
risks relating to the Company’sMacy’s business and its industry, including those discussed above;
strategic actions by the Companyus or itsour competitors;
variations in the Company’sour quarterly results of operations;
future sales or purchases of the Company’s common stock;Macy’s Common Stock; and
investor perceptions of the investment opportunity associated with the Company’s common stockMacy’s Common Stock relative to other investment alternatives.
In addition, the CompanyWe may fail to meet the expectations of itsour stockholders or of analysts at some time in the future. If the analysts that regularly follow the Company’sMacy’s stock lower their rating or lower their projections for future growth and financial performance, the Company’sMacy’s stock price could decline. Also, sales of a substantial number of shares of the Company’s common stockMacy’s Common Stock in the public market or the appearance that these shares are available for sale could adversely affect the market price of the Company’s common stock.Macy’s Common Stock.
| |
| Item 1B. | Unresolved Staff Comments. |
None.
The properties of the Company consist primarily of stores and related facilities, including a logistics network. The Company also owns or leases other properties, including corporate office space in Cincinnati and New York and other facilities at which centralized operational support functions are conducted. As of January 28, 2017February 3, 2018, the operations of the Company included 829852 stores in 4544 states, the District of Columbia, Puerto Rico and Guam, comprising a total of approximately130approximately 128 million square feet. Of such stores, 382370 were owned, 330359 were leased, 113118 stores were operated under arrangements where the Company owned the building and leased the land and 4five stores were comprised of partly owned and partly leased buildings. All owned properties are held free and clear of mortgages. Pursuant to various shopping center agreements, the Company is obligated to operate certain stores for periods of up to 20 years. Some of these agreements require that the stores be operated under a particular name. Most leases require the Company to pay real estate taxes, maintenance and other costs; some also require additional payments based on percentages of sales and some contain purchase options. Certain of the Company’s real estate leases have terms that extend for a significant number of years and provide for rental rates that increase or decrease over time.
The Company's operations were conducted through the following branded store locations:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Macy's | 673 |
| | 737 |
| | 773 |
| 660 |
| | 673 |
| | 737 |
|
| Bloomingdale's | 55 |
| | 54 |
| | 50 |
| 55 |
| | 55 |
| | 54 |
|
| Bluemercury | 101 |
| | 77 |
| | — |
| |
| bluemercury | | 137 |
| | 101 |
| | 77 |
|
| | 829 |
| | 868 |
| | 823 |
| 852 |
| | 829 |
| | 868 |
|
Store count activity was as follows:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Store count at beginning of fiscal year | 868 |
| | 823 |
| | 840 |
| 829 |
| | 868 |
| | 823 |
|
| Stores opened | 27 |
| | 26 |
| | 5 |
| 38 |
| | 27 |
| | 26 |
|
| Acquisition of Bluemercury stores | — |
| | 62 |
| | — |
| |
| Acquisition of bluemercury stores | | — |
| | — |
| | 62 |
|
| Stores closed or consolidated into existing centers | (66 | ) | | (43 | ) | | (22 | ) | (15 | ) | | (66 | ) | | (43 | ) |
| Store count at end of fiscal year | 829 |
| | 868 |
| | 823 |
| 852 |
| | 829 |
| | 868 |
|
Additional information about the Company’s stores as of January 28, 2017February 3, 2018 is as follows:
| | | Geographic Region | | Total | | Owned | | Leased | |
Subject to a Ground Lease | | Partly Owned and Partly Leased | | Total | | Owned | | Leased | |
Subject to a Ground Lease | | Partly Owned and Partly Leased |
| North Central | | 142 |
| | 84 |
| | 38 |
| | 20 |
| | — |
| | 144 |
| | 81 |
| | 43 |
| | 19 |
| | 1 |
|
| Northeast | | 250 |
| | 90 |
| | 132 |
| | 28 |
| | — |
| | 258 |
| | 88 |
| | 140 |
| | 30 |
| | — |
|
| Northwest | | 131 |
| | 44 |
| | 62 |
| | 22 |
| | 3 |
| | 131 |
| | 44 |
| | 63 |
| | 21 |
| | 3 |
|
| South | | 179 |
| | 116 |
| | 42 |
| | 21 |
| | — |
| | 188 |
| | 110 |
| | 53 |
| | 25 |
| | — |
|
| Southwest | | 127 |
| | 48 |
| | 56 |
| | 22 |
| | 1 |
| | 131 |
| | 47 |
| | 60 |
| | 23 |
| | 1 |
|
| | | 829 |
| | 382 |
| | 330 |
| | 113 |
| | 4 |
| | 852 |
| | 370 |
| | 359 |
| | 118 |
| | 5 |
|
The five geographic regions detailed in the foregoing table are based on the Company’s Macy’s-branded operational structure. The Company’s retail stores are located at urban or suburban sites, principally in densely populated areas across the United States.
Additional information about the Company’s logistics network as of January 28, 2017February 3, 2018 is as follows:
|
| | | | | | | |
| Location | | Primary Function | | Owned or Leased | | Square Footage (thousands) |
| Cheshire, CT | | Direct to customer | | Owned | | 565 |
|
| Chicago, IL | | Stores | | Owned | | 861 |
|
| Denver, CO | | Stores | | Leased | | 20 |
|
| Goodyear, AZ | | Direct to customer | | Owned | | 960 |
|
| Hayward, CA | | Stores | | Owned | | 386 |
|
| Houston, TX | | Stores | | Owned | | 1,124 |
|
| Joppa, MD | | Stores | | Owned | | 850 |
|
| Kapolei, HI | | Stores | | OwnedLeased | | 260 |
|
| Los Angeles, CA | | Stores | | Owned | | 1,178 |
|
| Martinsburg, WV | | Direct to customer | | Owned | | 1,300 |
|
| Miami, FL | | Stores | | Leased | | 535 |
|
| Portland, TN | | Direct to customer | | Owned | | 950 |
|
| Raritan, NJ | | Stores | | Owned | | 980 |
|
| Sacramento, CA | | Direct to customer | | Leased | | 385 |
|
| Secaucus, NJ | | Stores | | Leased | | 675 |
|
| South Windsor, CT | | Stores | | Owned | | 510 |
|
| Stone Mountain, GA | | Stores | | Owned | | 1,000 |
|
| Tampa, FL | | Stores | | Owned | | 670 |
|
| Tulsa, OK | | Direct to customer | | Owned | | 1,300 |
|
| Tukwila, WA | | Stores | | Leased | | 500 |
|
| Union City, CA | | Stores | | Leased | | 165 |
|
| Youngstown, OH | | Stores | | Owned | | 851 |
|
| |
| Item 3. | Legal Proceedings. |
The Company and its subsidiaries are involved in various proceedings that are incidental to the normal course of their businesses. As of the date of this report, the Company does not expect that any of such proceedings will have a material adverse effect on the Company’s financial position or results of operations.
PART II
| |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
The Company's Common Stock is listed on the NYSE under the trading symbol “M.” As of January 28, 2017February 3, 2018, the Company had approximately 16,20015,300 stockholders of record. The following table sets forth for each quarter during 20162017 and 20152016 the high and low sales prices per share of Common Stock as reported on the NYSE and the dividends declared with respect to each quarter on each share of Common Stock.
| | | | 2016 | | 2015 | 2017 | | 2016 |
| | Low | | High | | Dividend | | Low | | High | | Dividend | Low | | High | | Dividend | | Low | | High | | Dividend |
| 1st Quarter | 37.71 |
| | 45.50 |
| | 0.3600 |
| | 61.10 |
| | 69.98 |
| | 0.3125 |
| 27.72 |
| | 34.37 |
| | 0.3775 |
| | 37.71 |
| | 45.50 |
| | 0.3600 |
|
| 2nd Quarter | 29.94 |
| | 40.15 |
| | 0.3775 |
| | 62.80 |
| | 73.61 |
| | 0.3600 |
| 20.85 |
| | 29.83 |
| | 0.3775 |
| | 29.94 |
| | 40.15 |
| | 0.3775 |
|
| 3rd Quarter | 31.02 |
| | 40.98 |
| | 0.3775 |
| | 47.10 |
| | 70.12 |
| | 0.3600 |
| 19.32 |
| | 24.45 |
| | 0.3775 |
| | 31.02 |
| | 40.98 |
| | 0.3775 |
|
| 4th Quarter | 28.55 |
| | 45.41 |
| | 0.3775 |
| | 34.05 |
| | 52.48 |
| | 0.3600 |
| 17.41 |
| | 27.64 |
| | 0.3775 |
| | 28.55 |
| | 45.41 |
| | 0.3775 |
|
The declaration and payment of future dividends will be at the discretion of the Company’s Board of Directors, are subject to restrictions under the Company’s credit facility and may be affected by various other factors, including the Company’s earnings, financial condition and legal or contractual restrictions.
The following table provides information regarding the Company’s purchases of Common Stock during the fourth quarter of 20162017.
|
| | | | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price per Share ($) | | Number of Shares Purchased under Program (1) | | Open Authorization Remaining ($)(1) |
| | (thousands) | | | | (thousands) | | (millions) |
| October 30, 2016 – November 26, 2016 | 727 |
| | 42.90 |
| | 727 |
| | 1,763 |
|
| November 27, 2016 – December 31, 2016 | 1,152 |
| | 40.61 |
| | 1,152 |
| | 1,716 |
|
| January 1, 2017 – January 28, 2017 | — |
| | — |
| | — |
| | 1,716 |
|
| | 1,879 |
| | 41.49 |
| | 1,879 |
| | |
|
| | | | | | | | | | | |
| Total Number of Shares Purchased | | Average Price per Share ($) | | Number of Shares Purchased under Program (1) | | Open Authorization Remaining ($)(1) |
| (thousands) | | | | (thousands) | | (millions) |
| October 29, 2017 – November 25, 2017 | — |
| | — |
| | — |
| | 1,716 |
|
| November 26, 2017 – December 30, 2017 | — |
| | — |
| | — |
| | 1,716 |
|
| December 31, 2017 – February 3, 2018 | — |
| | — |
| | — |
| | 1,716 |
|
| — |
| | — |
| | — |
| | |
___________________
| |
| (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. All authorizations are cumulative and do not have an expiration date. As of January 28, 2017February 3, 2018, $1,716 million of authorization remained unused. The Company may continue, discontinue or resume purchases of Common Stock under these or possible future authorizations in the open market, in privately negotiated transactions or otherwise at any time and from time to time without prior notice. |
The following graph compares the cumulative total stockholder return on the Company's Common Stock with the Standard & Poor's 500 Composite Index and the Company's peer group for the period from January 28, 2012February 2, 2013 through January 28, 2017,February 3, 2018, assuming an initial investment of $100 and the reinvestment of all dividends, if any.
The companies included in the peer group are Bed, Bath & Beyond, Dillard's, Gap, J.C. Penney, Kohl's, L Brands, Nordstrom, Ross Stores, Sears Holdings, Target, TJX Companies and Wal-Mart.
| |
| Item 6. | Selected Financial Data. |
The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and the notes thereto and the other information contained elsewhere in this report.
| | | | 2016 | | 2015 | | 2014 | | 2013 | | 2012* | 2017* | | 2016 | | 2015 | | 2014 | | 2013 |
| | (millions, except per share) | (millions, except per share) |
| Consolidated Statement of Income Data: | | | | | | | | | | | | | | | | | | |
| Net sales | $ | 25,778 |
| | $ | 27,079 |
| | $ | 28,105 |
| | $ | 27,931 |
| | $ | 27,686 |
| $ | 24,837 |
| | $ | 25,778 |
| | $ | 27,079 |
| | $ | 28,105 |
| | $ | 27,931 |
|
| Cost of sales | (15,621 | ) | | (16,496 | ) | | (16,863 | ) | | (16,725 | ) | | (16,538 | ) | (15,152 | ) | | (15,621 | ) | | (16,496 | ) | | (16,863 | ) | | (16,725 | ) |
| Gross margin | 10,157 |
| | 10,583 |
| | 11,242 |
| | 11,206 |
| | 11,148 |
| 9,685 |
| | 10,157 |
| | 10,583 |
| | 11,242 |
| | 11,206 |
|
| Selling, general and administrative expenses | (8,265 | ) | | (8,256 | ) | | (8,355 | ) | | (8,440 | ) | | (8,482 | ) | (8,131 | ) | | (8,474 | ) | | (8,468 | ) | | (8,447 | ) | | (8,514 | ) |
| Impairments, store closing and other costs | (479 | ) | | (288 | ) | | (87 | ) | | (88 | ) | | (5 | ) | |
| Gains on sale of real estate | | 544 |
| | 209 |
| | 212 |
| | 92 |
| | 74 |
|
| Restructuring, impairment, store closing and other costs | | (186 | ) | | (479 | ) | | (288 | ) | | (87 | ) | | (88 | ) |
| Settlement charges | (98 | ) | | — |
| | — |
| | — |
| | — |
| (105 | ) | | (98 | ) | | — |
| | — |
| | — |
|
| Operating income | 1,315 |
| | 2,039 |
| | 2,800 |
| | 2,678 |
| | 2,661 |
| 1,807 |
| | 1,315 |
| | 2,039 |
| | 2,800 |
| | 2,678 |
|
| Interest expense | (367 | ) | | (363 | ) | | (395 | ) | | (390 | ) | | (425 | ) | (321 | ) | | (367 | ) | | (363 | ) | | (395 | ) | | (390 | ) |
| Premium on early retirement of debt | — |
| | — |
| | (17 | ) | | — |
| | (137 | ) | |
| Net premiums on early retirement of debt | | 10 |
| | — |
| | — |
| | (17 | ) | | — |
|
| Interest income | 4 |
| | 2 |
| | 2 |
| | 2 |
| | 3 |
| 11 |
| | 4 |
| | 2 |
| | 2 |
| | 2 |
|
| Income before income taxes | 952 |
| | 1,678 |
| | 2,390 |
| | 2,290 |
| | 2,102 |
| 1,507 |
| | 952 |
| | 1,678 |
| | 2,390 |
| | 2,290 |
|
| Federal, state and local income tax expense | (341 | ) | | (608 | ) | | (864 | ) | | (804 | ) | | (767 | ) | |
| Federal, state and local income tax benefit (expense) (a) | | 29 |
| | (341 | ) | | (608 | ) | | (864 | ) | | (804 | ) |
| Net income | 611 |
| | 1,070 |
| | 1,526 |
| | 1,486 |
| | 1,335 |
| 1,536 |
| | 611 |
| | 1,070 |
| | 1,526 |
| | 1,486 |
|
| Net loss attributable to noncontrolling interest | 8 |
| | 2 |
| | — |
| | — |
| | — |
| 11 |
| | 8 |
| | 2 |
| | — |
| | — |
|
| Net income attributable to Macy's, Inc. shareholders | $ | 619 |
| | $ | 1,072 |
| | $ | 1,526 |
| | $ | 1,486 |
| | $ | 1,335 |
| $ | 1,547 |
| | $ | 619 |
| | $ | 1,072 |
| | $ | 1,526 |
| | $ | 1,486 |
|
| | | | | | | | | | | | | | | | | | | |
Basic earnings per share attributable to
Macy's, Inc. shareholders | $ | 2.01 |
| | $ | 3.26 |
| | $ | 4.30 |
| | $ | 3.93 |
| | $ | 3.29 |
| $ | 5.07 |
| | $ | 2.01 |
| | $ | 3.26 |
| | $ | 4.30 |
| | $ | 3.93 |
|
Diluted earnings per share attributable to
Macy's, Inc. shareholders | $ | 1.99 |
| | $ | 3.22 |
| | $ | 4.22 |
| | $ | 3.86 |
| | $ | 3.24 |
| $ | 5.04 |
| | $ | 1.99 |
| | $ | 3.22 |
| | $ | 4.22 |
| | $ | 3.86 |
|
| Average number of shares outstanding | 308.5 |
| | 328.4 |
| | 355.2 |
| | 378.3 |
| | 405.5 |
| 305.4 |
| | 308.5 |
| | 328.4 |
| | 355.2 |
| | 378.3 |
|
| Cash dividends paid per share | $ | 1.4925 |
| | $ | 1.3925 |
| | $ | 1.1875 |
| | $ | .9500 |
| | $ | .8000 |
| $ | 1.5100 |
| | $ | 1.4925 |
| | $ | 1.3925 |
| | $ | 1.1875 |
| | $ | .9500 |
|
| Depreciation and amortization | $ | 1,058 |
| | $ | 1,061 |
| | $ | 1,036 |
| | $ | 1,020 |
| | $ | 1,049 |
| $ | 991 |
| | $ | 1,058 |
| | $ | 1,061 |
| | $ | 1,036 |
| | $ | 1,020 |
|
| Capital expenditures | $ | 912 |
| | $ | 1,113 |
| | $ | 1,068 |
| | $ | 863 |
| | $ | 942 |
| $ | 760 |
| | $ | 912 |
| | $ | 1,113 |
| | $ | 1,068 |
| | $ | 863 |
|
| Balance Sheet Data (at year end): | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 1,297 |
| | $ | 1,109 |
| | $ | 2,246 |
| | $ | 2,273 |
| | $ | 1,836 |
| $ | 1,455 |
| | $ | 1,297 |
| | $ | 1,109 |
| | $ | 2,246 |
| | $ | 2,273 |
|
| Property and Equipment - net | | 6,672 |
| | 7,017 |
| | 7,616 |
| | 7,800 |
| | 7,930 |
|
| Total assets | 19,851 |
| | 20,576 |
| | 21,330 |
| | 21,499 |
| | 20,858 |
| 19,381 |
| | 19,851 |
| | 20,576 |
| | 21,330 |
| | 21,499 |
|
| Short-term debt | 309 |
| | 642 |
| | 76 |
| | 463 |
| | 124 |
| 22 |
| | 309 |
| | 642 |
| | 76 |
| | 463 |
|
| Long-term debt | 6,562 |
| | 6,995 |
| | 7,233 |
| | 6,688 |
| | 6,768 |
| 5,861 |
| | 6,562 |
| | 6,995 |
| | 7,233 |
| | 6,688 |
|
| Total Shareholders’ equity | 4,322 |
| | 4,253 |
| | 5,378 |
| | 6,249 |
| | 6,051 |
| 5,661 |
| | 4,322 |
| | 4,253 |
| | 5,378 |
| | 6,249 |
|
___________________
(a) The income tax benefit in 2017 is due to U.S. federal tax reform that led to the recognition of an income tax benefit of $571 million associated with the remeasurement of the Company's deferred tax balances.
| |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The discussion in this Item 7 should be read in conjunction with the Consolidated Financial Statements and the related notes included elsewhere in this report. The discussion in this Item 7 contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in “Risk Factors” and “Forward-Looking Statements.”
Overview
The Company is an omnichannel retail organization operating stores, websites and mobile applications under three brands (Macy's, Bloomingdale's and Bluemercury)bluemercury) that sell a wide range of merchandise, including apparel and accessories (men's, women's and children's), cosmetics, home furnishings and other consumer goods. The Company operates 829approximately 850 stores in 4544 states, the District of Columbia, Guam and Puerto Rico. As of January 28, 2017,February 3, 2018, the Company's operations were conducted through Macy's, Bloomingdale's, Bloomingdale’s The Outlet, Macy’s Backstage, Bluemercurybluemercury and Macy’s China Limited which are aggregated into one reporting segment in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, “SegmentSegment Reporting.”
The Company continues to be focused on key strategies for growth in sales, earnings and cash flow in the years ahead that include:
Transforming theimplement its North Star strategy to transform its omnichannel business and focusingfocus on key growth areas,
Embracing embrace customer centricity, including a simplified value proposition, and
Optimizing optimize value in theits real estate portfolio.
These strategies continue Inspired by the North Star, there are five points to evolve and the Company has developed specific initiatives to deliver an exclusive and distinctive merchandise assortment, including the Company's private brands; expand the digital frontier while delivering repeatable, signature encounters; and develop an omnichannel customer relationship through personalized experiences, powerful brand messaging and strengthened, cross-channel loyalty programs.this strategy.
| |
| 1. | FromFamiliar to Favorite includes everything the Company does to further its brand awareness and identity to its core customers. Actions include understanding and anticipating customers’ needs, strengthening the Company's fashion authority and executing initiatives around its loyalty and pricing strategies. It celebrates the Company's iconic events and includes strategies to appeal to more value-oriented customers. |
| |
| 2. | It Must Be Macy’s encompasses delivering the products and experiences customers love and are exclusive to the Company. This includes styles and home fashion for every day and special occasions, from the Company's leading private brands, as well as exclusive national brands or assortments. |
| |
| 3. | Every Experience Matters, in-store and online. The Company's competitive advantage is the ability to combine the human touch in its physical stores with cutting-edge technology in its mobile applications and websites. Key to this point is the enhancement of a customer's experienceas they explore our stores, mobile applications and websites, find their favorite styles, sizes and colors, and receive their purchases through the shopping channels they prefer. |
| |
| 4. | Funding our Future represents the decisions and actions the Company takes to identify and realize resourcesto fuel growth. This involves a focus on cost reduction and reinvestment as well as creating value from the Company's real estate portfolio. |
| |
| 5. | What’s New, What’s Next explores and develops innovations to turn consumer and technology trends to the Company's advantage and to drive growth. This includes exploring previously unmet customer needs and making smart investment decisions based on customer insights and analytics. |
The Company remainshas taken a number of key steps over the past couple of years to position itself to successfully implement the North Star strategy. In 2017, the Company continued its investment in technology, reengineered its merchandising and marketing structure, improved its curation of merchandise and expanded different Company initiatives to stores throughout its portfolio. The Company also launched a new Macy's Star Rewards loyalty program in October 2017 that focused on driving additional profitable sales growth through a series of organicstrengthening relationships with the Company's best customers, migrating existing customers to higher spending levels and attracting new business initiatives.or infrequent customers. The initiatives include a focus on fine jewelry, watches and women’s shoes, a reinventioninitial launch of the beauty business that includesrewards program focused on proprietary cardholders with additional enhancements and expansion of Bluemercury freestanding locations and inside existing Macy's stores and a focus on enhancements to digital content and mobile technology, an expansion of "Last Act"- a simplified pricing approach to clearance merchandise in Macy's stores,beyond proprietary cardholders planned for the expansion of Macy's Backstage within existing Macy's store locations, and utilization of different customer incentive programs to increase customer choice and provide value in transactions previously limited by coupon exclusions.
Macy’s will continue to focus on customer initiatives including the development and testing of new merchandise concepts and categories, new services to increase traffic and new technology to improve the customer experience and the store’s ability to operate more efficiently. Such initiatives will enable the Company’s stores to personalize and simplify its customers’ shopping experiences, develop meaningful relationships with new customers and deepen relationships with its existing ones.future.
In JanuaryAugust 2017, the Company announced a seriesrestructuring which included the consolidation of actions to streamline its store portfolio, intensify cost efficiency effortsthree functions (merchandising, planning and execute its real estate strategy. Theseprivate brands) into a single merchandising function. During the third quarter of 2017, the Company recognized $33 million of costs primarily associated with this restructuring effort as well as a restructuring within the marketing function. Additional financial and operational impacts of such restructuring actions are intendedexpected to supportinclude future annual savings of approximately $38 million, all of which may be used for reinvestment in the Company's strategy to further investbusiness in omnichannel capabilities, improve customer experience and create shareholder value. In August 2016, the Company announced its intention to close approximately 100 Macy’s stores. The Company subsequently announced in January 2017, the closure of sixty-eight Macy’s stores by mid-2017, with the balance closing as leases and certain operating covenants expire or are amended and waived. In addition, the Company announced the reorganization of the field structure that supports the remaining stores and a significant restructuring of the Company's central operations to focus resources on strategic priorities, improve organizational agility and reduce expense.2018.
In January 2018, the Company announced actions to continue improvements in organizational efficiency and to allocate resources to support its growth strategy. Major components of these restructuring activities included staffing adjustments across the stores organization with reductions in some stores and increases in others, further streamlining of some non-store functions and the closure of 11 stores in early 2018.
The Company’sIn 2017, the Company continued to execute on its real estate strategy is designed to create value through both monetization and redevelopment of certain assets:
In January 2016, the Company completed a $270 million real estate transaction to recreate Macy's Brooklyn store. The Company continues to own and operate the first four floors and lower level of its existing nine-story retail store, which is currently being reconfigured and remodeled. The remaining portion of the store and its nearby parking facility were sold to Tishman Speyer in a single sales transaction. As the sales agreement required the Company to conduct certain redevelopment activities at Macy's Brooklyn store, the Company is recognizing the gain on the transaction, approximately $250 million, under the percentage of completion method of accounting over the redevelopment period. Accordingly, $117 million has been recognized to-date and the remaining gain is anticipated to be recognized over the next two years.
In 2016,Overall, the Company had property and equipment sales, primarily related to real estate,asset sale gains of $544 million, totaling $673$411 million in cash proceeds, in 2017. These gains and recognized real estate gains of $209 million. This includesproceeds include the sale of its 248,000 square-footstore and parking facility in downtown Minneapolis, the sale of an additional two floors of the downtown Seattle Macy's store (four floors were sold in a similar transaction in fiscal 2015) and additional gains and proceeds from Macy's Brooklyn transaction executed in 2015. In addition, the gains recognized in 2017 include those related to the 2016 sale of the Company's Union Square Men’s buildingMen's store in San Francisco for approximately $250 million in January 2017. The Company will use part of the proceeds to consolidate the Men’s store into its main Union Square store. The Company will lease the Men’s store property for two to three years as it completes the reconfiguration of the main store. The Company is expected to recognize a gain of approximately $235 million in January 2018.Francisco.
In January 2017,2016, the Company finalized the formation of a strategic alliance with Brookfield Asset Management ("Brookfield"), a leading global alternative asset manager, to create increased value in its real estate portfolio. Under the alliance, Brookfield has an exclusive right for up to 24 months to create a “pre-development plan”"pre-development plan" for each of approximately 50 Macy’s real estate assets, with an option for Macy’s to continue to identify and add assets into the alliance. The breadthCurrently, the Company expects approximately two-thirds of opportunity withinthese real estate assets to have potential for redevelopment. In February 2018, the portfolio ranges fromCompany announced that it had agreed to allow Brookfield to redevelop nine of these assets once it has received the additional development onnecessary approvals. Upon the completion of approval and entitlements, Macy’s will either sell its interests in the individual assets to Brookfield or contribute them into individual joint ventures. If sold, the cumulative value of the nine properties is estimated to be approximately $50 million plus a portionretained participation in the upside profits of the three largest assets.
In February 2018, the Company signed an asset (such as a Company-controlled land parcel adjacentagreement to sell the upper seven floors of its State Street store in Chicago to a store)private real estate fund sponsored by Brookfield. The Company expects to receive a total of $30 million upfront for the transaction, which includes a $3 million contribution towards redevelopment costs for migrating operations to the complete redevelopment of an existing store. Once a "pre-development plan" is created,floors the Company has the optionwill continue to contribute the asset into a joint venture for the development plan to commence or sell the asset to Brookfield. Ifown. In addition, the Company chooses to contribute the asset intowill receive a joint venture, the Company may elect to participate aspercentage of profit earned over and above a funding or non-funding partner. After development, the joint venture may sell the asset and distribute proceeds accordingly.threshold internal rate of return.
On February 28,
In 2017, the Company sold its downtown Minneapolisopened new Macy’s stores in Murray, UT and Los Angeles, CA as well as a Bloomingdale’s store in Kuwait under a license agreement with Al Tayer Group, LLC. The Company expects to open two additional Bloomingdale's stores in San Jose, CA and parking facility for $59 million of proceeds and a gain of approximately $47 million that is expected to be recognizedNorwalk, CT in the first quarter of 2017. The downtown Minneapolis store will close in early 2017.fiscal 2019.
In 2015, the Company opened the first six freestanding pilot stores inBoth Macy's new off-price business, Macy's Backstage, and its clearance strategy, Last Act, have been successful in the New York City metro area. Theproviding unique value opportunities to both existing and new Macy's Backstage locations average about 30,000 square feet and sell an assortment of women's, men's and children's apparel, cosmetics, shoes, fashion accessories, housewares, home textiles, toys intimate apparel and jewelry.customers. The Company has rolled out Last Act to all families of business and is nowcurrently focused on opening new Macy's Backstage stores within existing Macy's store locations as a way of increasing store productivity, increasing the number of shopping trips to Macy's and attracting new customers.locations. As of January 28, 2017,February 3, 2018, the Company is operating 22has a total of 52 Macy's Backstage locations (7 freestanding and 1545 inside Macy's stores).
In March 2015, the Company completed its acquisition of Bluemercury, Inc., a luxury beauty products and spa retailer. The Company is focused on accelerating the growth of sales inits luxury beauty products and spa retailer, bluemercury, by opening additional freestanding Bluemercurybluemercury stores in urban and suburban markets, enhancing its online capabilities and adding Bluemercurybluemercury products and boutiques to Macy's stores. During 2016, the Company opened 24 new freestanding Bluemercury stores and 15 new Bluemercury locations inside existing Macy's stores and asAs of January 28, 2017,February 3, 2018, the Company is operating 120 Bluemercury157 bluemercury locations (101(137 freestanding and 1920 inside Macy's stores).
In August 2015, the Company established a joint venture, Macy's China Limited, of which the Company holds a sixty-five percent ownership interest and Hong Kong-based Fung Retailing Limited holds the remaining thirty-five percent ownership interest. Macy's China Limited began selling merchandise in China in the fourth quarter of 2015 through an e-commerce presence on Alibaba Group's Tmall Global. The Company's reporting includes the financial operations of Macy's China Limited, with the thirty-five percent ownership reported as a noncontrolling interest.
In early
2017 Overview
2017 saw the implementation of the Company's North Star strategy and included the roll-outs of different initiatives that had been tested by the Company openedon a Macy’s store at Fashion Place in Murray, UTsmaller scale. 2017 ended with a strong fourth quarter and plans to open a store at Westfield Century City in Los Angeles, CA, later in the year. In addition, the Company expects to open approximately 30 additional Bluemercury locations and approximately 30 Macy’s Backstage locations inside Macy’s stores. Announced new stores in future years include Bloomingdale’s in San Jose, CA (2019), and Norwalk, CT (2019). In addition, under license agreements with Al Tayer Group, a new Bloomingdale’s store opened at 360 Mall in Al Zahra, Kuwait in March 2017 and new Macy’s and Bloomingdale’s stores are planned to open in Al Maryah Central in Abu Dhabi, United Arab Emirates in 2018.
2016 Overview
2016 was another challenging year due in part to changes in consumer buying habits and spending. However, the Company began implementation of a number of initiatives, including those announced in 2015 as well as a major organizational restructuring and streamlining the Company's store portfolio, which are expected to improve performance in the coming years.
Selectedselected results of 20162017 include:
Net sales, which include a 53rd week of operations, decreased 3.7% compared to 2016.
Comparable sales on an owned basis decreased 3.5%2.2% and comparable sales on an owned plus licensed basis decreased 2.9%1.9%.
Operating income for 20162017 was $1.892 billion$1,807 million or 7.3% of sales,sales; while operating income, excluding impairments,restructuring, impairment, store closing and other costs and settlement charges, was $2,098 million or 8.4% of sales.
Federal, state, and local income tax benefit for 2017 was $29 million compared to expense of $341 million in 2016, due to U.S. federal tax reform which led to a decreasenon-cash tax benefit of 18.7% and 130 basis points as a percent$571 million associated with the remeasurement of salesthe Company's deferred tax balances.
Net income attributable to Macy's, Inc. shareholders for 2017 was $1,547 million, an increase of $928 million from 2015 on a comparable basis.$619 million in 2016.
Diluted earnings per share attributable to Macy's, Inc. shareholders increased to $5.04 in 2017 compared to $1.99 in 2016. Diluted earnings per share attributable to Macy's, Inc. shareholders, excluding certain items, declined 17.5%increased to $3.77 in 2017 from $3.11 in 2016 from $3.77 in 2015.2016.
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, impairments,restructuring, impairment, store closing and other costs and settlement charges) as a percent to net sales was 11.4%12.4% in 2016,2017, as compared to 12.5%11.4% in 2015.2016.
Return on invested capital ("ROIC"), a key measure of operating productivity, was 18.5%, a decrease from 20.1% in 2015.
Net cash provided by operating activities, net of cash used by investing activities increased significantly in 2016 as compared to 2015.20.8% for 2017.
The Company repurchased 7.9or repaid approximately $950 million shares of its common stock for $316debt in 2017, consisting of $247 million in 2016, and increased its annualized dividend rate to $1.51 per share. This annualized dividend rate represents an increase of 5% and is the sixth increasedebt repurchased in the dividendopen market, $300 million of a debt maturity and $400 million of debt repurchased in the past five years.a tender offer ("tender offer").
See pages 2029 to 2332 for reconciliations of the non-GAAP financial measures presented above to the most comparable GAAPU.S. generally accepted accounting principles ("GAAP") financial measures and other important information.
Results of Operations
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | Amount | | % to Sales | | | Amount | | % to Sales | | | Amount | | % to Sales | |
| | | (dollars in millions, except per share figures) | |
| Net sales | | $ | 24,837 |
| | | | | $ | 25,778 |
| | | | | $ | 27,079 |
| | | |
| Decrease in sales | | (3.7 | ) | % | | | (4.8 | ) | % | | | (3.7 | ) | % | |
| Decrease in comparable sales | | (2.2 | ) | % | | | (3.5 | ) | % | | | (3.0 | ) | % | |
| Cost of sales | | (15,152 | ) | | (61.0 | ) | % | (15,621 | ) | | (60.6 | ) | % | (16,496 | ) | | (60.9 | ) | % |
| Gross margin | | 9,685 |
| | 39.0 |
| % | 10,157 |
| | 39.4 |
| % | 10,583 |
| | 39.1 |
| % |
| Selling, general and administrative expenses | | (8,131 | ) | | (32.8 | ) | % | (8,474 | ) | | (32.8 | ) | % | (8,468 | ) | | (31.3 | ) | % |
| Gains on sale of real estate | | 544 |
| | 2.2 |
| % | 209 |
| | 0.8 |
| % | 212 |
| | 0.8 |
| % |
| Restructuring, impairment, store closing and other costs | | (186 | ) | | (0.7 | ) | % | (479 | ) | | (1.9 | ) | % | (288 | ) | | (1.1 | ) | % |
| Settlement charges | | (105 | ) | | (0.4 | ) | % | (98 | ) | | (0.4 | ) | % | — |
| | — |
| % |
| Operating income | | 1,807 |
| | 7.3 |
| % | 1,315 |
| | 5.1 |
| % | 2,039 |
| | 7.5 |
| % |
| Interest expense - net | | (310 | ) | | | | | (363 | ) | | | | | (361 | ) | | | |
| Net premiums on early retirement of debt | | 10 |
| | | | | — |
| | | | | — |
| | | |
| Income before income taxes | | 1,507 |
| | | | | 952 |
| | | | | 1,678 |
| | | |
| Federal, state and local income tax benefit (expense) | | 29 |
| | | | | (341 | ) | | | | | (608 | ) | | | |
| Net income | | 1,536 |
| | | | | 611 |
| | | | | 1,070 |
| | | |
| Net loss attributable to noncontrolling interest | | 11 |
| | | | | 8 |
| | | | | 2 |
| | | |
Net income attributable to Macy's, Inc. shareholders | | $ | 1,547 |
| | 6.2 |
| % | $ | 619 |
| | 2.4 |
| % | $ | 1,072 |
| | 4.0 |
| % |
| | | | | | | | | | | | | | | | |
Diluted earnings per share attributable to Macy's, Inc. shareholders | | $ | 5.04 |
| | | | | $ | 1.99 |
| | | | | $ | 3.22 |
| | | |
| | | | | | | | | | | | | | | | |
| Supplemental Non-GAAP Financial Measures | | | | | | | | | | | | | | | |
Decrease in comparable sales on an owned plus licensed basis | | (1.9 | ) | % | | | (2.9 | ) | % | | | (2.5 | ) | % | |
| Operating income, excluding certain items | | $ | 2,098 |
| | 8.4 |
| % | $ | 1,892 |
| | 7.3 |
| % | $ | 2,327 |
| | 8.6 |
| % |
Diluted earnings per share attributable to Macy's, Inc. shareholders, excluding certain items | | $ | 3.77 |
| | | | | $ | 3.11 |
| | | | | $ | 3.77 |
| | |
| Adjusted EBITDA as a percent to net sales | | 12.4 |
| % | | | 11.4 |
| % | | | 12.5 |
| % | |
| ROIC | | 20.8 |
| % | | | 18.5 |
| % | | | 20.1 |
| % | |
| | | | | | | | | | | | | | | | |
| See pages 29 to 32 for a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measure and for other important information. |
| | | | | | | | | | | | | | | | |
| Store information (at year-end): | | | | | | | | | | | | | | | |
| Stores operated | | 852 |
| | | | | 829 |
| | | | | 868 |
| | | |
| Square footage (in millions) | | 127.7 |
| | | | | 130.2 |
| | | | | 141.9 |
| | | |
Comparison of 2017 and 2016
Net Sales
Net sales for 2017 include a 53rd week of operations and were $24,837 million, a decrease of $941 million, or 3.7%, from 2016. The decrease in comparable sales on an owned basis, which exclude the 53rd week of sales, for 2017 was 2.2% compared to 2016. The decrease in comparable sales on an owned plus licensed basis for 2017 was 1.9% compared to 2016. (See page 30 for information regarding the Company's calculation of comparable sales, a reconciliation of the non-GAAP measure which takes into account sales of departments licensed to third parties to the most comparable GAAP measure and other important information). Although net sales were down compared to 2016, the Company experienced a strong fourth quarter in 2017 with comparable sales on an owned basis up 1.3% and up 1.4% on an owned plus licensed basis. Geographically, sales in 2017 were strongest in Florida, Eastern Texas, Louisiana, Hawaii, Oregon, Southern California and Arizona. Digital sales continued to be strong in 2017 and experienced double digit growth. By family of business, sales in 2017 were strongest in active apparel, fine jewelry, fragrances, dresses and men's tailored clothing. Sales in 2017 were less strong in handbags although the trend improved in the second half of the year. Sales of the Company's private label brands represented approximately 20% of net sales in the Macy's-branded operations in 2017 and 2016.
Cost of Sales and Gross Margin
Cost of sales for 2017 decreased $469 million from 2016. The cost of sales rate as a percent to net sales of 61.0% was 40 basis points higher in 2017, as compared to 60.6% in 2016, primarily due to higher delivery expenses associated with the Company's omnichannel activities and free shipping promotions. Gross margin improved in the second half of 2017 as the Company benefited from its inventory management strategies.
SG&A Expenses
SG&A expenses for 2017 decreased $343 million from 2016 and the SG&A rate as a percent to net sales of 32.8% approximated the rate in 2016. The dollar decrease from 2016 was mainly due to store closings and the restructuring activities announced by the Company in 2016 and 2017, offset slightly by higher expenses associated with the continued investments in the Company's omnichannel operations, and investments in bluemercury and Macy's Backstage. The decrease was also driven by higher income from credit operations. Income from credit operations was $768 million in 2017 as compared to $736 million in 2016. Advertising expense, net of cooperative advertising allowances, was $1,108 million for 2017 compared to $1,153 million for 2016.
Gains on Sale of Real Estate
The Company recognized gains of $544 million in 2017 associated with sales of real estate, as compared to $209 million in 2016. 2017 included gains of $234 million related to the Macy's Union Square location, $71 million related to the Macy's Brooklyn transaction, $47 million related to the downtown Minneapolis properties and $40 million related to the downtown Seattle Macy's location. 2016 included $33 million of gains related to the Macy's Brooklyn transaction.
Restructuring, Impairment, Store Closing and Other Costs
Restructuring, impairment, store closing and other costs for 2017 includes costs and expenses primarily associated with the organizational changes and store closings announced in August 2017 and January 2018. In 2017, these costs included $120 million of severance and other human resource-related costs primarily associated with organization changes and store closings, $53 million of asset impairment charges and $13 million of other related costs and expenses. Restructuring, impairment, store closing and other costs for 2016 includes costs and expenses primarily associated with the organizational changes and store closings announced in August 2016 and January 2017. During 2016, these costs and expenses included asset impairment charges of $265 million, $168 million of severance and other human resource-related costs and $46 million of other related costs and expenses.
Settlement Charges
$105 million and $98 million of non-cash settlement charges were recognized in 2017 and 2016, respectively. These charges relate to the pro-rata recognition of net actuarial losses associated with the Company’s defined benefit retirement plans and are the result of an increase in lump sum distributions associated with store closings, a voluntary separation program, organizational restructuring, and periodic distribution activity.
Net Interest Expense and Net Premiums on the Early Retirement of Debt
Net interest expense, excluding net premiums on the early retirement of debt, for 2017 decreased $53 million from 2016. This decrease was primarily driven by the early repayment of $647 million of debt and the maturity of $300 million
of debt in 2017. This early repayment resulted in the recognition of a $10 million benefit related to the write-off of the premium associated with the debt repayments, net of the premium costs and other expenses incurred with the early repayment. This benefit is presented as a net premium on the early retirement of debt on the Consolidated Statements of Income.
Effective Tax Rate
The Company's effective tax rate was a benefit of 1.9% for 2017 and expense of 35.8% for 2016. 2017 differs from the federal income tax statutory rate of 33.7%, and on a comparative basis, principally due to 2017 U.S. federal tax reform that led to the recognition of a non-cash tax benefit of $571 million associated with the remeasurement of the Company's deferred tax balances. Further, 2017 included the recognition of approximately $15 million of net tax deficiencies associated with share-based payment awards due to the adoption of Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting. Historically, the Company had recognized such amounts as an offset to accumulated excess tax benefits previously recognized in additional paid-in capital.
Net Income Attributable to Macy's, Inc. Shareholders
Net income attributable to Macy's, Inc. shareholders for 2017 increased compared to 2016, driven by higher operating income due to higher asset sale gains, lower selling, general and administrative expenses, restructuring, impairment, store closing and other costs, partially offset by lower sales and gross margin. Coupled with lower net interest expense and a net income tax benefit resulted in net income attributable to Macy's Inc. shareholders increasing by $928 million in 2017 as compared to 2016.
Comparison of 2016 and 2015
Net Sales
Net sales for 2016 decreased $1,301 million or 4.8% compared to 2015. The decrease in comparable sales on an owned basis for 2016 was 3.5% compared to 2015. The decrease in comparable sales on an owned plus licensed basis for 2016 was 2.9% compared to 2015. (See page 30 for information regarding the Company's calculation of comparable sales, a reconciliation of the non-GAAP measure which takes into account sales of departments licensed to third parties to the most comparable GAAP measure and other important information). The Company experienced an overall weakness in sales, but geographically sales in 2016 were strongest in the Southwest, particularly southern California. Digital sales continued to be strong in 2016 and experienced double digit growth. By family of business, sales in 2016 were strongest in apparel, fine jewelry, shoes, intimate apparel and fragrances. Sales in 2016 were less strong in fashion jewelry, handbags, and fashion watches. Sales of the Company's private label brands represented approximately 20% of net sales in the Macy's-branded operations in 2016 and 2015.
Cost of Sales and Gross Margin
Cost of sales for 2016 decreased $875 million from 2015. The cost of sales rate as a percent to net sales of 60.6% was 30 basis points lower in 2016, as compared to 60.9% in 2015, primarily due to fewer markdowns taken in 2016 as compared to 2015 and offset slightly by higher delivery expenses associated with the Company's omnichannel activities and free shipping promotions.
SG&A Expenses
SG&A expenses for 2016 increased $6 million from 2015, however the SG&A rate as a percent to net sales of 32.8% was 150 basis points higher in 2016, as compared to 2015. SG&A expenses in 2016 were impacted by lower income from credit operations and higher expenses associated with the continued investments in the Company's omnichannel operations, investments in bluemercury, Macy's Backstage and Macy's China Limited. These increases were partially offset by lower retirement expenses (including Pension Plan, SERP and defined contribution plan expenses), lower advertising expense, net of cooperative advertising allowances and the impact of the restructuring announced at the end of 2015. Income from credit operations was $736 million in 2016 as compared to $831 million in 2015. Retirement expenses were $44 million in 2016 as compared to $77 million in 2015. Advertising expense, net of cooperative advertising allowances, was $1,153 million for 2016 compared to $1,173 million for 2015. Advertising expense, net of cooperative advertising allowances, as a percent to net sales was 4.5% for 2016 and 4.3% for 2015.
Gains on Sale of Real Estate
Gains on sale of real estate decreased $3 million to $209 million in 2016 compared to $212 million in 2015. 2016 and 2015 included $33 million and $84 million, respectively, of gains related to the Macy's Brooklyn transaction. 2015 also included a $57 million gain related to the sale of a portion of the downtown Macy's Seattle location.
Restructuring, Impairment, Store Closing and Other Costs
Restructuring, impairment, store closing and other costs for 2016 includes costs and expenses primarily associated with the organizational changes and store closings announced in August 2016 and January 2017. During 2016, these costs and expenses included asset impairment charges of $265 million, $168 million of severance and other human resource-related costs and $46 million of other related costs and expenses. Restructuring, impairment, store closing and other costs for 2015 included costs and expenses primarily associated with organization changes and store closings announced in January 2016. During 2015, these costs and expenses included asset impairment charges of $148 million, $123 million of severance and other human resource-related costs and $17 million of other related costs and expenses.
Settlement Charges
$98 million of non-cash settlement charges were recognized in 2016. These charges relate to the pro-rata recognition of net actuarial losses associated with the Company’s defined benefit retirement plans and are the result of an increase in lump sum distributions associated with store closings, a voluntary separation program, organizational restructuring, and periodic distribution activity.
Net Interest Expense
Net interest expense for 2016 decreased $2 million from 2015. Net interest expense for 2016 was impacted by lower capitalized interest associated with the Company's construction projects, offset slightly by lower rates on outstanding borrowings as compared to 2015.
Effective Tax Rate
The Company's effective tax rate of 35.8% for 2016 and 36.2% for 2015 differ from the federal income tax statutory rate of 35%, and on a comparative basis, principally because of the effect of state and local income taxes, including the settlement of various tax issues and tax examinations.
Net Income Attributable to Macy's, Inc. Shareholders
Net income attributable to Macy's, Inc. shareholders for 2016 decreased compared to 2015, reflecting lower sales and gross margin and higher selling, general and administrative expenses, restructuring, impairments, store closing costs and other costs, settlement charges and net interest expense, partially offset by lower income taxes in 2016 as compared to 2015.
Guidance
The Company's operations are impacted by competitive pressures from department stores, specialty stores, mass merchandisers, online retailers and all other retail channels. The Company's operations are also impacted by general consumer spending levels, including the impact of general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, the costs of basic necessities and other goods and the effects of weather or natural disasters and other factors over which the Company has little or no control.
In recent years, consumer spending levels have been affected to varying degrees by a number of factors, including modest economic growth, uncertainty regarding governmental spending and tax policies, unemployment levels, tightened consumer credit, an improving housing market and a fluctuating stock market. In addition, consumer spending levels of international customers are impacted by the strength of the U.S. dollar relative to foreign currencies. These factors have affected, to varying degrees, the amount of funds that consumers are willing and able to spend for discretionary purchases, including purchases of some of the merchandise offered by the Company.
All economic conditions ultimately affect the Company's overall operations. However, the effects of economic conditions can be experienced differently and at different times, in the various geographic regions in which the Company operates, in relation to the different types of merchandise that the Company offers for sale, or in relation to each of the Company's branded operations.
Based on its assessment of current and anticipated market conditions and its recent performance and reflecting the adoption of new revenue recognition and pension accounting standards issued by the FASB, the Company's 2018 assumptions include the following:
Net sales estimated decline of approximately 0.5% to 2.0% from 2017 levels. Net sales in 2017 reflected a 53rd week of sales, whereas comparable sales below are on a 52-week basis.
Comparable sales on both an owned and owned plus licensed basis are estimated to be flat to up 1.0%.
Gross margin on retail sales is estimated to be flat to up slightly compared to 2017.
Credit income, reflecting changes from the new revenue recognition standard, estimated to be approximately $645 million to $665 million.
Selling, general and administrative expense dollars are expected to be approximately flat with 2017 or up slightly depending on sales.
Estimated asset sale gains of approximately $300 million to $325 million, including a successful sale of the Company's I. Magnin section of its Union Square store in San Francisco.
Estimated interest expense of approximately $255 million to $260 million.
Effective tax rate is expected to be 23.25%.
Diluted earnings per share attributable to Macy's, Inc. shareholders, excluding certain items, is expected to be $3.55 to $3.75.
Depreciation and amortization is expected to be approximately flat with 2017.
Capital expenditures are estimated at approximately $1,050 million.
The Company's forecasted capital expenditures are primarily related to investments in several merchandising initiatives, continued growth of Backstage and bluemercury locations, expansion of store pick up, and the store, digital and technological enhancements associated with the Company's Growth 50 initiative. This initiative includes the roll-out of various strategies incubated in 2017 to 50 Macy's stores of different sizes and geography.
In 2018, the Company expects excess cash to be used to invest in strategies and initiatives to help grow the business, continue to fund the Company's dividends and repay debt.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash from operations, cash on hand and the credit facility described below.
Operating Activities
Net cash provided by operating activities was $1,944 million in 2017 compared to $1,801 million in 2016. The increase was driven by a 53rd week of operations and lower selling, general and administrative expenses offset by higher tax payments as compared to 2016.
Investing Activities
Net cash used by investing activities for 2017 was $373 million, compared to net cash used by investing activities of $187 million for 2016. Investing activities for 2017 included purchases of property and equipment totaling $487 million and capitalized software of $273 million, compared to purchases of property and equipment totaling $596 million and capitalized software of $316 million for 2016.
Capital expenditures were lower by $152 million in 2017 as compared to 2016. This decrease was mainly driven by intentional delays in capital projects that are estimated to begin in 2018 and are included in the Company's aforementioned 2018 guidance.
In 2017, the Company continued to execute on its real estate strategy that includes creating value through monetization and, in some cases, redevelopment of real estate assets. Overall, property and equipment sales, primarily related to real estate, generated cash proceeds of $411 million in 2017 compared to $673 million in 2016.
During 2017, the Company opened two new Macy's stores and 36 new freestanding bluemercury stores. During 2016, the Company opened one new Macy's store, one new Bloomingdale's The Outlet store, one new freestanding Macy's Backstage store and 24 new freestanding bluemercury stores.
Financing Activities
Net cash used by the Company for financing activities was $1,413 million for 2017, including the repayment of $954 million of debt and the payment of $461 million of cash dividends, partially offset by the issuance of $6 million of Common Stock, primarily related to the exercise of stock options, and proceeds of $13 million received from Macy's China Limited's noncontrolling interest shareholder.
During December 2017, the Company completed a tender offer and purchased $400 million in aggregate principal amount of certain senior unsecured notes and debentures. The purchased senior unsecured notes and debentures included $147 million of 6.9% senior debentures due 2032, $108 million of 6.7% senior debentures due 2034, $96 million of 6.375% senior notes due 2037, $43 million of 8.75% senior debentures due 2029, and $6 million of 7.875% senior debentures due 2030. The total cash cost for the tender offer was $423 million. The Company recognized $11 million of income related to the recognition of the unamortized debt premium partially offset by the redemption premium and other costs associated with this debt as net premiums on early retirement of debt on the Consolidated Statements of Income during 2017.
In July 2017 the Company paid $300 million of debt at maturity. During the first and second quarters of 2017, the Company repurchased $247 million face value of senior notes and debentures. The debt repurchases were made in the open market for a total cash cost of $257 million, including expenses related to the transactions. Such repurchases resulted in the recognition of expense of $1 million during 2017 presented as net premiums on early retirement of debt on the Consolidated Statements of Income.
Net cash used by the Company for financing activities was $1,426 million for 2016 and included the acquisition of the Company's Common Stock under its share repurchase program at a cost of $316 million, the repayment of $751 million of debt and the payment of $459 million of cash dividends, partially offset by an increase in outstanding checks of $61 million and the issuance of $36 million of Common Stock, primarily related to the exercise of stock options.
During August 2016, the Company redeemed at par the principal amount of $108 million of 7.875% senior debentures due 2036, pursuant to the terms of the debentures. Interest expense in 2016 benefited from the recognition of
unamortized debt premium associated with this debt. During October 2016, the Company repaid $59 million of 7.45% senior debentures at maturity. During December 2016, the Company repaid $577 million of 5.9% senior notes at maturity.
The Company entered into a new credit agreement with certain financial institutions as of May 6, 2016 providing for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing) outstanding at any particular time. This agreement is set to expire May 6, 2021 and replaced the prior agreement which was set to expire May 10, 2018.
As of February 3, 2018, and January 28, 2017, there were no revolving credit loans outstanding under this credit agreement, and there were no borrowings under the agreement during 2017 and 2016. In addition, there were no standby letters of credit outstanding at February 3, 2018 and January 28, 2017. Revolving loans under the credit agreement bear interest based on various published rates.
The Company is party to a $1,500 million unsecured commercial paper program. The Company may issue and sell commercial paper in an aggregate amount outstanding at any particular time not to exceed its then-current combined borrowing availability under the bank credit agreement with certain financial institutions. Over the past two fiscal years, the amount of borrowings under the commercial paper program increased to its highest level for 2016 of approximately $388 million during the fourth quarter of 2016. There were no borrowings under the program during 2017. As of February 3, 2018 and January 28, 2017, there were no remaining borrowings outstanding under the commercial paper program.
The credit agreement requires the Company to maintain a specified interest coverage ratio for the latest four quarters of no less than 3.25 and a specified leverage ratio as of and for the latest four quarters of no more than 3.75. The Company's interest coverage ratio for 2017 was 8.94 and its leverage ratio at February 3, 2018 was 2.04, in each case as calculated in accordance with the credit agreement. The interest coverage ratio is defined as EBITDA divided by net interest expense and the leverage ratio is defined as debt divided by EBITDA. For purposes of these calculations EBITDA is calculated as net income plus interest expense, taxes, depreciation, amortization, non-cash impairment of goodwill, intangibles and real estate, non-recurring cash charges not to exceed in the aggregate $300 million and extraordinary losses less interest income and non-recurring or extraordinary gains. Debt is adjusted to exclude the premium on acquired debt and net interest is adjusted to exclude the amortization of premium on acquired debt and premium on early retirement of debt.
A breach of a restrictive covenant in the Company's credit agreement or the inability of the Company to maintain the financial ratios described above could result in an event of default under the credit agreement. In addition, an event of default would occur under the credit agreement if any indebtedness of the Company in excess of an aggregate principal amount of $150 million becomes due prior to its stated maturity or the holders of such indebtedness become able to cause it to become due prior to its stated maturity. Upon the occurrence of an event of default, the lenders could, subject to the terms and conditions of the credit agreement, elect to declare the outstanding principal, together with accrued interest, to be immediately due and payable. Moreover, most of the Company's senior notes and debentures contain cross-default provisions based on the non-payment at maturity, or other default after an applicable grace period, of any other debt, the unpaid principal amount of which is not less than $100 million that could be triggered by an event of default under the credit agreement. In such an event, the Company's senior notes and debentures that contain cross-default provisions would also be subject to acceleration.
At February 3, 2018, no notes or debentures contain provisions requiring acceleration of payment upon a debt rating downgrade. However, the terms of approximately $4,019 million in aggregate principal amount of the Company's senior notes outstanding at that date require the Company to offer to purchase such notes at a price equal to 101% of their principal amount plus accrued and unpaid interest in specified circumstances involving both a change of control (as defined in the applicable indenture) of the Company and the rating of the notes by specified rating agencies at a level below investment grade.
During 2016, the Company repurchased approximately 7.9 million shares of its Common Stock for a total of approximately $316 million. As of February 3, 2018, the Company had $1,716 million of authorization remaining under its share repurchase program. The Company may continue or, from time to time, suspend repurchases of shares under its share repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors.
On February 23, 2018, the Company's board of directors declared a quarterly dividend of 37.75 cents per share on its Common Stock, payable April 2, 2018, to shareholders of record at the close of business on March 15, 2018.
Contractual Obligations and Commitments
At February 3, 2018, the Company had contractual obligations (within the scope of Item 303(a)(5) of Regulation S-K) as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Obligations Due, by Period |
| Total | | Less than 1 Year | | 1 – 3 Years | | 3 – 5 Years | | More than 5 Years |
| (millions) |
| Short-term debt | $ | 21 |
| | $ | 21 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Long-term debt | 5,806 |
| | — |
| | 581 |
| | 553 |
| | 4,672 |
|
| Interest on debt | 3,114 |
| | 286 |
| | 566 |
| | 500 |
| | 1,762 |
|
| Capital lease obligations | 49 |
| | 3 |
| | 6 |
| | 6 |
| | 34 |
|
| Operating leases | 3,546 |
| | 327 |
| | 586 |
| | 494 |
| | 2,139 |
|
| Letters of credit | 28 |
| | 28 |
| | — |
| | — |
| | — |
|
| Other obligations | 4,525 |
| | 2,476 |
| | 1,026 |
| | 230 |
| | 793 |
|
| | $ | 17,089 |
| | $ | 3,141 |
| | $ | 2,765 |
| | $ | 1,783 |
| | $ | 9,400 |
|
“Other obligations” in the foregoing table includes post employment and postretirement benefits, self-insurance reserves, group medical/dental/life insurance programs, merchandise purchase obligations and obligations under outsourcing arrangements, construction contracts, energy and other supply agreements identified by the Company and liabilities for unrecognized tax benefits that the Company expects to settle in cash in the next year. The Company's merchandise purchase obligations fluctuate on a seasonal basis, typically being higher in the summer and early fall and being lower in the late winter and early spring. The Company purchases a substantial portion of its merchandise inventories and other goods and services otherwise than through binding contracts. Consequently, the amounts shown as “Other obligations” in the foregoing table do not reflect the total amounts that the Company would need to spend on goods and services in order to operate its businesses in the ordinary course.
The Company has not included in the contractual obligations table $125 million of long-term liabilities for unrecognized tax benefits for various tax positions taken. The table also excludes federal, state and local interest and penalties related to unrecognized tax benefits of $27 million included in other liabilities and $24 million included in current income taxes. These liabilities may increase or decrease over time as a result of tax examinations, and given the status of examinations, the Company cannot reliably estimate the period of any cash settlement with the respective taxing authorities. The Company has included in the contractual obligations table $11 million of liabilities for unrecognized tax benefits that the Company expects to settle in cash in the next year.
Liquidity and Capital Resources Outlook
Management believes that, with respect to the Company's current operations, cash on hand and funds from operations, together with its credit facility and other capital resources, will be sufficient to cover the Company's reasonably foreseeable working capital, capital expenditure and debt service requirements and other cash requirements in both the near term and over the longer term. The Company's ability to generate funds from operations may be affected by numerous factors, including general economic conditions and levels of consumer confidence and demand; however, the Company expects to be able to manage its working capital levels and capital expenditure amounts so as to maintain sufficient levels of liquidity. To the extent that the Company's cash balances from time to time exceed amounts that are needed to fund its immediate liquidity requirements, the Company will consider alternative uses of some or all of such excess cash. Such alternative uses may include, among others, the redemption or repurchase of debt, equity or other securities through open market purchases, privately negotiated transactions or otherwise, and the funding of pension related obligations. Depending upon its actual and anticipated sources and uses of liquidity, conditions in the capital markets and other factors, the Company will from time to time consider the issuance of debt or other securities, or other possible capital markets transactions, for the purpose of raising capital which could be used to refinance current indebtedness or for other corporate purposes including the redemption or repurchase of debt, equity or other securities through open market purchases, privately negotiated transactions or otherwise, and the funding of pension related obligations.
The Company intends from time to time to consider additional acquisitions of, and investments in, retail businesses and other complementary assets and companies. Acquisition transactions, if any, are expected to be financed from one or more of the following sources: cash on hand, cash from operations, borrowings under existing or new credit facilities and the issuance of long-term debt or other securities, including Common Stock.
Important Information Regarding Non-GAAP Financial MeasuresNet Sales
Net sales for 2017 include a 53rd week of operations and were $24,837 million, a decrease of $941 million, or 3.7%, from 2016. The Company reports its financial resultsdecrease in accordance with U.S. generally accepted accounting principles ("GAAP")comparable sales on an owned basis, which exclude the 53rd week of sales, for 2017 was 2.2% compared to 2016. However, management believes that certain non-GAAP financial measures provide users of the Company's financial information with additional useful information in evaluating operating performance. Management believes that providing supplemental changesThe decrease in comparable sales on an owned plus licensed basis for 2017 was 1.9% compared to 2016. (See page 30 for information regarding the Company's calculation of comparable sales, a reconciliation of the non-GAAP measure which includes the impact of growth in comparabletakes into account sales of departments licensed to third parties assiststo the most comparable GAAP measure and other important information). Although net sales were down compared to 2016, the Company experienced a strong fourth quarter in evaluating2017 with comparable sales on an owned basis up 1.3% and up 1.4% on an owned plus licensed basis. Geographically, sales in 2017 were strongest in Florida, Eastern Texas, Louisiana, Hawaii, Oregon, Southern California and Arizona. Digital sales continued to be strong in 2017 and experienced double digit growth. By family of business, sales in 2017 were strongest in active apparel, fine jewelry, fragrances, dresses and men's tailored clothing. Sales in 2017 were less strong in handbags although the trend improved in the second half of the year. Sales of the Company's ability to generateprivate label brands represented approximately 20% of net sales growth, whether through owned businesses or departments licensed to third parties, and in evaluating the impact of changes in the mannerMacy's-branded operations in which certain departments2017 and 2016.
Cost of Sales and Gross Margin
Cost of sales for 2017 decreased $469 million from 2016. The cost of sales rate as a percent to net sales of 61.0% was 40 basis points higher in 2017, as compared to 60.6% in 2016, primarily due to higher delivery expenses associated with the Company's omnichannel activities and free shipping promotions. Gross margin improved in the second half of 2017 as the Company benefited from its inventory management strategies.
SG&A Expenses
SG&A expenses for 2017 decreased $343 million from 2016 and the SG&A rate as a percent to net sales of 32.8% approximated the rate in 2016. The dollar decrease from 2016 was mainly due to store closings and the restructuring activities announced by the Company in 2016 and 2017, offset slightly by higher expenses associated with the continued investments in the Company's omnichannel operations, and investments in bluemercury and Macy's Backstage. The decrease was also driven by higher income from credit operations. Income from credit operations was $768 million in 2017 as compared to $736 million in 2016. Advertising expense, net of cooperative advertising allowances, was $1,108 million for 2017 compared to $1,153 million for 2016.
Gains on Sale of Real Estate
The Company recognized gains of $544 million in 2017 associated with sales of real estate, as compared to $209 million in 2016. 2017 included gains of $234 million related to the Macy's Union Square location, $71 million related to the Macy's Brooklyn transaction, $47 million related to the downtown Minneapolis properties and $40 million related to the downtown Seattle Macy's location. 2016 included $33 million of gains related to the Macy's Brooklyn transaction.
Restructuring, Impairment, Store Closing and Other Costs
Restructuring, impairment, store closing and other costs for 2017 includes costs and expenses primarily associated with the organizational changes and store closings announced in August 2017 and January 2018. In 2017, these costs included $120 million of severance and other human resource-related costs primarily associated with organization changes and store closings, $53 million of asset impairment charges and $13 million of other related costs and expenses. Restructuring, impairment, store closing and other costs for 2016 includes costs and expenses primarily associated with the organizational changes and store closings announced in August 2016 and January 2017. During 2016, these costs and expenses included asset impairment charges of $265 million, $168 million of severance and other human resource-related costs and $46 million of other related costs and expenses.
Settlement Charges
$105 million and $98 million of non-cash settlement charges were recognized in 2017 and 2016, respectively. These charges relate to the pro-rata recognition of net actuarial losses associated with the Company’s defined benefit retirement plans and are operated. Management believesthe result of an increase in lump sum distributions associated with store closings, a voluntary separation program, organizational restructuring, and periodic distribution activity.
Net Interest Expense and Net Premiums on the Early Retirement of Debt
Net interest expense, excluding net premiums on the early retirement of debt, for 2017 decreased $53 million from 2016. This decrease was primarily driven by the early repayment of $647 million of debt and the maturity of $300 million
of debt in 2017. This early repayment resulted in the recognition of a $10 million benefit related to the write-off of the premium associated with the debt repayments, net of the premium costs and other expenses incurred with the early repayment. This benefit is presented as a net premium on the early retirement of debt on the Consolidated Statements of Income.
Effective Tax Rate
The Company's effective tax rate was a benefit of 1.9% for 2017 and expense of 35.8% for 2016. 2017 differs from the federal income tax statutory rate of 33.7%, and on a comparative basis, principally due to 2017 U.S. federal tax reform that excluding certain items that may vary substantiallyled to the recognition of a non-cash tax benefit of $571 million associated with the remeasurement of the Company's deferred tax balances. Further, 2017 included the recognition of approximately $15 million of net tax deficiencies associated with share-based payment awards due to the adoption of Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting. Historically, the Company had recognized such amounts as an offset to accumulated excess tax benefits previously recognized in frequency and magnitude period-to-period from diluted earnings per shareadditional paid-in capital.
Net Income Attributable to Macy's, Inc. Shareholders
Net income attributable to Macy's, Inc. shareholders and fromfor 2017 increased compared to 2016, driven by higher operating income due to higher asset sale gains, lower selling, general and EBITDAadministrative expenses, restructuring, impairment, store closing and other costs, partially offset by lower sales and gross margin. Coupled with lower net interest expense and a net income tax benefit resulted in net income attributable to Macy's Inc. shareholders increasing by $928 million in 2017 as percentagescompared to 2016.
Comparison of 2016 and 2015
Net Sales
Net sales provides useful supplemental measures that assistfor 2016 decreased $1,301 million or 4.8% compared to 2015. The decrease in evaluating the Company's abilitycomparable sales on an owned basis for 2016 was 3.5% compared to generate earnings and leverage sales, respectively, and to more readily compare these metrics between past and future periods. Management also believes that EBITDA and Adjusted EBITDA are frequently used by investors and securities analysts in their evaluations of companies, and that such supplemental measures facilitate comparisons between companies that have different capital and financing structures and/or tax rates. In addition, management believes that ROIC is a useful supplemental measure in evaluating how efficiently the Company employs its capital.2015. The Company uses some of these non-GAAP financial measures as performance measures for components of executive compensation.
The reconciliation of the forward-looking non-GAAP financial measure of changesdecrease in comparable sales on an owned plus licensed basis for 2016 was 2.9% compared to GAAP2015. (See page 30 for information regarding the Company's calculation of comparable sales, (i.e., on an owned basis) is ina reconciliation of the same manner as illustrated below, where the impact of growth in comparablenon-GAAP measure which takes into account sales of departments licensed to third parties is the only reconciling item. In addition, the Company does not provideto the most directly comparable forward-looking GAAP measure of diluted earnings per share attributable to Macy’s, Inc. shareholders because the timing and amount of excluded items (e.g., asset impairment charges, retirement settlement charges and other store closing related costs) are unreasonably difficultimportant information). The Company experienced an overall weakness in sales, but geographically sales in 2016 were strongest in the Southwest, particularly southern California. Digital sales continued to fullybe strong in 2016 and accurately estimate.
Non-GAAP financial measures should be viewed as supplementing,experienced double digit growth. By family of business, sales in 2016 were strongest in apparel, fine jewelry, shoes, intimate apparel and not as an alternative or substitute for,fragrances. Sales in 2016 were less strong in fashion jewelry, handbags, and fashion watches. Sales of the Company's financial results preparedprivate label brands represented approximately 20% of net sales in accordance with GAAP. Certainthe Macy's-branded operations in 2016 and 2015.
Cost 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 operationsSales and cash flows and should therefore be considered in assessing the Company's actual and future financial condition and performance. Additionally, the amounts received by the Company on accountGross Margin
Cost of sales for 2016 decreased $875 million from 2015. The cost of departments licensed to third parties are limited to commissions received on such sales. The methods used by the Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies.
Change in Comparable Sales
The following is a tabular reconciliation of the non-GAAP financial measure of changes in comparable sales on an owned plus licensed basis, to GAAP comparable sales (i.e., on an owned basis), which the Company believes to be the most directly comparable GAAP financial measure.
|
| | | | | | | | | | |
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
Increase (decrease) in comparable sales on an owned basis (note 1) | | (3.5)% | | (3.0)% | | 0.7% | | 1.9% | | 3.7% |
Impact of growth in comparable sales of departments licensed
to third parties (note 2) | | 0.6% | | 0.5% | | 0.7% | | 0.9% | | 0.3% |
| Increase (decrease) in comparable sales on an owned plus licensed basis | | (2.9)% | | (2.5)% | | 1.4% | | 2.8% | | 4.0% |
Notes:
| |
(1) | Represents the period-to-period percentage change in net sales from stores in operation throughout the year presented and the immediately preceding year and all online sales of macys.com and bloomingdales.com, adjusting for the 53rd week in 2012, excluding commissions from departments licensed to third parties. Stores undergoing remodeling, expansion or relocation remain in the comparable sales calculation unless the store is closed for a significant period of time. Definitions and calculations of comparable sales differ among companies in the retail industry. |
| |
(2) | Represents the impact of including the sales of departments licensed to third parties occurring in stores in operation throughout the year presented and the immediately preceding year and all online sales of macys.com and bloomingdales.com, adjusting for the 53rd week in 2012, in the calculation of comparable sales. The Company licenses third parties to operate certain departments in its stores and online and receives commissions from these third parties based on a percentage of their net sales. In its financial statements prepared in conformity with GAAP, the Company includes these commissions (rather than sales of the departments licensed to third parties) in its net sales. The Company does not, however, include any amounts in respect of licensed department sales (or any commissions earned on such sales) in its comparable sales in accordance with GAAP (i.e., on an owned basis). The amounts of commissions earned on sales of departments licensed to third parties are not material to its net sales for the periods presented. |
Operating Income, Excluding Certain Items, as a Percent to Net Sales
The following is a tabular reconciliation of the non-GAAP financial measure operating income, excluding certain items,rate as a percent to net sales of 60.6% was 30 basis points lower in 2016, as compared to GAAP operating income60.9% in 2015, primarily due to fewer markdowns taken in 2016 as compared to 2015 and offset slightly by higher delivery expenses associated with the Company's omnichannel activities and free shipping promotions.
SG&A Expenses
SG&A expenses for 2016 increased $6 million from 2015, however the SG&A rate as a percent to net sales whichof 32.8% was 150 basis points higher in 2016, as compared to 2015. SG&A expenses in 2016 were impacted by lower income from credit operations and higher expenses associated with the Company believes to becontinued investments in the most directly comparable GAAP financial measure.
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | | (millions, except percentages) |
| Net sales | | $ | 25,778 |
| | $ | 27,079 |
| | $ | 28,105 |
| | $ | 27,931 |
| | $ | 27,686 |
|
| | | | | | | | | | | |
| Operating income | | $ | 1,315 |
| | $ | 2,039 |
| | $ | 2,800 |
| | $ | 2,678 |
| | $ | 2,661 |
|
| | | | | | | | | | | |
| Operating income as a percent to net sales | | 5.1 | % | | 7.5 | % | | 10.0 | % | | 9.6 | % | | 9.6 | % |
| | | | | | | | | | | |
| Operating income | | $ | 1,315 |
| | $ | 2,039 |
| | $ | 2,800 |
| | $ | 2,678 |
| | $ | 2,661 |
|
Add back impairments, store closing and
other costs | | 479 |
| | 288 |
| | 87 |
| | 88 |
| | 5 |
|
| Add back settlement charges | | 98 |
| | — |
| | — |
| | — |
| | — |
|
| Operating income, excluding certain items | | $ | 1,892 |
| | $ | 2,327 |
| | $ | 2,887 |
| | $ | 2,766 |
| | $ | 2,666 |
|
Operating income, excluding certain items, as a
percent to net sales | | 7.3 | % | | 8.6 | % | | 10.3 | % | | 9.9 | % | | 9.6 | % |
Diluted Earnings Per Share Attributable toCompany's omnichannel operations, investments in bluemercury, Macy's Inc. Shareholders, Excluding Certain Items
The following is a tabular reconciliationBackstage and Macy's China Limited. These increases were partially offset by lower retirement expenses (including Pension Plan, SERP and defined contribution plan expenses), lower advertising expense, net of cooperative advertising allowances and the impact of the non-GAAP financial measure diluted earnings per share attributablerestructuring announced at the end of 2015. Income from credit operations was $736 million in 2016 as compared to Macy's, Inc. shareholders, excluding certain items,$831 million in 2015. Retirement expenses were $44 million in 2016 as compared to GAAP diluted earnings per share attributable$77 million in 2015. Advertising expense, net of cooperative advertising allowances, was $1,153 million for 2016 compared to Macy's, Inc. shareholders, which the Company believes to be the most directly comparable GAAP measure.
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
Diluted earnings per share attributable to
Macy's, Inc. shareholders | | $ | 1.99 |
| | $ | 3.22 |
| | $ | 4.22 |
| | $ | 3.86 |
| | $ | 3.24 |
|
| Add back the pre-tax impact of impairments, store closing and other costs | | 1.54 |
| | 0.86 |
| | 0.24 |
| | 0.23 |
| | 0.01 |
|
| Add back the pre-tax impact of settlement charges | | 0.31 |
| | — |
| | — |
| | — |
| | — |
|
Add back the pre-tax impact of premium on early
retirement of debt | | — |
| | — |
| | 0.05 |
| | — |
| | 0.33 |
|
| Deduct the income tax impact of impairments, store closing and other costs, settlement charges and premium on early retirement of debt | | (0.73 | ) | | (0.31 | ) | | (0.11 | ) | | (0.09 | ) | | (0.12 | ) |
Diluted earnings per share attributable to
Macy's, Inc. shareholders, excluding the impact
of impairments, store closing and other costs, settlement charges and premium on early retirement of debt | | $ | 3.11 |
| | $ | 3.77 |
| | $ | 4.40 |
| | $ | 4.00 |
| | $ | 3.46 |
|
Adjusted EBITDA as a Percent to Net Sales
The following is a tabular reconciliation$1,173 million for 2015. Advertising expense, net of the non-GAAP financial measure earnings before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted to exclude premium on early retirement of debt, impairments, store closing and other costs and settlement charges ("Adjusted EBITDA"),cooperative advertising allowances, as a percent to net sales to GAAP net income as a percent to net sales, which the Company believes to be the most directly comparable GAAP financial measure. |
| | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | | (millions, except percentages) |
| Net sales | | $ | 25,778 |
| | $ | 27,079 |
| | $ | 28,105 |
| | $ | 27,931 |
| | $ | 27,686 |
|
| | | | | | | | | | | |
| Net income | | $ | 611 |
| | $ | 1,070 |
| | $ | 1,526 |
| | $ | 1,486 |
| | $ | 1,335 |
|
| | | | | | | | | | | |
| Net income as a percent to net sales | | 2.4 | % | | 4.0 | % | | 5.4 | % | | 5.3 | % | | 4.8 | % |
| | | | | | | | | | | |
| Net income | | $ | 611 |
| | $ | 1,070 |
| | $ | 1,526 |
| | $ | 1,486 |
| | $ | 1,335 |
|
Add back impairments, store
closing and other costs | | 479 |
| | 288 |
| | 87 |
| | 88 |
| | 5 |
|
| Add back settlement charges | | 98 |
| | — |
| | — |
| | — |
| | — |
|
| Add back interest expense - net | | 363 |
| | 361 |
| | 393 |
| | 388 |
| | 422 |
|
Add back premium on early retirement
of debt | | — |
| | — |
| | 17 |
| | — |
| | 137 |
|
Add back federal, state and local income
tax expense | | 341 |
| | 608 |
| | 864 |
| | 804 |
| | 767 |
|
| Add back depreciation and amortization | | 1,058 |
| | 1,061 |
| | 1,036 |
| | 1,020 |
| | 1,049 |
|
| Adjusted EBITDA | | $ | 2,950 |
| | $ | 3,388 |
| | $ | 3,923 |
| | $ | 3,786 |
| | $ | 3,715 |
|
| Adjusted EBITDA as a percent to net sales | | 11.4 | % | | 12.5 | % | | 14.0 | % | | 13.6 | % | | 13.4 | % |
ROIC
The Company defines ROIC as adjusted operating income as a percent to average invested capital. Average invested capital is comprised of an annual two-point (i.e., end of the year presented and the immediately preceding year) average of gross property and equipment, a capitalized value of non-capitalized leases equal to periodic annual reported net rent expense multiplied by a factor of eight and a four-point (i.e., end of each quarter within the period presented) average of other selected assets and liabilities. The calculation of the capitalized value of non-capitalized leases is consistent with industry and credit rating agency practice and the specified assets are subject to a four-point average to compensate for seasonal fluctuations.
The following is a tabular reconciliation of the non-GAAP financial measure of ROIC to operating income as a percent to property and equipment - net, which the Company believes to be the most directly comparable GAAP financial measure.
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2016 |
| 2015 |
| 2014 |
| 2013 |
| 2012 |
| | | (millions, except percentages) |
| Operating income | | $ | 1,315 |
| | $ | 2,039 |
| | $ | 2,800 |
| | $ | 2,678 |
| | $ | 2,661 |
|
| | | | | | | | | | | |
| Property and equipment - net | | $ | 7,317 |
| | $ | 7,708 |
| | $ | 7,865 |
| | $ | 8,063 |
| | $ | 8,308 |
|
| | | | | | | | | | | |
Operating income as a percent to property and
equipment - net | | 18.0 | % | | 26.5 | % | | 35.6 | % | | 33.2 | % | | 32.0 | % |
| | | | | | | | | | | |
| Operating income | | $ | 1,315 |
| | $ | 2,039 |
| | $ | 2,800 |
| | $ | 2,678 |
| | $ | 2,661 |
|
Add back impairments, store closing and
other costs | | 479 |
| | 288 |
| | 87 |
| | 88 |
| | 5 |
|
| Add back settlement charges | | 98 |
| | — |
| | — |
| | — |
| | — |
|
| Add back depreciation and amortization | | 1,058 |
| | 1,061 |
| | 1,036 |
| | 1,020 |
| | 1,049 |
|
| Add back rent expense, net | | | | | | | | | | |
| Real estate | | 319 |
| | 301 |
| | 279 |
| | 268 |
| | 258 |
|
| Personal property | | 11 |
| | 12 |
| | 12 |
| | 11 |
| | 11 |
|
| Deferred rent amortization | | 9 |
| | 8 |
| | 7 |
| | 8 |
| | 7 |
|
| Adjusted operating income | | $ | 3,289 |
| | $ | 3,709 |
| | $ | 4,221 |
| | $ | 4,073 |
| | $ | 3,991 |
|
| | | | | | | | | | | |
| Property and equipment - net | | $ | 7,317 |
| | $ | 7,708 |
| | $ | 7,865 |
| | $ | 8,063 |
| | $ | 8,308 |
|
| Add back accumulated depreciation and amortization | | 5,088 |
| | 5,457 |
| | 5,830 |
| | 6,007 |
| | 5,967 |
|
| Add capitalized value of non-capitalized leases | | 2,712 |
| | 2,568 |
| | 2,384 |
| | 2,296 |
| | 2,208 |
|
| Add (deduct) other selected assets and liabilities: | | | | | | | | | | |
| Receivables | | 411 |
| | 338 |
| | 336 |
| | 339 |
| | 322 |
|
| Merchandise inventories | | 6,012 |
| | 6,226 |
| | 6,155 |
| | 6,065 |
| | 5,754 |
|
| Prepaid expenses and other current assets | | 456 |
| | 453 |
| | 443 |
| | 398 |
| | 390 |
|
| Other assets | | 881 |
| | 775 |
| | 784 |
| | 659 |
| | 579 |
|
| Merchandise accounts payable | | (2,182 | ) | | (2,366 | ) | | (2,472 | ) | | (2,520 | ) | | (2,362 | ) |
| Accounts payable and accrued liabilities | | (2,924 | ) | | (2,677 | ) | | (2,511 | ) | | (2,328 | ) | | (2,333 | ) |
| Total average invested capital | | $ | 17,771 |
| | $ | 18,482 |
| | $ | 18,814 |
| | $ | 18,979 |
| | $ | 18,833 |
|
| | | | | | | | | | | |
| ROIC | | 18.5 | % | | 20.1 | % | | 22.4 | % | | 21.5 | % | | 21.2 | % |
Gains on Sale of Real Estate
ResultsGains on sale of Operations
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | | 2015 | | | 2014 | |
| | | Amount | | % to Sales | | | Amount | | % to Sales | | | Amount | | % to Sales | |
| | | (dollars in millions, except per share figures) | |
| Net sales | | $ | 25,778 |
| | | | | $ | 27,079 |
| | | | | $ | 28,105 |
| | | |
| Increase (decrease) in sales | | (4.8 | ) | % | | | (3.7 | ) | % | | | 0.6 |
| % | |
| Increase (decrease) in comparable sales | | (3.5 | ) | % | | | (3.0 | ) | % | | | 0.7 |
| % | |
| Cost of sales | | (15,621 | ) | | (60.6 | ) | % | (16,496 | ) | | (60.9 | ) | % | (16,863 | ) | | (60.0 | ) | % |
| Gross margin | | 10,157 |
| | 39.4 |
| % | 10,583 |
| | 39.1 |
| % | 11,242 |
| | 40.0 |
| % |
| Selling, general and administrative expenses | | (8,265 | ) | | (32.0 | ) | % | (8,256 | ) | | (30.5 | ) | % | (8,355 | ) | | (29.7 | ) | % |
| Impairments, store closing and other costs | | (479 | ) | | (1.9 | ) | % | (288 | ) | | (1.1 | ) | % | (87 | ) | | (0.3 | ) | % |
| Settlement charges | | (98 | ) | | (0.4 | ) | % | — |
| | — |
| % | — |
| | — |
| % |
| Operating income | | 1,315 |
| | 5.1 |
| % | 2,039 |
| | 7.5 |
| % | 2,800 |
| | 10.0 |
| % |
| Interest expense - net | | (363 | ) | | | | | (361 | ) | | | | | (393 | ) | | | |
| Premium on early retirement of debt | | — |
| | | | | — |
| | | | | (17 | ) | | | |
| Income before income taxes | | 952 |
| | | | | 1,678 |
| | | | | 2,390 |
| | | |
| Federal, state and local income tax expense | | (341 | ) | | | | | (608 | ) | | | | | (864 | ) | | | |
| Net income | | 611 |
| | | | | 1,070 |
| | | | | 1,526 |
| | | |
| Net loss attributable to noncontrolling interest | | 8 |
| | | | | 2 |
| | | | | — |
| | | |
Net income attributable to Macy's, Inc. shareholders | | $ | 619 |
| | 2.0 | % | % | $ | 1,072 |
| | 4.0 |
| % | $ | 1,526 |
| | 5.4 |
| % |
| | | | | | | | | | | | | | | | |
Diluted earnings per share attributable to Macy's, Inc. shareholders | | $ | 1.99 |
| | | | | $ | 3.22 |
| | | | | $ | 4.22 |
| | | |
| | | | | | | | | | | | | | | | |
| Supplemental Non-GAAP Financial Measures | | | | | | | | | | | | | | | |
Increase (decrease) in comparable sales on an owned plus licensed basis | | (2.9 | ) | % | | | (2.5 | ) | % | | | 1.4 |
| % | |
| Operating income, excluding certain items | | $ | 1,892 |
| | 7.3 |
| % | $ | 2,327 |
| | 8.6 |
| % | $ | 2,887 |
| | 10.3 |
| % |
Diluted earnings per share attributable to Macy's, Inc. shareholders, excluding certain items | | $ | 3.11 |
| | | | | $ | 3.77 |
| | | | | $ | 4.40 |
| | |
| Adjusted EBITDA as a percent to net sales | | 11.4 |
| % | | | 12.5 |
| % | | | 14.0 |
| % | |
| ROIC | | 18.5 |
| % | | | 20.1 |
| % | | | 22.4 |
| % | |
| | | | | | | | | | | | | | | | |
| See pages 20 to 23 for a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measure and for other important information. |
| | | | | | | | | | | | | | | | |
| Store information (at year-end): | | | | | | | | | | | | | | | |
| Stores operated | | 829 |
| | | | | 868 |
| | | | | 823 |
| | | |
| Square footage (in millions) | | 130.2 |
| | | | | 141.9 |
| | | | | 147.4 |
| | | |
Comparison ofreal estate decreased $3 million to $209 million in 2016 compared to $212 million in 2015. 2016 and 2015 included $33 million and $84 million, respectively, of gains related to the Macy's Brooklyn transaction. 2015 also included a $57 million gain related to the sale of a portion of the downtown Macy's Seattle location.
Restructuring, Impairment, Store Closing and Other Costs
Restructuring, impairment, store closing and other costs for 2016 includes costs and expenses primarily associated with the organizational changes and store closings announced in August 2016 and January 2017. During 2016, these costs and expenses included asset impairment charges of $265 million, $168 million of severance and other human resource-related costs and $46 million of other related costs and expenses. Restructuring, impairment, store closing and other costs for 2015 included costs and expenses primarily associated with organization changes and store closings announced in January 2016. During 2015, these costs and expenses included asset impairment charges of $148 million, $123 million of severance and other human resource-related costs and $17 million of other related costs and expenses.
Settlement Charges
$98 million of non-cash settlement charges were recognized in 2016. These charges relate to the pro-rata recognition of net actuarial losses associated with the Company’s defined benefit retirement plans and are the result of an increase in lump sum distributions associated with store closings, a voluntary separation program, organizational restructuring, and periodic distribution activity.
Net Interest Expense
Net interest expense for 2016 decreased $2 million from 2015. Net interest expense for 2016 was impacted by lower capitalized interest associated with the Company's construction projects, offset slightly by lower rates on outstanding borrowings as compared to 2015.
Effective Tax Rate
The Company's effective tax rate of 35.8% for 2016 and 36.2% for 2015 differ from the federal income tax statutory rate of 35%, and on a comparative basis, principally because of the effect of state and local income taxes, including the settlement of various tax issues and tax examinations.
Net Income Attributable to Macy's, Inc. Shareholders
Net income attributable to Macy's, Inc. shareholders for 2016 decreased compared to 2015,, reflecting lower sales and gross margin and higher selling, general and administrative expenses, restructuring, impairments, store closing costs and other costs, settlement charges and net interest expense, partially offset by lower income taxes in 2016 as compared to 2015.
Guidance
The Company's operations are impacted by competitive pressures from department stores, specialty stores, mass merchandisers, online retailers and all other retail channels. The Company's operations are also impacted by general consumer spending levels, including the impact of general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, the costs of basic necessities and other goods and the effects of weather or natural disasters and other factors over which the Company has little or no control.
In recent years, consumer spending levels have been affected to varying degrees by a number of factors, including modest economic growth, uncertainty regarding governmental spending and tax policies, unemployment levels, tightened consumer credit, an improving housing market and a fluctuating stock market. In addition, consumer spending levels of international customers are impacted by the strength of the U.S. dollar relative to foreign currencies. These factors have affected, to varying degrees, the amount of funds that consumers are willing and able to spend for discretionary purchases, including purchases of some of the merchandise offered by the Company.
All economic conditions ultimately affect the Company's overall operations. However, the effects of economic conditions can be experienced differently and at different times, in the various geographic regions in which the Company operates, in relation to the different types of merchandise that the Company offers for sale, or in relation to each of the Company's branded operations.
Based on its assessment of current and anticipated market conditions and its recent performance and reflecting the adoption of new revenue recognition and pension accounting standards issued by the FASB, the Company's 2018 assumptions include the following:
Net sales estimated decline of approximately 0.5% to 2.0% from 2017 levels. Net sales in 2017 reflected a 53rd week of sales, whereas comparable sales below are on a 52-week basis.
Comparable sales on both an owned and owned plus licensed basis are estimated to be flat to up 1.0%.
Gross margin on retail sales is estimated to be flat to up slightly compared to 2017.
Credit income, reflecting changes from the new revenue recognition standard, estimated to be approximately $645 million to $665 million.
Selling, general and administrative expense dollars are expected to be approximately flat with 2017 or up slightly depending on sales.
Estimated asset sale gains of approximately $300 million to $325 million, including a successful sale of the Company's I. Magnin section of its Union Square store in San Francisco.
Estimated interest expense of approximately $255 million to $260 million.
Effective tax rate is expected to be 23.25%.
Diluted earnings per share attributable to Macy's, Inc. shareholders, excluding certain items, is expected to be $3.55 to $3.75.
Depreciation and amortization is expected to be approximately flat with 2017.
Capital expenditures are estimated at approximately $1,050 million.
The Company's forecasted capital expenditures are primarily related to investments in several merchandising initiatives, continued growth of Backstage and bluemercury locations, expansion of store pick up, and the store, digital and technological enhancements associated with the Company's Growth 50 initiative. This initiative includes the roll-out of various strategies incubated in 2017 to 50 Macy's stores of different sizes and geography.
In 2018, the Company expects excess cash to be used to invest in strategies and initiatives to help grow the business, continue to fund the Company's dividends and repay debt.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash from operations, cash on hand and the credit facility described below.
Operating Activities
Net cash provided by operating activities was $1,944 million in 2017 compared to $1,801 million in 2016. The increase was driven by a 53rd week of operations and lower selling, general and administrative expenses offset by higher tax payments as compared to 2016.
Investing Activities
Net cash used by investing activities for 2017 was $373 million, compared to net cash used by investing activities of $187 million for 2016. Investing activities for 2017 included purchases of property and equipment totaling $487 million and capitalized software of $273 million, compared to purchases of property and equipment totaling $596 million and capitalized software of $316 million for 2016.
Capital expenditures were lower by $152 million in 2017 as compared to 2016. This decrease was mainly driven by intentional delays in capital projects that are estimated to begin in 2018 and are included in the Company's aforementioned 2018 guidance.
In 2017, the Company continued to execute on its real estate strategy that includes creating value through monetization and, in some cases, redevelopment of real estate assets. Overall, property and equipment sales, primarily related to real estate, generated cash proceeds of $411 million in 2017 compared to $673 million in 2016.
During 2017, the Company opened two new Macy's stores and 36 new freestanding bluemercury stores. During 2016, the Company opened one new Macy's store, one new Bloomingdale's The Outlet store, one new freestanding Macy's Backstage store and 24 new freestanding bluemercury stores.
Financing Activities
Net cash used by the Company for financing activities was $1,413 million for 2017, including the repayment of $954 million of debt and the payment of $461 million of cash dividends, partially offset by the issuance of $6 million of Common Stock, primarily related to the exercise of stock options, and proceeds of $13 million received from Macy's China Limited's noncontrolling interest shareholder.
During December 2017, the Company completed a tender offer and purchased $400 million in aggregate principal amount of certain senior unsecured notes and debentures. The purchased senior unsecured notes and debentures included $147 million of 6.9% senior debentures due 2032, $108 million of 6.7% senior debentures due 2034, $96 million of 6.375% senior notes due 2037, $43 million of 8.75% senior debentures due 2029, and $6 million of 7.875% senior debentures due 2030. The total cash cost for the tender offer was $423 million. The Company recognized $11 million of income related to the recognition of the unamortized debt premium partially offset by the redemption premium and other costs associated with this debt as net premiums on early retirement of debt on the Consolidated Statements of Income during 2017.
In July 2017 the Company paid $300 million of debt at maturity. During the first and second quarters of 2017, the Company repurchased $247 million face value of senior notes and debentures. The debt repurchases were made in the open market for a total cash cost of $257 million, including expenses related to the transactions. Such repurchases resulted in the recognition of expense of $1 million during 2017 presented as net premiums on early retirement of debt on the Consolidated Statements of Income.
Net cash used by the Company for financing activities was $1,426 million for 2016 and included the acquisition of the Company's Common Stock under its share repurchase program at a cost of $316 million, the repayment of $751 million of debt and the payment of $459 million of cash dividends, partially offset by an increase in outstanding checks of $61 million and the issuance of $36 million of Common Stock, primarily related to the exercise of stock options.
During August 2016, the Company redeemed at par the principal amount of $108 million of 7.875% senior debentures due 2036, pursuant to the terms of the debentures. Interest expense in 2016 benefited from the recognition of
unamortized debt premium associated with this debt. During October 2016, the Company repaid $59 million of 7.45% senior debentures at maturity. During December 2016, the Company repaid $577 million of 5.9% senior notes at maturity.
The Company entered into a new credit agreement with certain financial institutions as of May 6, 2016 providing for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing) outstanding at any particular time. This agreement is set to expire May 6, 2021 and replaced the prior agreement which was set to expire May 10, 2018.
As of February 3, 2018, and January 28, 2017, there were no revolving credit loans outstanding under this credit agreement, and there were no borrowings under the agreement during 2017 and 2016. In addition, there were no standby letters of credit outstanding at February 3, 2018 and January 28, 2017. Revolving loans under the credit agreement bear interest based on various published rates.
The Company is party to a $1,500 million unsecured commercial paper program. The Company may issue and sell commercial paper in an aggregate amount outstanding at any particular time not to exceed its then-current combined borrowing availability under the bank credit agreement with certain financial institutions. Over the past two fiscal years, the amount of borrowings under the commercial paper program increased to its highest level for 2016 of approximately $388 million during the fourth quarter of 2016. There were no borrowings under the program during 2017. As of February 3, 2018 and January 28, 2017, there were no remaining borrowings outstanding under the commercial paper program.
The credit agreement requires the Company to maintain a specified interest coverage ratio for the latest four quarters of no less than 3.25 and a specified leverage ratio as of and for the latest four quarters of no more than 3.75. The Company's interest coverage ratio for 2017 was 8.94 and its leverage ratio at February 3, 2018 was 2.04, in each case as calculated in accordance with the credit agreement. The interest coverage ratio is defined as EBITDA divided by net interest expense and the leverage ratio is defined as debt divided by EBITDA. For purposes of these calculations EBITDA is calculated as net income plus interest expense, taxes, depreciation, amortization, non-cash impairment of goodwill, intangibles and real estate, non-recurring cash charges not to exceed in the aggregate $300 million and extraordinary losses less interest income and non-recurring or extraordinary gains. Debt is adjusted to exclude the premium on acquired debt and net interest is adjusted to exclude the amortization of premium on acquired debt and premium on early retirement of debt.
A breach of a restrictive covenant in the Company's credit agreement or the inability of the Company to maintain the financial ratios described above could result in an event of default under the credit agreement. In addition, an event of default would occur under the credit agreement if any indebtedness of the Company in excess of an aggregate principal amount of $150 million becomes due prior to its stated maturity or the holders of such indebtedness become able to cause it to become due prior to its stated maturity. Upon the occurrence of an event of default, the lenders could, subject to the terms and conditions of the credit agreement, elect to declare the outstanding principal, together with accrued interest, to be immediately due and payable. Moreover, most of the Company's senior notes and debentures contain cross-default provisions based on the non-payment at maturity, or other default after an applicable grace period, of any other debt, the unpaid principal amount of which is not less than $100 million that could be triggered by an event of default under the credit agreement. In such an event, the Company's senior notes and debentures that contain cross-default provisions would also be subject to acceleration.
At February 3, 2018, no notes or debentures contain provisions requiring acceleration of payment upon a debt rating downgrade. However, the terms of approximately $4,019 million in aggregate principal amount of the Company's senior notes outstanding at that date require the Company to offer to purchase such notes at a price equal to 101% of their principal amount plus accrued and unpaid interest in specified circumstances involving both a change of control (as defined in the applicable indenture) of the Company and the rating of the notes by specified rating agencies at a level below investment grade.
During 2016, the Company repurchased approximately 7.9 million shares of its Common Stock for a total of approximately $316 million. As of February 3, 2018, the Company had $1,716 million of authorization remaining under its share repurchase program. The Company may continue or, from time to time, suspend repurchases of shares under its share repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors.
On February 23, 2018, the Company's board of directors declared a quarterly dividend of 37.75 cents per share on its Common Stock, payable April 2, 2018, to shareholders of record at the close of business on March 15, 2018.
Contractual Obligations and Commitments
At February 3, 2018, the Company had contractual obligations (within the scope of Item 303(a)(5) of Regulation S-K) as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Obligations Due, by Period |
| Total | | Less than 1 Year | | 1 – 3 Years | | 3 – 5 Years | | More than 5 Years |
| (millions) |
| Short-term debt | $ | 21 |
| | $ | 21 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Long-term debt | 5,806 |
| | — |
| | 581 |
| | 553 |
| | 4,672 |
|
| Interest on debt | 3,114 |
| | 286 |
| | 566 |
| | 500 |
| | 1,762 |
|
| Capital lease obligations | 49 |
| | 3 |
| | 6 |
| | 6 |
| | 34 |
|
| Operating leases | 3,546 |
| | 327 |
| | 586 |
| | 494 |
| | 2,139 |
|
| Letters of credit | 28 |
| | 28 |
| | — |
| | — |
| | — |
|
| Other obligations | 4,525 |
| | 2,476 |
| | 1,026 |
| | 230 |
| | 793 |
|
| | $ | 17,089 |
| | $ | 3,141 |
| | $ | 2,765 |
| | $ | 1,783 |
| | $ | 9,400 |
|
“Other obligations” in the foregoing table includes post employment and postretirement benefits, self-insurance reserves, group medical/dental/life insurance programs, merchandise purchase obligations and obligations under outsourcing arrangements, construction contracts, energy and other supply agreements identified by the Company and liabilities for unrecognized tax benefits that the Company expects to settle in cash in the next year. The Company's merchandise purchase obligations fluctuate on a seasonal basis, typically being higher in the summer and early fall and being lower in the late winter and early spring. The Company purchases a substantial portion of its merchandise inventories and other goods and services otherwise than through binding contracts. Consequently, the amounts shown as “Other obligations” in the foregoing table do not reflect the total amounts that the Company would need to spend on goods and services in order to operate its businesses in the ordinary course.
The Company has not included in the contractual obligations table $125 million of long-term liabilities for unrecognized tax benefits for various tax positions taken. The table also excludes federal, state and local interest and penalties related to unrecognized tax benefits of $27 million included in other liabilities and $24 million included in current income taxes. These liabilities may increase or decrease over time as a result of tax examinations, and given the status of examinations, the Company cannot reliably estimate the period of any cash settlement with the respective taxing authorities. The Company has included in the contractual obligations table $11 million of liabilities for unrecognized tax benefits that the Company expects to settle in cash in the next year.
Liquidity and Capital Resources Outlook
Management believes that, with respect to the Company's current operations, cash on hand and funds from operations, together with its credit facility and other capital resources, will be sufficient to cover the Company's reasonably foreseeable working capital, capital expenditure and debt service requirements and other cash requirements in both the near term and over the longer term. The Company's ability to generate funds from operations may be affected by numerous factors, including general economic conditions and levels of consumer confidence and demand; however, the Company expects to be able to manage its working capital levels and capital expenditure amounts so as to maintain sufficient levels of liquidity. To the extent that the Company's cash balances from time to time exceed amounts that are needed to fund its immediate liquidity requirements, the Company will consider alternative uses of some or all of such excess cash. Such alternative uses may include, among others, the redemption or repurchase of debt, equity or other securities through open market purchases, privately negotiated transactions or otherwise, and the funding of pension related obligations. Depending upon its actual and anticipated sources and uses of liquidity, conditions in the capital markets and other factors, the Company will from time to time consider the issuance of debt or other securities, or other possible capital markets transactions, for the purpose of raising capital which could be used to refinance current indebtedness or for other corporate purposes including the redemption or repurchase of debt, equity or other securities through open market purchases, privately negotiated transactions or otherwise, and the funding of pension related obligations.
The Company intends from time to time to consider additional acquisitions of, and investments in, retail businesses and other complementary assets and companies. Acquisition transactions, if any, are expected to be financed from one or more of the following sources: cash on hand, cash from operations, borrowings under existing or new credit facilities and the issuance of long-term debt or other securities, including Common Stock.
Net Sales
Net sales for 20162017 decreasedinclude a 53rd week of operations and were $24,837 million, a decrease of $1,301941 million, or 4.8%3.7% compared to 2015., from 2016. The decrease in comparable sales on an owned basis, which exclude the 53rd week of sales, for 20162017 was 3.5%2.2% compared to 20152016. The decrease in comparable sales on an owned plus licensed basis for 20162017 was 2.9%1.9% compared to 2015.2016. (See pages 20 and 21page 30 for information regarding the Company's calculation of comparable sales, a reconciliation of the non-GAAP measure which takes into account sales of departments licensed to third parties to the most comparable GAAP measure and other important information). TheAlthough net sales were down compared to 2016, the Company experienced a strong fourth quarter in 2017 with comparable sales on an overall weakness in sales, but geographicallyowned basis up 1.3% and up 1.4% on an owned plus licensed basis. Geographically, sales in 20162017 were strongest in the Southwest, particularly southern California.Florida, Eastern Texas, Louisiana, Hawaii, Oregon, Southern California and Arizona. Digital sales continued to be strong in 20162017 and experienced double digit growth. By family of business, sales in 20162017 were strongest in active apparel, fine jewelry, shoes, intimate apparelfragrances, dresses and fragrances.men's tailored clothing. Sales in 20162017 were less strong in fashion jewelry, handbags and fashion watches.although the trend improved in the second half of the year. Sales of the Company's private label brands represented approximately 20% of net sales in the Macy's-branded operations in 20162017 and 2015.2016.
Cost of Sales and Gross Margin
Cost of sales for 20162017 decreased $875469 million from 2015.2016. The cost of sales rate as a percent to net sales of 60.6%61.0% was 3040 basis points lowerhigher in 2017, as compared to 60.6% in 2016, as compared to 60.9% in 2015, primarily due to fewer markdowns taken in 2016 as compared to 2015 and offset slightly by higher delivery expenses associated with the Company's omnichannel activities and free shipping promotions. The application of the last-in, first-out (LIFO) retail inventory method did not resultGross margin improved in the recognitionsecond half of any LIFO charges or credits affecting cost of sales in either period.2017 as the Company benefited from its inventory management strategies.
SG&A Expenses
SG&A expenses for 2016 increased $92017 decreased $343 million from 20152016 and the SG&A rate as a percent to net sales of 32.0%32.8% approximated the rate in 2016. The dollar decrease from 2016 was 150 basis points highermainly due to store closings and the restructuring activities announced by the Company in 2016, as compared to 2015. SG&A expenses in 2016 were impacted and 2017, offset slightly by lower income from credit operations and higher expenses associated with the continued investments in the Company's omnichannel operations, and investments in Bluemercury, Macy's Backstagebluemercury and Macy's China Limited. These increases were partially offsetBackstage. The decrease was also driven by lower retirement expenses (including Pension Plan, SERP and defined contribution plan expenses), lower advertising expense, net of cooperative advertising allowances and the impact of the restructuring announced at the end of 2015.higher income from credit operations. Income from credit operations was $768 million in 2017 as compared to $736 million in 2016 as compared to $831 million in 2015. SG&A expenses included gains on the sales of certain store locations and surplus properties of $209 million in 2016 compared to $212 million in 2015. Retirement expenses were $44 million in 2016 as compared to $77 million in 2015. Depreciation and amortization expense was $1,058 million for 2016, compared to $1,061 million for 2015.2016. Advertising expense, net of cooperative advertising allowances, was $1,108 million for 2017 compared to $1,153 million for 20162016.
Gains on Sale of Real Estate
The Company recognized gains of $544 million in 2017 associated with sales of real estate, as compared to $1,173$209 million for 2015. Advertising expense, netin 2016. 2017 included gains of cooperative advertising allowances, as a percent$234 million related to net sales was 4.5% forthe Macy's Union Square location, $71 million related to the Macy's Brooklyn transaction, $47 million related to the downtown Minneapolis properties and $40 million related to the downtown Seattle Macy's location. 2016 and 4.3% for 2015.included $33 million of gains related to the Macy's Brooklyn transaction.
Impairments,Restructuring, Impairment, Store Closing and Other Costs
Impairments,Restructuring, impairment, store closing and other costs for 20162017 includes costs and expenses primarily associated with the organizational changes and store closings announced in August 2017 and January 2018. In 2017, these costs included $120 million of severance and other human resource-related costs primarily associated with organization changes and store closings, $53 million of asset impairment charges and $13 million of other related costs and expenses. Restructuring, impairment, store closing and other costs for 2016 includes costs and expenses primarily associated with the organizational changes and store closings announced in August 2016 and January 2017. During 2016,, these costs and expenses included asset impairment charges of $265 million, $168 million of severance and other human resource-related costs and $46 million of other related costs and expenses. Impairments, store closing and other costs for 2015 included costs and expenses primarily associated with organization changes and store closings announced in January 2016. During 2015, these costs and expenses included asset impairment charges of $148 million, $123 million of severance and other human resource-related costs and $17 million of other related costs and expenses.
Settlement Charges
$98105 million and $98 million of non-cash settlement charges were recognized in 2016.2017 and 2016, respectively. These charges relate to the pro-rata recognition of net actuarial losses associated with the Company’s defined benefit retirement plans and are the result of an increase in lump sum distributions associated with store closings, a voluntary separation program, organizational restructuring, and periodic distribution activity.
Net Interest Expense
and Net interest expense for 2016 increased $2 million from 2015. Net interest expense for 2016 was impacted by lower capitalized interest associated with the Company's construction projects, offset slightly by lower rates on outstanding borrowings as compared to 2015.
Effective Tax Rate
The Company's effective tax rate of 35.8% for 2016 and 36.2% for 2015 differ from the federal income tax statutory rate of 35%, and on a comparative basis, principally because of the effect of state and local income taxes, including the settlement of various tax issues and tax examinations.
Comparison of 2015 and 2014
Net Income Attributable to Macy's, Inc. Shareholders
Net income attributable to Macy's, Inc. shareholders for 2015 decreased compared to 2014, reflecting lower sales and gross margin and higher impairments, store closing costs and other costs, partially offset by lower selling, general and administrative expenses, interest expense and income taxes in 2015 as compared to 2014.
Net Sales
Net sales for 2015 decreased $1,026 million or 3.7% compared to 2014. The decrease in comparable sales on an owned basis for 2015 was 3.0% compared to 2014. The decrease in comparable sales on an owned plus licensed basis for 2015 was 2.5% compared to 2014. (See pages 20 and 21 for information regarding the Company's calculation of comparable sales, a reconciliation of the non-GAAP measure which takes into account sales of departments licensed to third parties to the most comparable GAAP measure and other important information). The Company experienced an overall weakness in sales, but geographically sales in 2015 were stronger in the western and southern regions, where weather was less of a factor, while sales at locations that are frequented by international tourists, such as New York City, Las Vegas, San Francisco and Chicago were negatively impacted by lower levels of spending by these tourists. Digital sales growth continued to be strong in 2015. By family of business, sales in 2015 were strongest in active apparel, cosmetics and fragrances and furniture and mattresses. Sales in 2015 were less strong in fashion watches, cold weather items, and the housewares and tabletop businesses. Sales of the Company's private label brands represented approximately 20% of net sales in the Macy's-branded operations in 2015.
Cost of Sales
Cost of sales for 2015 decreased $367 million from 2014. The cost of sales rate as a percent to net sales of 60.9% was 90 basis points higher in 2015, as compared to 60.0% in 2014, primarily due to higher markdowns resulting from the need to clear inventory basedPremiums on the weaker sales trend as well as continued growth of the omnichannel businesses and the resulting impact of free shipping. The application of the last-in, first-out (LIFO) retail inventory method did not result in the recognition of any LIFO charges or credits affecting cost of sales in either period.
SG&A Expenses
SG&A expenses for 2015 decreased $99 million from 2014, however the SG&A rate as a percent to net sales of 30.5% was 80 basis points higher in 2015, as compared to 2014. SG&A expenses in 2015 benefited from higher income from credit operations and higher gains on the sale of certain store locations and surplus properties, partially offset by higher retirement expenses (including Pension Plan, SERP and defined contribution plan expenses), higher expenses associated with the continued investments in the Company's omnichannel operations, investments in Bluemercury, Macy's Backstage and Macy's China Limited and higher depreciation and amortization expense. Income from credit operations was $831 million in 2015 as compared to $776 million in 2014. SG&A expenses included gains on the sales of certain store locations and surplus properties of $212 million in 2015 as compared to $92 million in 2014. Included in the gains on the sales of store locations and surplus properties in 2015 was $84 million related to the sale of Brooklyn real estate and $57 million related to the downtown Seattle real estate transaction. Retirement expenses were $77 million in 2015 as compared to $65 million in 2014. Depreciation and amortization expense was $1,061 million for 2015, compared to $1,036 million for 2014. Advertising expense, net of cooperative advertising allowances, was $1,173 million for 2015 compared to $1,177 million for 2014. Advertising expense, net of cooperative advertising allowances, as a percent to net sales was 4.3% for 2015 and 4.2% for 2014.
Impairments, Store Closing and Other Costs
Impairments, store closing and other costs for 2015 included costs and expenses primarily associated with the cost efficiency initiatives and store closings announced in January 2016. During 2015, these costs and expenses included $123 million of severance and other human resource-related costs and asset impairment charges of $148 million. Impairments, store closing and other costs for 2014 included costs and expenses primarily associated with organization changes and store closings announced in January 2015. During 2014, these costs and expenses included $46 million of severance and other human resource-related costs and asset impairment charges of $33 million.
Net Interest Expense
Net interest expense for 2015 decreased $32 million from 2014. Net interest expense for 2015 benefited from lower rates on outstanding borrowings as compared to 2014 and from the recognition of unamortized debt premium associated with the $76 million of 8.125% senior debentures due 2035 which were redeemed at par on August 17, 2015, pursuant to the terms of the debentures.
Premium on Early Retirement of Debt
On November 14, 2014,Net interest expense, excluding net premiums on the Company provided a noticeearly retirement of redemption related to alldebt, for 2017 decreased $53 million from 2016. This decrease was primarily driven by the early repayment of the $407$647 million of 7.875% senior notes due 2015, as allowed underdebt and the termsmaturity of the indenture. The price for the redemption was calculated pursuant to the indenture and$300 million
of debt in 2017. This early repayment resulted in the recognition of additional interest expensea $10 million benefit related to the write-off of $17 million during 2014. The additional interest expense resulting from this transactionthe premium associated with the debt repayments, net of the premium costs and other expenses incurred with the early repayment. This benefit is presented as a net premium on the early retirement of debt on the Consolidated Statements of Income.
Effective Tax Rate
The Company's effective tax rate was a benefit of 1.9% for 2017 and expense of 35.8% for 2016. 2017 differs from the federal income tax statutory rate of 33.7%, and on a comparative basis, principally due to 2017 U.S. federal tax reform that led to the recognition of a non-cash tax benefit of $571 million associated with the remeasurement of the Company's deferred tax balances. Further, 2017 included the recognition of approximately $15 million of net tax deficiencies associated with share-based payment awards due to the adoption of Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting. Historically, the Company had recognized such amounts as an offset to accumulated excess tax benefits previously recognized in additional paid-in capital.
Net Income Attributable to Macy's, Inc. Shareholders
Net income attributable to Macy's, Inc. shareholders for 2017 increased compared to 2016, driven by higher operating income due to higher asset sale gains, lower selling, general and administrative expenses, restructuring, impairment, store closing and other costs, partially offset by lower sales and gross margin. Coupled with lower net interest expense and a net income tax benefit resulted in net income attributable to Macy's Inc. shareholders increasing by $928 million in 2017 as compared to 2016.
Comparison of 2016 and 2015
Net Sales
Net sales for 2016 decreased $1,301 million or 4.8% compared to 2015. The decrease in comparable sales on an owned basis for 2016 was 3.5% compared to 2015. The decrease in comparable sales on an owned plus licensed basis for 2016 was 2.9% compared to 2015. (See page 30 for information regarding the Company's calculation of comparable sales, a reconciliation of the non-GAAP measure which takes into account sales of departments licensed to third parties to the most comparable GAAP measure and other important information). The Company experienced an overall weakness in sales, but geographically sales in 2016 were strongest in the Southwest, particularly southern California. Digital sales continued to be strong in 2016 and experienced double digit growth. By family of business, sales in 2016 were strongest in apparel, fine jewelry, shoes, intimate apparel and fragrances. Sales in 2016 were less strong in fashion jewelry, handbags, and fashion watches. Sales of the Company's private label brands represented approximately 20% of net sales in the Macy's-branded operations in 2016 and 2015.
Cost of Sales and Gross Margin
Cost of sales for 2016 decreased $875 million from 2015. The cost of sales rate as a percent to net sales of 60.6% was 30 basis points lower in 2016, as compared to 60.9% in 2015, primarily due to fewer markdowns taken in 2016 as compared to 2015 and offset slightly by higher delivery expenses associated with the Company's omnichannel activities and free shipping promotions.
SG&A Expenses
SG&A expenses for 2016 increased $6 million from 2015, however the SG&A rate as a percent to net sales of 32.8% was 150 basis points higher in 2016, as compared to 2015. SG&A expenses in 2016 were impacted by lower income from credit operations and higher expenses associated with the continued investments in the Company's omnichannel operations, investments in bluemercury, Macy's Backstage and Macy's China Limited. These increases were partially offset by lower retirement expenses (including Pension Plan, SERP and defined contribution plan expenses), lower advertising expense, net of cooperative advertising allowances and the impact of the restructuring announced at the end of 2015. Income from credit operations was $736 million in 2016 as compared to $831 million in 2015. Retirement expenses were $44 million in 2016 as compared to $77 million in 2015. Advertising expense, net of cooperative advertising allowances, was $1,153 million for 2016 compared to $1,173 million for 2015. Advertising expense, net of cooperative advertising allowances, as a percent to net sales was 4.5% for 2016 and 4.3% for 2015.
Gains on Sale of Real Estate
Gains on sale of real estate decreased $3 million to $209 million in 2016 compared to $212 million in 2015. 2016 and 2015 included $33 million and $84 million, respectively, of gains related to the Macy's Brooklyn transaction. 2015 also included a $57 million gain related to the sale of a portion of the downtown Macy's Seattle location.
Restructuring, Impairment, Store Closing and Other Costs
Restructuring, impairment, store closing and other costs for 2016 includes costs and expenses primarily associated with the organizational changes and store closings announced in August 2016 and January 2017. During 2016, these costs and expenses included asset impairment charges of $265 million, $168 million of severance and other human resource-related costs and $46 million of other related costs and expenses. Restructuring, impairment, store closing and other costs for 2015 included costs and expenses primarily associated with organization changes and store closings announced in January 2016. During 2015, these costs and expenses included asset impairment charges of $148 million, $123 million of severance and other human resource-related costs and $17 million of other related costs and expenses.
Settlement Charges
$98 million of non-cash settlement charges were recognized in 2016. These charges relate to the pro-rata recognition of net actuarial losses associated with the Company’s defined benefit retirement plans and are the result of an increase in lump sum distributions associated with store closings, a voluntary separation program, organizational restructuring, and periodic distribution activity.
Net Interest Expense
Net interest expense for 2016 decreased $2 million from 2015. Net interest expense for 2016 was impacted by lower capitalized interest associated with the Company's construction projects, offset slightly by lower rates on outstanding borrowings as compared to 2015.
Effective Tax Rate
The Company's effective tax rate of 35.8% for 2016 and 36.2% for 2015 and 2014 differ from the federal income tax statutory rate of 35%, and on a comparative basis, principally because of the effect of state and local income taxes, including the settlement of various tax issues and tax examinations. Additionally,
Net Income Attributable to Macy's, Inc. Shareholders
Net income taxattributable to Macy's, Inc. shareholders for 2016 decreased compared to 2015, reflecting lower sales and gross margin and higher selling, general and administrative expenses, restructuring, impairments, store closing costs and other costs, settlement charges and net interest expense, for 2015 and 2014 benefited from historic rehabilitation tax credits.partially offset by lower income taxes in 2016 as compared to 2015.
Guidance
The Company's operations are impacted by competitive pressures from department stores, specialty stores, mass merchandisers, online retailers and all other retail channels. The Company's operations are also impacted by general consumer spending levels, including the impact of general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, the costs of basic necessities and other goods and the effects of weather or natural disasters and other factors over which the Company has little or no control.
In recent years, consumer spending levels have been affected to varying degrees by a number of factors, including modest economic growth, uncertainty regarding governmental spending and tax policies, unemployment levels, tightened consumer credit, an improving housing market and a fluctuating stock market. In addition, consumer spending levels of international customers are impacted by the strength of the U.S. dollar relative to foreign currencies. These factors have affected, to varying degrees, the amount of funds that consumers are willing and able to spend for discretionary purchases, including purchases of some of the merchandise offered by the Company.
All economic conditions ultimately affect the Company's overall operations. However, the effects of economic conditions can be experienced differently and at different times, in the various geographic regions in which the Company operates, in relation to the different types of merchandise that the Company offers for sale, or in relation to each of the Company's branded operations.
Based on its assessment of current and anticipated market conditions and its recent performance and reflecting the adoption of new revenue recognition and pension accounting standards issued by the FASB, the Company's 20172018 assumptions include the following:
TotalNet sales estimated decline of approximately 3.2% - 4.3%0.5% to 2.0% from 20162017 levels. TotalNet sales in 2017 reflectreflected a 53rd week of sales, whereas comparable sales below are on a 52-week basis.
Comparable sales decrease on both an owned basis of approximately 2.2% - 3.3%, with comparable sales on anand owned plus licensed basis are estimated to decline approximately 2% - 3%be flat to up 1.0%.
Asset sale gains of approximately $415 million - $435 million, including an expected $235 million gain associated with the sale of the Company's Union Square Macy's store and $100 million of additional gainGross margin on retail sales is estimated to be flat to up slightly compared to 2017.
Credit income, reflecting changes from the sale of the Brooklyn real estate.new revenue recognition standard, estimated to be approximately $645 million to $665 million.
Selling, general and administrative expense savings ofdollars are expected to be approximately $550 million from the restructuring and store closures announced at the end of 2016, partially offset by increased growth spending of approximately $250 million (resulting in a net expense savingsflat with 2017 or up slightly depending on sales.
Estimated asset sale gains of approximately $300 million).million to $325 million, including a successful sale of the Company's I. Magnin section of its Union Square store in San Francisco.
Credit incomeEstimated interest expense of approximately $740$255 million - $760to $260 million.
Adjusted dilutedEffective tax rate is expected to be 23.25%.
Diluted earnings per share attributable to Macy's, Inc. shareholders, of $3.37 to $3.62, excluding any charges associated with store closures, restructuring, or settlement charges associated with Company's defined benefit plans. Included in this guidance is the expected gain of approximately $235 million, or approximately $.47 per diluted share, associated with the sale of the Company's Union Square Macy's Men's store.
Capital expenditures of approximately $900 million.
Excess cash after capital expenditures, payment of the Company's dividends and the $300 million debt maturity in July 2017certain items, is expected to be used$3.55 to repurchase debt.$3.75.
Depreciation and amortization is expected to be approximately flat with 2017.
Capital expenditures are estimated at approximately $1,050 million.
The Company's budgetedforecasted capital expenditures are primarily related to new stores,investments in several merchandising initiatives, continued growth of Backstage and bluemercury locations, expansion of store remodels, development costspick up, and the store, digital and technological enhancements associated with the Brookfield Strategic Alliance joint venture, technologyCompany's Growth 50 initiative. This initiative includes the roll-out of various strategies incubated in 2017 to 50 Macy's stores of different sizes and omnichannel investments, distribution network improvements and new growth initiatives. geography.
In early 2017, the Company opened a Macy’s store at Fashion Place in Murray, UT and plans to open a store at Westfield Century City in Los Angeles, CA, later in the year. In addition,2018, the Company expects excess cash to open approximately 30 additional Bluemercury locationsbe used to invest in strategies and approximately 30 Macy’s Backstage locations inside Macy’s stores. Announced new stores in future years include Bloomingdale’s in San Jose, CA (2019),initiatives to help grow the business, continue to fund the Company's dividends and Norwalk, CT (2019). In addition, under license agreements with Al Tayer Group, a new Bloomingdale’s store opened at 360 Mall in Al Zahra, Kuwait in March 2017 and new Macy’s and Bloomingdale’s stores are planned to open in Al Maryah Central in Abu Dhabi, United Arab Emirates in 2018.repay debt.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash from operations, cash on hand and the credit facility described below.
Operating Activities
Net cash provided by operating activities was $1,944 million in 2017 compared to $1,801 million in 2016. The increase was driven by a 53rd week of operations and lower selling, general and administrative expenses offset by higher tax payments as compared to $1,984 million in 2015, reflecting lower net income.2016.
Investing Activities
Net cash used by investing activities for 20162017 was $187373 million, compared to net cash used by investing activities of $1,092187 million for 20152016. Investing activities for 20162017 included purchases of property and equipment totaling $487 million and capitalized software of $273 million, compared to purchases of property and equipment totaling $596 million and capitalized software of $316 million, for 2016.
Capital expenditures were lower by $152 million in 2017 as compared to purchases of property2016. This decrease was mainly driven by intentional delays in capital projects that are estimated to begin in 2018 and equipment totaling $777 million and capitalized software of $336 million for 2015. Investing activities for 2015 includesare included in the acquisition of Bluemercury, Inc., net of cash acquired, for $212 million.Company's aforementioned 2018 guidance.
In 2016,2017, the Company continued to execute on its real estate strategy that includes creating value through monetization and, in some case,cases, redevelopment of real estate assets. Overall, property and equipment sales, primarily related to real estate, generated cash proceeds of $411 million in 2017 compared to $673 million in 2016, compared to $204 million in 2015.2016.
During 2017, the Company opened two new Macy's stores and 36 new freestanding bluemercury stores. During 2016, the Company opened one new Macy's store, one new Bloomingdale's The Outlet store, one new freestanding Macy's Backstage store and 24 new freestanding Bluemercurybluemercury stores. During 2015,
Financing Activities
Net cash used by the Company opened one newfor financing activities was $1,413 million for 2017, including the repayment of $954 million of debt and the payment of $461 million of cash dividends, partially offset by the issuance of $6 million of Common Stock, primarily related to the exercise of stock options, and proceeds of $13 million received from Macy's store, one new Bloomingdale's store, three new Bloomingdale's The Outlet stores, six new Macy's freestanding Backstage stores and 15 new freestanding Bluemercury stores. Since the acquisition of Bluemercury in March 2015,China Limited's noncontrolling interest shareholder.
During December 2017, the Company has opened 39 freestanding Bluemercury storescompleted a tender offer and 19 locations within an existing Macy's.purchased $400 million in aggregate principal amount of certain senior unsecured notes and debentures. The purchased senior unsecured notes and debentures included $147 million of 6.9% senior debentures due 2032, $108 million of 6.7% senior debentures due 2034, $96 million of 6.375% senior notes due 2037, $43 million of 8.75% senior debentures due 2029, and $6 million of 7.875% senior debentures due 2030. The total cash cost for the tender offer was $423 million. The Company recognized $11 million of income related to the recognition of the unamortized debt premium partially offset by the redemption premium and other costs associated with this debt as net premiums on early retirement of debt on the Consolidated Statements of Income during 2017.
Financing Activities
In July 2017 the Company paid $300 million of debt at maturity. During the first and second quarters of 2017, the Company repurchased $247 million face value of senior notes and debentures. The debt repurchases were made in the open market for a total cash cost of $257 million, including expenses related to the transactions. Such repurchases resulted in the recognition of expense of $1 million during 2017 presented as net premiums on early retirement of debt on the Consolidated Statements of Income.
Net cash used by the Company for financing activities was $1,426 million for 2016 includingand included the acquisition of the Company's common stockCommon Stock under its share repurchase program at an approximatea cost of $316 million, the repayment of $751 million of debt and the payment of $459 million of cash dividends, partially offset by an increase in outstanding checks of $61 million and the issuance of $36 million of common stock,Common Stock, primarily related to the exercise of stock options, and an increase in outstanding checks of $61 million.options.
OnDuring August 15, 2016, the Company redeemed at par the principal amount of $108 million of 7.875% senior debentures due 2036, pursuant to the terms of the debentures. Interest expense in 2016 benefited from the recognition of
unamortized debt premium associated with this debt. OnDuring October 14, 2016, the Company repaid $59 million of 7.45% senior debentures at maturity. OnDuring December 1, 2016, the Company repaid $577 million of 5.9% senior notes at maturity.
The Company entered into a new credit agreement with certain financial institutions onas of May 6, 2016 providing for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing) outstanding at any particular time. This agreement is set to expire May 6, 2021 and replaced the prior agreement which was set to expire May 10, 2018.
As of February 3, 2018, and January 28, 2017, and January 30, 2016, there were no revolving credit loans outstanding under this credit agreement, and there were no borrowings under the agreement throughout all of 2016during 2017 and 2015.2016. In addition, there were no standby letters of credit outstanding at February 3, 2018 and January 28, 2017 and there were less than $1 million of standby letters of credit outstanding at January 30, 2016.2017. Revolving loans under the credit agreement bear interest based on various published rates.
The Company is party to a $1,500 million unsecured commercial paper program. The Company may issue and sell commercial paper in an aggregate amount outstanding at any particular time not to exceed its then-current combined borrowing availability under the bank credit agreement with certain financial institutions. TheOver the past two fiscal years, the amount of borrowings under the commercial paper program increased to its highest level for 2016 of approximately $388 million during the fourth quarter.quarter of 2016. There were no borrowings under the program during 2017. As of February 3, 2018 and January 28, 2017, there were no remaining borrowings outstanding under the commercial paper program.
Net cash used by the Company for financing activities was $2,029 million for 2015 and included the acquisition of the Company's common stock under its share repurchase program at an approximate cost of $2,000 million, the repayment of $152 million of debt and the payment of $456 million of cash dividends and a decrease in outstanding checks of $83 million, partially offset by the issuance of approximately $500 million of debt and the issuance of $163 million of common stock, primarily related to the exercise of stock options.
On June 1, 2015, the Company repaid $69 million of 7.5% senior debentures at maturity. On August 17, 2015, the Company redeemed at par the principal amount of $76 million of 8.125% senior debentures due 2035, pursuant to the terms of the debentures. Interest expense in 2015 benefited from the recognition of unamortized debt premium associated with the $76 million of 8.125% senior debentures.
The credit agreement requires the Company to maintain a specified interest coverage ratio for the latest four quarters of no less than 3.25 and a specified leverage ratio as of and for the latest four quarters of no more than 3.75. The Company's interest coverage ratio for 20162017 was 7.368.94 and its leverage ratio at January 28, 2017February 3, 2018 was 2.38,2.04, in each case as calculated in accordance with the credit agreement. The interest coverage ratio is defined as EBITDA divided by net interest expense and the leverage ratio is defined as debt divided by EBITDA. For purposes of these calculations EBITDA is calculated as net income plus interest expense, taxes, depreciation, amortization, non-cash impairment of goodwill, intangibles and real estate, non-recurring cash charges not to exceed in the aggregate $300 million and extraordinary losses less interest income and non-recurring or extraordinary gains. Debt is adjusted to exclude the premium on acquired debt and net interest is adjusted to exclude the amortization of premium on acquired debt and premium on early retirement of debt.
A breach of a restrictive covenant in the Company's credit agreement or the inability of the Company to maintain the financial ratios described above could result in an event of default under the credit agreement. In addition, an event of default would occur under the credit agreement if any indebtedness of the Company in excess of an aggregate principal amount of $150 million becomes due prior to its stated maturity or the holders of such indebtedness become able to cause it to become due prior to its stated maturity. Upon the occurrence of an event of default, the lenders could, subject to the terms and conditions of the credit agreement, elect to declare the outstanding principal, together with accrued interest, to be immediately due and payable. Moreover, most of the Company's senior notes and debentures contain cross-default provisions based on the non-payment at maturity, or other default after an applicable grace period, of any other debt, the unpaid principal amount of which is not less than $100 million that could be triggered by an event of default under the credit agreement. In such an event, the Company's senior notes and debentures that contain cross-default provisions would also be subject to acceleration.
At January 28, 2017February 3, 2018, no notes or debentures contain provisions requiring acceleration of payment upon a debt rating downgrade. However, the terms of approximately $4,250$4,019 million in aggregate principal amount of the Company's senior notes outstanding at that date require the Company to offer to purchase such notes at a price equal to 101% of their principal amount plus accrued and unpaid interest in specified circumstances involving both a change of control (as defined in the applicable indenture) of the Company and the rating of the notes by specified rating agencies at a level below investment grade.
On February 26, 2016, the Company's board of directors approved an additional $1,500 million in authorization to purchase Common Stock. During 2016, the Company repurchased approximately 7.9 million shares of its common stockCommon Stock for a total of approximately $316 million. As of January 28, 2017February 3, 2018, the Company had $1,716 million of authorization remaining under its share repurchase program. The Company may continue or, from time to time, suspend repurchases of shares under its share repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors.
On February 24, 2017,23, 2018, the Company's board of directors declared a quarterly dividend of 37.75 cents per share on its common stock,Common Stock, payable April 3, 20172, 2018, to Macy's shareholders of record at the close of business on March 15, 2017.2018.
Contractual Obligations and Commitments
At January 28, 2017,February 3, 2018, the Company had contractual obligations (within the scope of Item 303(a)(5) of Regulation S-K) as follows:
| | | | Obligations Due, by Period | Obligations Due, by Period |
| Total | | Less than 1 Year | | 1 – 3 Years | | 3 – 5 Years | | More than 5 Years | Total | | Less than 1 Year | | 1 – 3 Years | | 3 – 5 Years | | More than 5 Years |
(millions) | | Short-term debt | $ | 308 |
| | $ | 308 |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 21 |
| | $ | 21 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Long-term debt | 6,459 |
| | — |
| | 48 |
| | 1,092 |
| | 5,319 |
| 5,806 |
| | — |
| | 581 |
| | 553 |
| | 4,672 |
|
| Interest on debt | 4,162 |
| | 342 |
| | 658 |
| | 631 |
| | 2,531 |
| 3,114 |
| | 286 |
| | 566 |
| | 500 |
| | 1,762 |
|
| Capital lease obligations | 52 |
| | 3 |
| | 6 |
| | 6 |
| | 37 |
| 49 |
| | 3 |
| | 6 |
| | 6 |
| | 34 |
|
| Operating leases | 3,683 |
| | 321 |
| | 587 |
| | 486 |
| | 2,289 |
| 3,546 |
| | 327 |
| | 586 |
| | 494 |
| | 2,139 |
|
| Letters of credit | 30 |
| | 30 |
| | — |
| | — |
| | — |
| 28 |
| | 28 |
| | — |
| | — |
| | — |
|
| Other obligations | 4,325 |
| | 2,744 |
| | 470 |
| | 279 |
| | 832 |
| 4,525 |
| | 2,476 |
| | 1,026 |
| | 230 |
| | 793 |
|
| | $ | 19,019 |
| | $ | 3,748 |
| | $ | 1,769 |
| | $ | 2,494 |
| | $ | 11,008 |
| $ | 17,089 |
| | $ | 3,141 |
| | $ | 2,765 |
| | $ | 1,783 |
| | $ | 9,400 |
|
“Other obligations” in the foregoing table includes post employment and postretirement benefits, self-insurance reserves, group medical/dental/life insurance programs, merchandise purchase obligations and obligations under outsourcing arrangements, construction contracts, energy and other supply agreements identified by the Company and liabilities for unrecognized tax benefits that the Company expects to settle in cash in the next year. The Company's merchandise purchase obligations fluctuate on a seasonal basis, typically being higher in the summer and early fall and being lower in the late winter and early spring. The Company purchases a substantial portion of its merchandise inventories and other goods and services otherwise than through binding contracts. Consequently, the amounts shown as “Other obligations” in the foregoing table do not reflect the total amounts that the Company would need to spend on goods and services in order to operate its businesses in the ordinary course.
The Company has not included in the contractual obligations table $157125 million of long-term liabilities for unrecognized tax benefits for various tax positions taken or $54 million of related accruedtaken. The table also excludes federal, state and local interest and penalties.penalties related to unrecognized tax benefits of $27 million included in other liabilities and $24 million included in current income taxes. These liabilities may increase or decrease over time as a result of tax examinations, and given the status of examinations, the Company cannot reliably estimate the period of any cash settlement with the respective taxing authorities. The Company has included in the contractual obligations table $611 million of liabilities for unrecognized tax benefits that the Company expects to settle in cash in the next year.
Liquidity and Capital Resources Outlook
Management believes that, with respect to the Company's current operations, cash on hand and funds from operations, together with its credit facility and other capital resources, will be sufficient to cover the Company's reasonably foreseeable working capital, capital expenditure and debt service requirements and other cash requirements in both the near term and over the longer term. The Company's ability to generate funds from operations may be affected by numerous factors, including general economic conditions and levels of consumer confidence and demand; however, the Company expects to be able to manage its working capital levels and capital expenditure amounts so as to maintain sufficient levels of liquidity. To the extent that the Company's cash balances from time to time exceed amounts that are needed to fund its immediate liquidity requirements, the Company will consider alternative uses of some or all of such excess cash. Such alternative uses may include, among others, the redemption or repurchase of debt, equity or other securities through open market purchases, privately negotiated transactions or otherwise, and the funding of pension related obligations. Depending upon its actual and anticipated sources and uses of liquidity, conditions in the capital markets and other factors, the Company will from time to time consider the issuance of debt or other securities, or other possible capital markets transactions, for the purpose of raising capital which could be used to refinance current indebtedness or for other corporate purposes including the redemption or repurchase of debt, equity or other securities through open market purchases, privately negotiated transactions or otherwise, and the funding of pension related obligations.
The Company intends from time to time to consider additional acquisitions of, and investments in, retail businesses and other complementary assets and companies. Acquisition transactions, if any, are expected to be financed from one or more of the following sources: cash on hand, cash from operations, borrowings under existing or new credit facilities and the issuance of long-term debt or other securities, including common stock.Common Stock.
Important Information Regarding Non-GAAP Financial Measures
The Company reports its financial results in accordance with GAAP. However, management believes that certain non-GAAP financial measures provide users of the Company's financial information with additional useful information in evaluating operating performance. Management believes that providing supplemental changes in comparable sales on an owned plus licensed basis, which includes the impact of growth in comparable sales of departments licensed to third parties, assists in evaluating the Company's ability to generate sales growth, whether through owned businesses or departments licensed to third parties, on a comparable basis, and in evaluating the impact of changes in the manner in which certain departments are operated. In addition, management believes that excluding certain items that are not associated with the Company's core operations and that may vary substantially in frequency and magnitude period-to-period from diluted earnings per share attributable to Macy's, Inc. shareholders, operating income, EBIT (earnings before interest and taxes) and EBITDA as percentages to sales provides useful supplemental measures that assist in evaluating the Company's ability to generate earnings and leverage sales, respectively, and to more readily compare these metrics between past and future periods. Management also believes that EBIT, EBITDA, Adjusted EBIT and Adjusted EBITDA are frequently used by investors and securities analysts in their evaluations of companies, and that such supplemental measures facilitate comparisons between companies that have different capital and financing structures and/or tax rates. In addition, management believes that ROIC is a useful supplemental measure in evaluating how efficiently the Company employs its capital. The Company uses some of these non-GAAP financial measures as performance measures for components of executive compensation.
The reconciliation of the forward-looking non-GAAP financial measure of changes in comparable sales on an owned plus licensed basis to GAAP comparable sales (i.e., on an owned basis) is in the same manner as illustrated below, where the impact of growth in comparable sales of departments licensed to third parties is the only reconciling item. In addition, the Company does not provide the most directly comparable forward-looking GAAP measure of diluted earnings per share attributable to Macy’s, Inc. shareholders excluding certain items because the timing and amount of excluded items are unreasonably difficult to fully and accurately estimate.
Non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, the Company's financial results prepared in accordance with GAAP. Certain of the items that may be excluded or included in non-GAAP financial measures may be significant items that could impact the Company's financial position, results of operations or cash flows and should therefore be considered in assessing the Company's actual and future financial condition and performance. Additionally, the amounts received by the Company on account of sales of departments licensed to third parties are limited to commissions received on such sales. The methods used by the Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies.
Change in Comparable Sales
The following is a tabular reconciliation of the non-GAAP financial measure of changes in comparable sales on an owned plus licensed basis, to GAAP comparable sales (i.e., on an owned basis), which the Company believes to be the most directly comparable GAAP financial measure.
|
| | | | | | | | | | | | |
| | | 14 weeks ended February 3, 2018 | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Increase (decrease) in comparable sales on an owned basis (note 1) | | 1.3% | | (2.2)% | | (3.5)% | | (3.0)% | | 0.7% | | 1.9% |
| Impact of growth in comparable sales of departments licensed to third parties (note 2) | | 0.1% | | 0.3% | | 0.6% | | 0.5% | | 0.7% | | 0.9% |
| Increase (decrease) in comparable sales on an owned plus licensed basis | | 1.4% | | (1.9)% | | (2.9)% | | (2.5)% | | 1.4% | | 2.8% |
Notes:
| |
| (1) | Represents the period-to-period percentage change in net sales from stores in operation throughout the year presented and the immediately preceding year and all online sales, adjusting for the 53rd week in 2017, excluding commissions from departments licensed to third parties. Stores impacted by a natural disaster or undergoing significant expansion or shrinkage remain in the comparable sales calculation unless the store is closed for a significant period of time. Definitions and calculations of comparable sales differ among companies in the retail industry. |
| |
| (2) | Represents the impact of including the sales of departments licensed to third parties occurring in stores in operation throughout the year presented and the immediately preceding year and all online sales, adjusting for the 53rd week in 2017, in the calculation of comparable sales. The Company licenses third parties to operate certain departments in its stores and online and receives commissions from these third parties based on a percentage of their net sales. In its financial statements prepared in conformity with GAAP, the Company includes these commissions (rather than sales of the departments licensed to third parties) in its net sales. The Company does not, however, include any amounts in respect of licensed department sales (or any commissions earned on such sales) in its comparable sales in accordance with GAAP (i.e., on an owned basis). The amounts of commissions earned on sales of departments licensed to third parties are not material to its net sales for the periods presented. |
Operating Income, Excluding Certain Items, as a Percent to Net Sales
The following is a tabular reconciliation of the non-GAAP financial measure operating income, excluding certain items, as a percent to net sales to GAAP operating income as a percent to net sales, which the Company believes to be the most directly comparable GAAP financial measure.
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | (millions, except percentages) |
| Net sales | | $ | 24,837 |
| | $ | 25,778 |
| | $ | 27,079 |
| | $ | 28,105 |
| | $ | 27,931 |
|
| | | | | | | | | | | |
| Operating income | | $ | 1,807 |
| | $ | 1,315 |
| | $ | 2,039 |
| | $ | 2,800 |
| | $ | 2,678 |
|
| | | | | | | | | | | |
| Operating income as a percent to net sales | | 7.3 | % | | 5.1 | % | | 7.5 | % | | 10.0 | % | | 9.6 | % |
| | | | | | | | | | | |
| Operating income | | $ | 1,807 |
| | $ | 1,315 |
| | $ | 2,039 |
| | $ | 2,800 |
| | $ | 2,678 |
|
Add back restructuring, impairment, store closing and
other costs | | 186 |
| | 479 |
| | 288 |
| | 87 |
| | 88 |
|
| Add back settlement charges | | 105 |
| | 98 |
| | — |
| | — |
| | — |
|
| Operating income, excluding certain items | | $ | 2,098 |
| | $ | 1,892 |
| | $ | 2,327 |
| | $ | 2,887 |
| | $ | 2,766 |
|
Operating income, excluding certain items, as a
percent to net sales | | 8.4 | % | | 7.3 | % | | 8.6 | % | | 10.3 | % | | 9.9 | % |
Diluted Earnings Per Share Attributable to Macy's, Inc. Shareholders, Excluding Certain Items
The following is a tabular reconciliation of the non-GAAP financial measure diluted earnings per share attributable to Macy's, Inc. shareholders, excluding certain items, to GAAP diluted earnings per share attributable to Macy's, Inc. shareholders, which the Company believes to be the most directly comparable GAAP measure.
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Diluted earnings per share attributable to
Macy's, Inc. shareholders | | $ | 5.04 |
| | $ | 1.99 |
| | $ | 3.22 |
| | $ | 4.22 |
| | $ | 3.86 |
|
| Add back the pre-tax impact of restructuring, impairment, store closing and other costs | | 0.61 |
| | 1.54 |
| | 0.86 |
| | 0.24 |
| | 0.23 |
|
| Add back the pre-tax impact of settlement charges | | 0.34 |
| | 0.31 |
| | — |
| | — |
| | — |
|
| Add back (deduct) the pre-tax impact of net premiums on the early retirement of debt | | (0.03 | ) | | — |
| | — |
| | 0.05 |
| | — |
|
| Deduct the income tax impact of certain items identified above | | (0.33 | ) | | (0.73 | ) | | (0.31 | ) | | (0.11 | ) | | (0.09 | ) |
| Deduct the deferred tax effects of federal tax reform | | (1.86 | ) | | — |
| | — |
| | — |
| | — |
|
Diluted earnings per share attributable to
Macy's, Inc. shareholders, excluding certain items | | $ | 3.77 |
| | $ | 3.11 |
| | $ | 3.77 |
| | $ | 4.40 |
| | $ | 4.00 |
|
Adjusted EBIT and EBITDA as a Percent to Net Sales
The following is a tabular reconciliation of the non-GAAP financial measure earnings before interest and taxes ("EBIT") and earnings before interest, taxes, and depreciation and amortization ("EBITDA"), as adjusted to exclude certain items ("Adjusted EBIT and Adjusted EBITDA"), as a percent to net sales to GAAP net income as a percent to net sales, which the Company believes to be the most directly comparable GAAP financial measure.
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | (millions, except percentages) |
| Net sales | | $ | 24,837 |
| | $ | 25,778 |
| | $ | 27,079 |
| | $ | 28,105 |
| | $ | 27,931 |
|
| | | | | | | | | | | |
| Net income | | $ | 1,536 |
| | $ | 611 |
| | $ | 1,070 |
| | $ | 1,526 |
| | $ | 1,486 |
|
| | | | | | | | | | | |
| Net income as a percent to net sales | | 6.2 | % | | 2.4 | % | | 4.0 | % | | 5.4 | % | | 5.3 | % |
| | | | | | | | | | | |
| Net income | | $ | 1,536 |
| | $ | 611 |
| | $ | 1,070 |
| | $ | 1,526 |
| | $ | 1,486 |
|
Add back restructuring, impairment, store
closing and other costs | | 186 |
| | 479 |
| | 288 |
| | 87 |
| | 88 |
|
| Add back settlement charges | | 105 |
| | 98 |
| | — |
| | — |
| | — |
|
| Add back interest expense - net | | 310 |
| | 363 |
| | 361 |
| | 393 |
| | 388 |
|
| Add back (deduct) net premiums on the early retirement of debt | | (10 | ) | | — |
| | — |
| | 17 |
| | — |
|
Add back (deduct) federal, state and local income
tax expense (benefit) | | (29 | ) | | 341 |
| | 608 |
| | 864 |
| | 804 |
|
| Adjusted EBIT | | $ | 2,098 |
| | $ | 1,892 |
| | $ | 2,327 |
| | $ | 2,887 |
| | $ | 2,766 |
|
| Adjusted EBIT as a percent to net sales | | 8.4 | % | | 7.3 | % | | 8.6 | % | | 10.3 | % | | 9.9 | % |
| | | | | | | | | | | |
| Add back depreciation and amortization | | 991 |
| | 1,058 |
| | 1,061 |
| | 1,036 |
| | 1,020 |
|
| Adjusted EBITDA | | $ | 3,089 |
| | $ | 2,950 |
| | $ | 3,388 |
| | $ | 3,923 |
| | $ | 3,786 |
|
| Adjusted EBITDA as a percent to net sales | | 12.4 | % | | 11.4 | % | | 12.5 | % | | 14.0 | % | | 13.6 | % |
ROIC
The Company defines ROIC as adjusted operating income as a percent to average invested capital. Average invested capital is comprised of an annual two-point (i.e., end of the year presented and the immediately preceding year) average of gross property and equipment, a capitalized value of non-capitalized leases equal to periodic annual reported net rent expense multiplied by a factor of eight and a four-point (i.e., end of each quarter within the period presented) average of other selected assets and liabilities. The calculation of the capitalized value of non-capitalized leases is consistent with industry and credit rating agency practice and the specified assets are subject to a four-point average to compensate for seasonal fluctuations.
The following is a tabular reconciliation of the non-GAAP financial measure of ROIC to operating income as a percent to property and equipment - net, which the Company believes to be the most directly comparable GAAP financial measure.
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | (millions, except percentages) |
| Operating income | | $ | 1,807 |
| | $ | 1,315 |
| | $ | 2,039 |
| | $ | 2,800 |
| | $ | 2,678 |
|
| | | | | | | | | | | |
| Property and equipment - net | | $ | 6,845 |
| | $ | 7,317 |
| | $ | 7,708 |
| | $ | 7,865 |
| | $ | 8,063 |
|
| | | | | | | | | | | |
Operating income as a percent to property and
equipment - net | | 26.4 | % | | 18.0 | % | | 26.5 | % | | 35.6 | % | | 33.2 | % |
| | | | | | | | | | | |
| Operating income | | $ | 1,807 |
| | $ | 1,315 |
| | $ | 2,039 |
| | $ | 2,800 |
| | $ | 2,678 |
|
Add back restructuring, impairment, store closing and
other costs | | 186 |
| | 479 |
| | 288 |
| | 87 |
| | 88 |
|
| Add back settlement charges | | 105 |
| | 98 |
| | — |
| | — |
| | — |
|
| Add back depreciation and amortization | | 991 |
| | 1,058 |
| | 1,061 |
| | 1,036 |
| | 1,020 |
|
| Add back rent expense, net | | | | | | | | | | |
| Real estate | | 325 |
| | 319 |
| | 301 |
| | 279 |
| | 268 |
|
| Personal property | | 10 |
| | 11 |
| | 12 |
| | 12 |
| | 11 |
|
| Deferred rent amortization | | 14 |
| | 9 |
| | 8 |
| | 7 |
| | 8 |
|
| Adjusted operating income | | $ | 3,438 |
| | $ | 3,289 |
| | $ | 3,709 |
| | $ | 4,221 |
| | $ | 4,073 |
|
| | | | | | | | | | | |
| Property and equipment - net | | $ | 6,845 |
| | $ | 7,317 |
| | $ | 7,708 |
| | $ | 7,865 |
| | $ | 8,063 |
|
| Add back accumulated depreciation and amortization | | 4,733 |
| | 5,088 |
| | 5,457 |
| | 5,830 |
| | 6,007 |
|
| Add capitalized value of non-capitalized leases | | 2,792 |
| | 2,712 |
| | 2,568 |
| | 2,384 |
| | 2,296 |
|
| Add (deduct) other selected assets and liabilities: | | | | | | | | | | |
| Receivables | | 327 |
| | 402 |
| | 338 |
| | 336 |
| | 339 |
|
| Merchandise inventories | | 5,712 |
| | 6,012 |
| | 6,226 |
| | 6,155 |
| | 6,065 |
|
| Prepaid expenses and other current assets | | 422 |
| | 456 |
| | 453 |
| | 443 |
| | 398 |
|
| Other assets | | 830 |
| | 881 |
| | 775 |
| | 784 |
| | 659 |
|
| Merchandise accounts payable | | (2,115 | ) | | (2,173 | ) | | (2,366 | ) | | (2,472 | ) | | (2,520 | ) |
| Accounts payable and accrued liabilities | | (3,027 | ) | | (2,924 | ) | | (2,677 | ) | | (2,511 | ) | | (2,328 | ) |
| Total average invested capital | | $ | 16,519 |
| | $ | 17,771 |
| | $ | 18,482 |
| | $ | 18,814 |
| | $ | 18,979 |
|
| | | | | | | | | | | |
| ROIC | | 20.8 | % | | 18.5 | % | | 20.1 | % | | 22.4 | % | | 21.5 | % |
Critical Accounting Policies
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the last-in, first-out (LIFO) retail inventory method. Under the retail inventory method, inventory is segregated into departments of merchandise having similar characteristics, and is stated at its current retail selling value. The retail inventory method inherently requires management judgments and estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation as well as gross margins.
Permanent markdowns designated for clearance activity are recorded when the utility of the inventory has diminished. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise and fashion trends. When a decision is made to permanently mark down merchandise, the resulting gross profit reduction is recognized in the period the markdown is recorded.
Long-Lived Asset Impairment and Restructuring Charges
The carrying values of long-lived assets are periodically reviewed by the Company whenever events or changes in circumstances indicate that the carrying value may not be recoverable, such as historical operating losses or plans to close stores before the end of their previously estimated useful lives. Additionally, on an annual basis, the recoverability of the carrying values of individual stores is evaluated. A potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management's assumptions of cash inflows and outflows directly resulting from the use of those assets in operations. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long-lived asset exceeds its fair value. The Company believes its estimated cash flows are sufficient to support the carrying value of its long-lived assets. If estimated cash flows significantly differ in the future, the Company may be required to record asset impairment write-downs.
If the Company commits to a plan to dispose of a long-lived asset before the end of its previously estimated useful life, estimated cash flows are revised accordingly, and the Company may be required to record an asset impairment write-down. Additionally, related liabilities arise such as severance, contractual obligations and other accruals associated with store closings from decisions to dispose of assets. The Company estimates these liabilities based on the facts and circumstances in existence for each restructuring decision. The amounts the Company will ultimately realize or disburse could differ from the amounts assumed in arriving at the asset impairment and restructuring charge recorded.
Income Taxes
Income taxes are estimated based on the tax statutes, regulations and case law of the various jurisdictions in which the Company operates. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets are evaluated for recoverability based on all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. Deferred income tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred income tax assets will not be realized.
Uncertain tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Uncertain tax positions meeting the more-likely-than-not recognition threshold are then measured to determine the amount of benefit eligible for recognition in the financial statements. Each uncertain tax position is measured at the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. Uncertain tax positions are evaluated and adjusted as appropriate, while taking into account the progress of audits of various taxing jurisdictions. The Company does not anticipate that resolutionResolution of these matters willcould have a material impact on the Company's consolidated financial position, results of operations or cash flows.
Significant judgment is required in evaluating the Company's uncertain tax positions, provision for income taxes, and any valuation allowance recorded against deferred tax assets. Although the Company believes that its judgments are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the Company's historical income provisions and accruals.
Pension and Supplementary Retirement Plans
The Company has a funded defined benefit pension plan (the “Pension Plan”) and an unfunded defined benefit supplementary retirement plan (the “SERP”). The Company accounts for these plans in accordance with ASC Topic 715, “CompensationCompensation - Retirement Benefits.” Under ASC Topic 715, an employer recognizes the funded status of a defined benefit postretirement plan as an asset or liability on the balance sheet and recognizes changes in that funded status in the year in which the changes occur through comprehensive income. Additionally, pension expense is generally recognized on an accrual basis over the average remaining lifetime of participants. The pension expense calculation is generally independent of funding decisions or requirements.
The Pension Protection Act of 2006 provides the funding requirements for the Pension Plan which are different from the employer's accounting for the plan as outlined in ASC Topic 715. No funding contributions were required, and the Company made no funding contributions to the Pension Plan in 2017 and 2016. As of the date of this report, the Company does not anticipate making funding contributions to the Pension Plan in 2017.2018. Management believes that, with respect to the Company's current operations, cash on hand and funds from operations, together with available borrowing under its credit facility and other capital resources, will be sufficient to cover the Company's Pension Plan cash requirements in both the near term and also over the longer term.
At January 28, 2017, the Company had unrecognized actuarial losses of $1,232 million for the Pension Plan and $248 million for the SERP. The unrecognized losses for the Pension Plan and the SERP will be recognized as a component of pension expense in future years in accordance with ASC Topic 715, and is expected to impact 2017 Pension and SERP net periodic benefit costs by approximately $41 million. The Company generally amortizes unrecognized gains and losses on a straight-line basis over the average remaining lifetime of participants using the corridor approach. In addition, approximately $80 to 90 million of net actuarial losses are also expected to be recognized in 2017 as part of a non-cash settlement charge, resulting from an anticipated increase in lump sum distributions associated with store closings, a voluntary separation program and organizational restructuring and small balance force outs, in addition to annual distribution activity.
The calculation of pension expense and pension liabilities requires the use of a number of assumptions. Changes in these assumptions can result in different expense and liability amounts, and future actual experience may differ significantly from current expectations. The Company believes that the most critical assumptions relate to the long-term rate of return on plan assets (in the case of the Pension Plan) and the discount rate used to determine the present value of projected benefit obligations.
As of January 31, 2015, the Company lowered theThe Company's assumed annual long-term rate of return for the Pension Plan's assets from 7.50% towas 7.00% for 2017, 2016 and 2015 based on expected future returns on the portfolio of assets. For 2018, the Company is lowering the assumed annual long-term rate of return to 6.75% based on expected future returns of the portfolio of assets. The Company develops its expected long-term rate of return assumption by evaluating input from several professional advisors taking into account the asset allocation of the portfolio and long-term asset class return expectations, as well as long-term inflation assumptions. Pension expense increases or decreases as the expected rate of return on the assets of the Pension Plan decreases or increases, respectively. Lowering or raising the expected long-term rate of return assumption on the Pension Plan's assets by 0.25% would increase or decrease the estimated 20172018 pension expense by approximately $8 million.
The Company discounted its future pension obligations using a weighted-average rate of 3.74% at February 3, 2018 and 4.00% at January 28, 2017 and 4.17% at January 30, 2016 for the Pension Plan and 3.78% at February 3, 2018 and 4.07% at January 28, 2017 and 4.23% at January 30, 2016 for the SERP. The discount rate used to determine the present value of the Company's Pension Plan and SERP obligations is based on a yield curve constructed from a portfolio of high quality corporate debt securities with various maturities. Each year's expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate for Pension Plan and SERP obligations. As the discount rate is reduced or increased, the pension liability would increase or decrease, respectively, and future pension expense would decrease or increase, respectively. Lowering the discount rates by 0.25% would increase the projected benefit obligations at January 28, 2017February 3, 2018 by approximately $105$92 million and would decrease estimated 20172018 pension expense by approximately $3 million. Increasing the discount rates by 0.25% would decrease the projected benefit obligations at January 28, 2017February 3, 2018 by approximately $99$85 million and would increase estimated 20172018 pension expense by approximately $3 million.
In 2016, the Company changed the method used to estimate the service and interest cost components of net periodic benefit costs for the Pension Plan and SERP. The new method uses a full yield curve approach in the estimation of these components of net periodic benefit costs. Under this approach, the Company applies discounting using individual spot rates from the yield curve composed of the rates of return from a portfolio of high quality corporate debt securities available at the measurement date. These spot rates align to each of the projected benefit obligation and service cost cash flows. Historically, the Company estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligations.
The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest costs. The Company accounted for this change as a change in estimate prospectively starting in 2016. The 2016 reduction in service cost and interest cost for the Pension Plan and SERP associated with this change was approximately $36 million.
New Pronouncements
Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which establishes principles to report useful information to financial statements users about the nature, timing and uncertainty of revenue from contracts with customers. ASU No. 2014-09 along with various related amendments ASU Nos. 2016-20, 2016-12, 2016-10, 2016-08, and 2015-14 comprise ASC Topic 606, Revenue from Contracts with Customers, and provide guidance that is applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns .patterns. The new standard and its related updates arewere effective for the Company beginning on February 4, 2018. Early adoption is permitted in 2017; however, Macy's will not early adopt the new guidance. On the effective date, the Company will apply the new guidance retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company is currently evaluating the methods of adoption and has not yet decided on the method to be applied whenpresented.
Overall, the new standard will not have a material impact to the results of the Company's operations or consolidated statements of financial position, but will change the presentation and timing of certain revenue guidance is effective.
Combined with the guidance in ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20), thetransactions. The Company currently estimates the material impacts to its consolidated financial statements to include changes in thegross presentation of its estimates for future sales returns and related recoverable assets, presentation of earningspresenting income from credit operations, gift card breakage income and Thanks For Sharing loyalty program income as separate components of revenue and recognizing gift card breakage revenue over the period of redemption for gift cards associated with certain returns. In addition, on a quarterly basis, the timing of certain real estate gains (particularly those with leaseback components) andrecognizing revenue for the presentationCompany's Thanks For Sharing loyalty program will change as compared to historical recognition. The Company's evaluation of the new standards included a review of certain consignment and licensevendor arrangements to determine whether the Company acts as principal or agent in such arrangements.
The Company does not expect material changes in gross versus net presentation as a result of the adoption of the new guidancestandard.
The following tables reflect the preliminary and unaudited expected impacts to materially impact the revenue recognition associated with gift card breakage as well as the accountingreported 2017 and 2016 results, respectively, for its warranty arrangements, loyalty programs and other customer incentive arrangements. The Company is continuing to evaluate the impact of the new standards and the final determinations of the impactadoption of the new guidance may differstandard on our consolidated financial statements.
|
| | | | | | | | | | | | | |
| | | 2017 (Unaudited) | |
| | | As Reported | | New Revenue Standard Adjustments | | As Adjusted | |
| Consolidated Statement of Income: | | (dollars in millions, except per share figures) | |
| Net sales | | $ | 24,837 |
| | $ | 104 |
| | $ | 24,941 |
| |
| Credit card revenues, net | | — |
| | 702 |
| | 702 |
| |
| Cost of sales | | (15,152 | ) | | (30 | ) | | (15,182 | ) | |
| Selling, general and administrative expenses | | (8,131 | ) | | (766 | ) | | (8,897 | ) | |
| Federal, state and local income tax benefit | | 29 |
| | (2 | ) | | 27 |
| |
Net income attributable to Macy's, Inc. shareholders | | 1,547 |
| | 8 |
| | 1,555 |
| |
Diluted earnings per share attributable to Macy's, Inc. shareholders | | 5.04 |
| | 0.02 |
| | 5.06 |
| |
|
| | | | | | | | | | | | | |
| | | 2016 (Unaudited) | |
| | | As Reported | | New Revenue Standard Adjustments | | As Adjusted | |
| Consolidated Statement of Income: | | (dollars in millions, except per share figures) | |
| Net sales | | $ | 25,778 |
| | $ | 132 |
| | $ | 25,910 |
| |
| Credit card revenues, net | | — |
| | 656 |
| | 656 |
| |
| Cost of sales | | (15,621 | ) | | (46 | ) | | (15,667 | ) | |
| Selling, general and administrative expenses | | (8,474 | ) | | (728 | ) | | (9,202 | ) | |
| Federal, state and local income tax expense | | (341 | ) | | (5 | ) | | (346 | ) | |
Net income attributable to Macy's, Inc. shareholders | | 619 |
| | 9 |
| | 628 |
| |
Diluted earnings per share attributable to Macy's, Inc. shareholders | | 1.99 |
| | 0.03 |
| | 2.02 |
| |
|
| | | | | | | | | | | | | | |
| | | 2017 (Unaudited) | |
| | | As Reported | | New Revenue Standard Adjustments | | As Adjusted | |
| Consolidated Balance Sheet: | | (dollars in millions) | |
| Prepaid expenses and other current assets | 448 |
| $ | 448 |
| | $ | 201 |
| | $ | 649 |
| |
| Accounts payable and accrued liabilities | 3,167 |
| 3,167 |
| | 102 |
| | 3,269 |
| |
| Deferred income taxes | 1,122 |
| 1,122 |
| | 25 |
| | 1,147 |
| |
| Total Shareholders' equity | 5,661 |
| 5,661 |
| | 74 |
| | 5,735 |
| |
|
| | | | | | | | | | | | | | |
| | | 2016 (Unaudited) | |
| | | As Reported | | New Revenue Standard Adjustments | | As Adjusted | |
| Consolidated Balance Sheet: | | (dollars in millions) | |
| Prepaid expenses and other current assets | 448 |
| $ | 408 |
| | $ | 232 |
| | $ | 640 |
| |
| Accounts payable and accrued liabilities | 3,167 |
| 3,563 |
| | 143 |
| | 3,706 |
| |
| Deferred income taxes | 1,122 |
| 1,443 |
| | 35 |
| | 1,478 |
| |
| Total Shareholders' equity | 5,661 |
| 4,322 |
| | 54 |
| | 4,376 |
| |
Adoption of ASC Topic 606 is not expected to impact cash from these initial estimates.or used in operating, financing, or investing on our consolidated statements of cash flows.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic(ASC Topic 842), which requires lessees to recognize substantially all leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right of use (ROU)("ROU") model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard is effective for the Company on February 3, 2019, with early adoption permitted. The2019. Currently, the new standard is to be adopted utilizing a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. However, the FASB has proposed another transition method, in addition to the existing requirements, to transition to the new lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has not yet decided whether it will early adoptis awaiting finalization of the alternatives for transitioning to the new standard but the Company currently plans to elect allbefore deciding upon a method of the standard's available practical expedients on adoption.
The Company expects that the new lease standard will have a material impact on the Company's consolidated financial statements. While the Company is continuing to assess the effects of adoption, the Company currently believes the most significant changes relate to the recognition of new ROU assets and lease liabilities on the consolidated balance sheets for real property and personal property operating leases as well as changes to the timing of recognition of certain real estate asset sale gains in the consolidated statements of income due to application of the new sale-leaseback guidance and ASU No. 2017-05, as discussed above.Other Income - Gains and Losses from the Derecognition of NonFinancial Assets (Subtopic 610-20). The Company expects that substantially all of its operating lease commitments disclosed in Note 4, "Properties and Leases", to the consolidated financial statements will be subject to the new guidance and will be recognized as operating lease liabilities and ROU assets upon adoption. A significant change in leasing activity between the date of this report and adoption is not expected.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting. The new guidance includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, including accounting for income taxes, earnings per share and forfeitures. This guidance requires all excess tax benefits and tax deficiencies to be recorded in income tax expense when the awards vest or are settled, with prospective application required. The new standard is effective for the Company on January 29, 2017. The impact of the new standard will vary based on the intrinsic value of vested awards when exercised or expired but is not currently expected to have a material impact on the Company's consolidated financial position, results of operations and cash flows.
Retirement Plans
In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic(ASC Topic 715), which requires employers to disaggregate the service cost component from other components of net periodic benefit costs and to disclose the amounts of net periodic benefit costs that are included in each income statement line item. The standard requires employers to report the service cost component in the same line item as other compensation costs and to report the other components of net periodic benefit costs (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) separately and outside a subtotal of operating income. The
income statement guidance requires application on a retrospective basis. TheFor 2017 and 2016, $57 million and $55 million, respectively, of net retirement plan income, excluding service cost, and settlement charges of $105 million and $98 million, respectively, will be reclassified to separate financial statement captions below operating income. This standard was effective for the Company on February 4, 2018.
Goodwill
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (ASC Topic 350), which eliminates the second step in the two-step goodwill impairment test. Previously the second step required the computation of the implied fair value of goodwill by determining the fair value of its assets and liabilities (including unrecognized assets and liabilities). Under the new standard, an entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary for its annual, or interim, goodwill impairment test. If the quantitative impairment test is deemed necessary, the Company should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit to its carrying value and recognize an impairment charge for the amount by which the carrying value exceeds the fair value. This standard is effective for the Company on a prospective basis beginning on February 2, 2020. The Company elected to early adopt this new standard in the firstfourth quarter of 2018, with early2017. The adoption permitted. The Company is currently evaluatingof this new standard did not have an impact on the impact this standard will have on itsCompany's consolidated financial position, results of operations or cash flowsflows.
Statement of Cash Flows
In 2016 the FASB issued ASU No. 2016-18, Statement of Cash Flows (ASC Topic 230): Restricted Cash, and related disclosures.ASU No. 2016-15, Statement of Cash Flows (ASC Topic 230): Classification of Certain Cash Receipts and Cash Payments. These standards were issued to resolve numerous diversities in practice with regards to the presentation and classification of certain cash receipts and payments in the statement of cash flows. The standards were effective for the Company plans to adopt this standard on February 4, 2018.2018, and will be applied using a retrospective transition method to each period presented. The standards will change the Company's classification of cash payments for debt prepayment and extinguishment costs from an operating outflow to a financing outflow. Additionally, the standards will result in the Company including its restricted cash balances with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on its statements of cash flows to explain the change in restricted cash during the respective periods. The Company does not anticipate the adoption of this standard will have a material impact on the Company's consolidated statement of cash flows.
The Company does not anticipate that the adoption of any other recent accounting pronouncements will have a material impact on the Company's consolidated financial position, results of operations or cash flows.
Comprehensive Income
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for stranded tax effects in accumulated other comprehensive income resulting from H.R. 1, originally known as the “Tax Cuts and Jobs Act,” to be reclassified to retained earnings. The new standard is effective for the Company on February 3, 2019. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new standard and does not expect the new standard to have a material impact on the Company’s financial position or results of operations.
| |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
The Company is exposed to market risk from changes in interest rates that may adversely affect its financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposures through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company does not use financial instruments for trading or other speculative purposes and is not a party to any leveraged financial instruments.
The Company is exposed to interest rate risk through its borrowing activities, which are described in Note 6 to the Consolidated Financial Statements.consolidated financial statements. All of the Company’s borrowings are under fixed rate instruments. However, the Company, from time to time, may use interest rate swap and interest rate cap agreements to help manage its exposure to interest rate movements and reduce borrowing costs. At January 28, 2017February 3, 2018, the Company was not a party to any derivative financial instruments and based on the Company’s lack of market risk sensitive instruments outstanding at January 28, 2017February 3, 2018, the Company has determined that there was no material market risk exposure to the Company’s consolidated financial position, results of operations or cash flows as of such date.
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| Item 8. | Consolidated Financial Statements and Supplementary Data. |
Information called for by this item is set forth in the Company’s Consolidated Financial Statements and supplementary data contained in this report and is incorporated herein by this reference. Specific financial statements and supplementary data can be found at the pages listed in the following index:
INDEX
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| | Page |
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| Consolidated Balance Sheets as of February 3, 2018 and January 28, 2017 | |
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
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| Item 9A. | Controls and Procedures. |
a. Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have carried out, as of January 28, 2017February 3, 2018, with the participation of the Company’s management, an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of February 3, 2018 the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in reports the Company files under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
b. Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The Company’s management conducted an assessment of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on this assessment, the Company’s management has concluded that, as of January 28, 2017February 3, 2018, the Company’s internal control over financial reporting is effective.
The Company’s independent registered public accounting firm, KPMG LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of January 28, 2017February 3, 2018 and has issued an attestation report expressing an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting, as stated in their report located on page F-3.
c. Changes in Internal Control over Financial Reporting
ThereFrom time to time 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 controlscontrol over financial reporting that occurred during the Company’s most recently completed quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART III
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| Item 10. | Directors, Executive Officers and Corporate Governance. |
The information required by this item for executive officers is set forth under “Item 1. Business - Executive Officers of the Registrant” in this report. The other information called for by this item is set forth under “Item 1 -1. Election of Directors” and “Further Information Concerning the Board of Directors - Committees of the Board” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement to be delivered to stockholders in connection with the 20172018 Annual Meeting of Shareholders (the “Proxy Statement”), and incorporated herein by reference.
The Company’s Code of Conduct is in compliance with the applicable rules of the SEC that apply to the principal executive officer, principal financial officer and principal accounting officer or comptroller, or persons performing similar functions. A copy of the Code of Conduct is available, free of charge, through the Company’s website at http://www.macysinc.com. We intend to satisfy any disclosure requirement under Item 5 of Form 8-K regarding an amendment to or waiver from, a provision of the Code of Conduct by posting such information to the Company’s website at the address and location specified above.
Set forth below are the names, ages and principal occupations of the Company's non-employee directors as of March 24, 2017.23, 2018.
| | | Name | | Age | | Director Since | | Principal Occupation | | Age | | Director Since | | Principal Occupation |
| Francis S. Blake | | 67 | | 2015 | | Former Chairman and Chief Executive Officer of The Home Depot, Inc. | | 68 | | 2015 | | Former Chairman and Chief Executive Officer of The Home Depot, Inc. |
| John A. Bryant | | 51 | | 2015 | | Chairman of the Board of Kellogg Company since July 2014 and President and Chief Executive Officer since January 2011. | | 52 | | 2015 | | Former Chairman and Chief Executive Officer of Kellogg Company. |
| Deirdre P. Connelly | | 56 | | 2008 | | Former President, North American Pharmaceuticals of GlaxoSmithKline, a global pharmaceutical company. | | 57 | | 2008 | | Former President, North American Pharmaceuticals of GlaxoSmithKline, a global pharmaceutical company. |
| Leslie D. Hale | | 44 | | 2015 | | Chief Operating Officer since 2016, Chief Financial Officer since 2007 and Executive Vice President since 2013 of RLJ Lodging Trust, a publicly-traded lodging real estate investment trust. | | 45 | | 2015 | | Chief Operating Officer since 2016, Chief Financial Officer since 2007 and Executive Vice President since 2013 of RLJ Lodging Trust, a publicly-traded lodging real estate investment trust. |
| William H. Lenehan | | 40 | | 2016 | | President and Chief Executive Officer of Four Corners Property Trust, Inc., a real estate investment trust, since August 2015. | | 41 | | 2016 | | President and Chief Executive Officer of Four Corners Property Trust, Inc., a real estate investment trust, since August 2015. |
| Sara Levinson | | 66 | | 1997 | | Co-Founder and Director of Katapult, a digital entertainment company making products for today's creative generation, since April 2013. | | 67 | | 1997 | | Co-Founder and Director of Katapult, a digital entertainment company making products for today's creative generation, since April 2013. |
| Joyce M. Roché | | 70 | | 2006 | | Former President and Chief Executive Officer of Girls Incorporated, a national non-profit research, education and advocacy organization. | | 71 | | 2006 | | Former President and Chief Executive Officer of Girls Incorporated, a national non-profit research, education and advocacy organization. |
| Paul C. Varga | | 53 | | 2012 | | Chairman of Brown-Forman Corporation, a spirits and wine company, since August 2007 and Chief Executive Officer since 2005. | | 54 | | 2012 | | Chairman of Brown-Forman Corporation, a spirits and wine company, since August 2007 and Chief Executive Officer since 2005. |
| Marna C. Whittington | | 69 | | 1993 | | Former Chief Executive Officer of Allianz Global Investors Capital, a diversified global investment firm. | | 70 | | 1993 | | Former Chief Executive Officer of Allianz Global Investors Capital, a diversified global investment firm. |
| Annie Young-Scrivner | | 48 | | 2014 | | Executive Vice President of Starbucks Corporation since September 2009, with responsibility for global loyalty and digital development since September 2015. | |
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| Item 11. | Executive Compensation. |
Information called for by this item is set forth under “Compensation Discussion & Analysis,” “Compensation of the Named Executives for 20162017,” “Compensation Committee Report”,Report,” “Compensation Committee Interlocks and Insider Participation” and "Further Information Concerning the Board of Directors-Risk Oversight" in the Proxy Statement and incorporated herein by reference.
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| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Information called for by this item is set forth under “Stock Ownership – Certain Beneficial Owners”Owners,” “Stock Ownership - Securities Authorized for Issuance Under Equity Compensation Plans,” and “Stock Ownership – Stock Ownership of Directors and Executive Officers” in the Proxy Statement and incorporated herein by reference.
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| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Information called for by this item is set forth under “Further Information Concerning the Board of Directors – Director Independence” and “Policy on Related Person Transactions” in the Proxy Statement and incorporated herein by reference.
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| Item 14. | Principal Accountant Fees and Services. |
Information called for by this item is set forth under “Item 2 –2. Ratification of the Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement and incorporated herein by reference.
PART IV
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| Item 15. | Exhibits and Financial Statement Schedules. |
(a) The following documents are filed as part of this report:
1. Financial Statements:
The list of financial statements required by this item is set forth in Item 8 “Consolidated Financial Statements and Supplementary Data” and is incorporated herein by reference.
2. Financial Statement Schedules:
All schedules are omitted because they are inapplicable, not required, or the information is included elsewhere in the Consolidated Financial Statements or the notes thereto.
3. Exhibits:
|
| | | | |
Exhibit Number | | Description | | Document if Incorporated by Reference |
| 3.1 | | Amended and Restated Certificate of Incorporation | | |
| | | | | |
| 3.1.1 | | Certificate of Designations of Series A Junior Participating Preferred Stock | | Form 10-K (File No. 1-13536) for the fiscal year ended January 28, 1995 |
| | | | | |
| 3.1.2 | | Article Seventh of the Amended and Restated Certificate of Incorporation | | |
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| 3.2 | | Amended and Restated By-Laws | | |
| | | | | |
| 4.1 | | Amended and Restated Certificate of Incorporation | | |
| | | | | |
| 4.2 | | Amended and Restated By-Laws | | |
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| 4.3 | | Indenture, dated as of January 15, 1991, among the Company (as successor to The May Department Stores Company (“May Delaware”)), Macy's Retail Holdings, Inc. (“Macy's Retail”) (f/k/a The May Department Stores Company (NY) or “May New York”) and The Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”, successor to J.P. Morgan Trust Company and as successor to The First National Bank of Chicago), as Trustee (the “1991 Indenture”) | | Exhibit 4(2) to May New York’s Current Report on Form 8-K filed on January 15, 1991 |
| | | | | |
| 4.3.1 | | Guarantee of Securities, dated as of August 30, 2005, by the Company relating to the 1991 Indenture | | Form 8-K filed on August 30, 2005 (the “August 30, 2005 Form 8-K”) |
| | | | | |
| 4.4 | | Indenture, dated as of December 15, 1994, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company and The First National Bank of Boston), as Trustee (the “1994 Indenture”) | | Exhibit 4.1 to the Company's Registration Statement on Form S-3 (Registration No. 33-88328) filed on January 9, 1995 |
| | | | | |
4.4.1 | | Eighth Supplemental Indenture to the 1994 Indenture, dated as of July 14, 1997, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company and The First National Bank of Boston), as Trustee | | Exhibit 2 to the Company's Current Report on Form 8-K filed on July 15, 1997 (the “July 15, 1997 Form 8-K”) |
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| | | | |
Exhibit Number | | Description | | Document if Incorporated by Reference |
4.4.24.4.1 | | Ninth Supplemental Indenture to the 1994 Indenture, dated as of July 14, 1997, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company and The First National Bank of Boston), as Trustee | | |
| | | | | |
4.4.34.4.2 | | Tenth Supplemental Indenture to the 1994 Indenture, dated as of August 30, 2005, among the Company, Macy's Retail and U.S. Bank National Association (as successor to State Street Bank and Trust Company and as successor to The First National Bank of Boston), as Trustee | | |
| | | | | |
4.4.44.4.3 | | Guarantee of Securities, dated as of August 30, 2005, by the Company relating to the 1994 Indenture | | |
| | | | | |
| 4.5 | | Indenture, dated as of September 10, 1997, between the Company and U.S. Bank National Association (successor to Citibank, N.A.), as Trustee (the “1997 Indenture”) | | |
| | | | | |
| 4.5.1 | | First Supplemental Indenture to the 1997 Indenture, dated as of February 6, 1998, between the Company and U.S. Bank National Association (successor to Citibank, N.A.), as Trustee | | |
| | | | | |
| 4.5.2 | | Third Supplemental Indenture to the 1997 Indenture, dated as of March 24, 1999, between the Company and U.S. Bank National Association (successor to Citibank, N.A.), as Trustee | | |
| | | | | |
| 4.5.3 | | Seventh Supplemental Indenture to the 1997 Indenture, dated as of August 30, 2005 among the Company, Macy's Retail and U.S. Bank National Association (successor to Citibank, N.A.), as Trustee | | |
| | | | | |
| 4.5.4 | | Guarantee of Securities, dated as of August 30, 2005, by the Company relating to the 1997 Indenture | | |
| | | | | |
| 4.6 | | Indenture, dated as of June 17, 1996, among the Company (as successor to May Delaware), Macy's Retail (f/k/a May New York) and The Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”, successor to J.P. Morgan Trust Company), as Trustee (the “1996 Indenture”) | | |
| | | | | |
| 4.6.1 | | First Supplemental Indenture to the 1996 Indenture, dated as of August 30, 2005, by and among the Company (as successor to May Delaware), Macy's Retail (f/k/a May New York) and BNY Mellon, as Trustee | | |
| | | | | |
| 4.7 | | Indenture, dated as of July 20, 2004, among the Company (as successor to May Delaware), Macy's Retail (f/k/a May New York) and BNY Mellon, as Trustee (the “2004 Indenture”) | | |
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| 4.7.1 | | First Supplemental Indenture to the 2004 Indenture, dated as of August 30, 2005 among the Company (as successor to May Delaware), Macy's Retail and BNY Mellon, as Trustee | | |
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| 4.8 | | Indenture, dated as of November 2, 2006, by and among Macy's Retail, the Company and U.S. Bank National Association, as Trustee (the “2006 Indenture”) | | |
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Exhibit Number | | Description | | Document if Incorporated by Reference |
| 4.8.1 | | First Supplemental Indenture to the 2006 Indenture, dated November 29, 2006, among Macy's Retail, the Company and U.S. Bank National Association, as Trustee | | Exhibit 4.1 to the Company's Current Report on Form 8-K filed on November 29, 2006 |
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4.8.2 | | Third Supplemental Indenture to the 2006 Indenture, dated March 12, 2007, among Macy's Retail, the Company and U.S. Bank National Association, as Trustee | | |
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4.8.34.8.2 | | Sixth Supplemental Indenture to the 2006 Indenture, dated December 10, 2015, among Macy's Retail, the Company and U.S. Bank National Association, as Trustee | | |
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| 4.9 | | Indenture, dated as of January 13, 2012, among Macy's Retail, the Company and BNY Mellon, as Trustee (the "2012 Indenture") | | |
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| 4.9.1 | | First Supplemental Trust Indenture to the 2012 Indenture, dated as of January 13, 2012, among Macy's Retail, as issuer, the Company, as guarantor, and BNY Mellon, as trustee | | |
| | | | | |
| 4.9.2 | | Second Supplemental Trust Indenture to the 2012 Indenture, dated as of January 13, 2012, among Macy's Retail, as issuer, the Company, as guarantor, and BNY Mellon, as trustee | | |
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| 4.9.3 | | Third Supplemental Trust Indenture, dated as of November 20, 2012, among Macy's Retail, as issuer, the Company, as guarantor, and BNY Mellon, as trustee | | |
| | | | | |
| 4.9.4 | | Fourth Supplemental Trust Indenture, dated as of November 20, 2012, among Macy's Retail, as issuer, the Company, as guarantor, and BNY Mellon, as trustee | | |
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| 4.9.5 | | Fifth Supplemental Trust Indenture, dated as of September 6, 2013, among Macy's Retail, as issuer, the Company, as guarantor, and BNY Mellon, as trustee | | |
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| 4.9.6 | | Sixth Supplemental Trust Indenture, dated as of May 23, 2014, among Macy's Retail, as issuer, the Company, as guarantor, and BNY Mellon, as trustee | | |
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| 4.9.7 | | Seventh Supplemental Trust Indenture, dated as of November 18, 2014, among Macy's Retail, as issuer, the Company, as guarantor, and BNY Mellon, as trustee | | |
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| 10.1 | | Credit Agreement, dated as of May 6, 2016, among the Company, Macy's Retail, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and paying agent, and Bank of America, N.A., as administrative agent | | |
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| 10.2 | | Guarantee Agreement, dated as of May 16,6, 2016, among the Company, Macy's Retail, certain subsidiary guarantors and JPMorgan Chase Bank, N.A., as paying agent | | |
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| 10.3 | | Tax Sharing Agreement, dated as of October 31, 2014, among Macy's, Inc. and members of the Affiliated Group | | |
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Exhibit Number | | Description | | Document if Incorporated by Reference |
| 10.4+ | | Amended and Restated Credit Card Program Agreement, dated November 10, 2014, among the Company, FDS Bank, Macy's Credit and Customer Services, Inc. (“MCCS”), Macy's West Stores, Inc., Bloomingdales, Inc., Department Stores National Bank ("DSNB") and Citibank, N.A. | | |
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| 10.5 | �� | 1995 Executive Equity Incentive Plan, as amended and restated as of June 1, 2007 (the “1995 Plan”) * | | |
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| 10.6 | | Senior Executive Incentive Compensation Plan * | | |
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| 10.7 | | 1994 Stock Incentive Plan, as amended and restated as of June 1, 2007 * | | |
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| 10.8 | | Form of Indemnification Agreement * | | Exhibit 10.14 to the Registration Statement on Form 10 (File No. 1-10951), filed on November 27, 1991 |
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| 10.9 | | Executive Severance Plan, effective November 1, 2009, as revised and restated January 1, 2014 * | | |
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| 10.9.1 | | | | |
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| 10.10 | | Form of Non-Qualified Stock Option Agreement for the 1995 Plan (for Executives and Key Employees) * | | |
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| 10.10.1 | | Form of Non-Qualified Stock Option Agreement for the 1995 Plan (for Executives and Key Employees), as amended * | | |
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| 10.10.2 | | Form of Non-Qualified Stock Option Agreement for the 1994 Stock Incentive Plan * | | |
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| 10.10.3 | | Form of Nonqualified Stock Option Agreement under the 2009 Omnibus Incentive Compensation Plan (for Executives and Key Employees) * | | |
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| 10.10.4 | | Form of Nonqualified Stock Option Agreement under the Amended and Restated 2009 Omnibus Incentive Compensation Plan (for Executives and Key Employees) * | | |
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| 10.10.5 | | | | |
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| 10.11 | | Nonqualified Stock Option Agreement, dated as of October 26, 2007, by and between the Company and Terry Lundgren * | | Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 1, 2007 |
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10.12 | | Form of Restricted Stock Agreement for the 1994 Stock Incentive Plan * | | |
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10.12.110.11.1 | | Form of Time-Based Restricted Stock Agreement under the 2009 Omnibus Incentive Compensation Plan * | | |
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10.13 | | Form of Performance-Based Restricted Stock Unit Agreement under the Amended and Restated 2009 Omnibus Incentive Compensation Plan for the 2015-2017 performance period * | | Exhibit 10.17.2 to the 2014 Form 10-K |
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10.13.110.12 | | 2016-2018 Performance-Based Restricted Stock Unit Terms and Conditions * | | |
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10.13.210.12.1 | | 2017-2019 Performance-Based Restricted Stock Unit Terms and Conditions * | | |
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Exhibit Number | | Description | | Document if Incorporated by Reference |
10.14 | | | | |
| 10.12.2 | | | | |
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| 10.13 | | Form of Time-Based Restricted Stock Unit Agreement under the 2009 Omnibus Incentive Compensation Plan * | | |
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10.14.110.13.1 | | Form of Time-Based Restricted Stock Unit Agreement under the Amended and Restated 2009 Omnibus Incentive Compensation Plan * | | |
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10.1510.13.2 | | Supplementary Executive Retirement | | Exhibit 10.29 to the 2008 Form 10-K |
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10.15.110.13.3 | |
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| 10.14 | | Supplementary Executive Retirement Plan * | | |
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| 10.14.1 | | First Amendment to the Supplementary Executive Retirement Plan effective January 1, 2012 * | | |
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10.15.210.14.2 | | Second Amendment to Supplementary Executive Retirement Plan effective January 1, 2012 * | | |
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10.15.310.14.3 | | Third Amendment to Supplementary Executive Retirement Plan effective December 31, 2013 * | | |
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10.1610.15 | | Executive Deferred Compensation Plan * | | |
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10.16.110.15.1 | | First Amendment to Executive Deferred Compensation Plan effective December 19, 2013 * | | |
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10.1710.16 | | Macy's, Inc. 401(k) Retirement Investment Plan (the "Plan") (amending and restating the Macy's, Inc. 401(k) Retirement Investment Plan) effective as of January 1, 2014 * | | |
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10.17.110.16.1 | | First Amendment to the Plan regarding matching contributions with respect to the Plan’s plan years beginning on and after January 1, 2014, effective January 1, 2014 * | | |
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10.17.210.16.2 | | Second Amendment to the Plan regarding marriage status, effective January 1, 2014 * | | |
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10.17.310.16.3 | | Third Amendment to the Plan regarding matching contributions with respect to the Plan’s plan years beginning on and after January 1, 2014 * | | |
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10.17.410.16.4 | | Fourth Amendment to the Plan regarding rules applicable to Puerto Rico participants effective January 1, 2011 (and for the Plan's plan years beginning on and after that date)* | | |
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10.17.510.16.5 | | Fifth Amendment to the Plan regarding eligible associates to participate (pre-tax deferrals only, no match) immediately upon hire* | | |
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10.1810.17 | | Director Deferred Compensation Plan * | | |
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10.19 | | Macy's, Inc. Amended and Restated 2009 Omnibus Incentive Compensation Plan * | | Appendix B to the Company's Proxy Statement dated April 2, 2014 |
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10.20 | | Macy's, Inc. Deferred Compensation Plan *
| | Exhibit 4.5 to the Company's Registration Statement on Form S-8 (Registration No. 333-192917) filed on December 18, 2013 |
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10.20.1 | | First Amendment to Deferred Compensation Plan regarding special rules of eligibility for newly eligible participants, effective April 1, 2014 * | | Exhibit 10.24.1 to the 2014 Form 10-K |
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Exhibit Number | | Description | | Document if Incorporated by Reference |
10.20.210.18 | | Macy's, Inc. Amended and Restated 2009 Omnibus Incentive Compensation Plan * | | |
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| 10.19 | | Macy's, Inc. Deferred Compensation Plan *
| | |
| | | | |
| 10.19.1 | | First Amendment to Deferred Compensation Plan regarding special rules of eligibility for newly eligible participants, effective April 1, 2014 * | | |
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| 10.19.2 | | Second Amendment to Deferred Compensation Plan regarding payment rules for plan years that begin on or after January 1, 2015, effective January 1, 2014 * | | |
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10.20.310.19.3 | | Third Amendment to Deferred Compensation Plan regarding a lump sum distribution from account if its balance does not exceed a certain amount, effective July 1, 2015* | | |
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10.2110.20 | | | | Exhibit 10.26 to the 2013 Form 10-K |
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10.2210.21 | | Amended and Restated Time Sharing Agreement between Macy's, Inc. and Terry J. Lundgren, dated August 21, 2014 * | | |
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10.2310.21.1 | | | | |
| | | | |
| 10.22 | | General Release with Addendum between Macy's, Inc. and Peter R. Sachse * | | |
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| 21 | | | | |
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| 23 | | | | |
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| 24 | | | | |
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| 31.1 | | | | |
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| 31.2 | | | | |
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| 32.1 | | | | |
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| 32.2 | | | | |
| | | | | |
| 101 | | The following financial statements from Macy's, Inc.’s Annual Report on Form 10-K for the year ended January 28, 2017,February 3, 2018, filed on March 29, 2017,April 4, 2018, formatted in XBRL: (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (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, tagged as blocksblock of text and in detail. | | |
___________________
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| |
| + | Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The confidential portions have been provided to the SEC. |
| * | Constitutes a compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | |
| | MACY’S, INC. |
| | | |
| | By: | /s/ ELISA D. GARCIA |
| | | Elisa D. Garcia Chief Legal Officer and Secretary |
Date: March 29, 2017April 4, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 29, 2017April 4, 2018.
|
| | | | |
| | | | | |
| * | | * | | * |
| Jeff Gennette | | Karen M. Hoguet | | Felicia Williams |
| | | | | |
President, Chief Executive Officer (principal executive officer), Chairman of the Board and Director | | Chief Financial Officer (principal financial officer) | | Executive Vice President, Controller and Enterprise Risk Officer (principal accounting officer) |
| | | | | |
| * | | * | | * |
Terry J. Lundgren | | Francis S. Blake | | John A. Bryant |
| | | | | |
Executive Chairman, Chairman of the Board and Director | | Director | | Director |
| | | | |
* | | * | | * |
| Deirdre P. Connelly | | Leslie D. Hale | | William H. Lenehan |
| | | | | |
| Director | | Director | | Director |
| | | | | |
| * | | * | | * |
Sara LevinsonLeslie D. Hale | | Joyce M. RochéWilliam H. Lenehan | | Paul C. VargaSara Levinson |
| | | | | |
| Director | | Director | | Director |
| | | | | |
| * | | * | | * |
| Joyce M. Roché | | Paul C. Varga | | Marna C. Whittington | | Annie Young-Scrivner | | |
| | | | | |
| Director | | Director | | Director |
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___________________
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| * | The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K pursuant to the Powers of Attorney executed by the above-named officers and directors and filed herewith. |
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| | |
| | By: | /s/ ELISA D. GARCIA |
| | | Elisa D. Garcia Attorney-in-Fact |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
| |
| | Page |
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Consolidated Statements of Income for the fiscal years ended
February 3, 2018, January 28, 2017, and January 30, 2016 and January 31, 2015 | |
Consolidated Statements of Comprehensive Income for the fiscal years ended
January 28, 2017, January 30, 2016 and January 31, 2015 | |
Consolidated Balance Sheets atFebruary 3, 2018, January 28, 2017, and January 30, 2016 | |
| Consolidated Balance Sheets at February 3, 2018 and January 28, 2017 | |
Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended
February 3, 2018, January 28, 2017, and January 30, 2016 and January 31, 2015 | |
Consolidated Statements of Cash Flows for the fiscal years ended
February 3, 2018, January 28, 2017, and January 30, 2016 and January 31, 2015 | |
| Notes to Consolidated Financial Statements | |
REPORT OF MANAGEMENT
To the Shareholders of
Macy’s, Inc.:
The integrity and consistency of the Consolidated Financial Statements of Macy’s, Inc. and subsidiaries, which were prepared in accordance with accounting principles generally accepted in the United States of America, are the responsibility of management and properly include some amounts that are based upon estimates and judgments.
The Company maintains a system of internal accounting controls, which is supported by a program of internal audits with appropriate management follow-up action, to provide reasonable assurance, at appropriate cost, that the Company’s assets are protected and transactions are properly recorded. Additionally, the integrity of the financial accounting system is based on careful selection and training of qualified personnel, organizational arrangements which provide for appropriate division of responsibilities and communication of established written policies and procedures.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) and has issued Management’s Report on Internal Control over Financial Reporting.
The Consolidated Financial Statements of the Company have been audited by KPMG LLP. Their report expresses their opinion as to the fair presentation, in all material respects, of the financial statements and is based upon their independent audits.
The Audit Committee, composed solely of outside directors, meets periodically with KPMG LLP, the internal auditors and representatives of management to discuss auditing and financial reporting matters. In addition, KPMG LLP and the Company’s internal auditors meet periodically with the Audit Committee without management representatives present and have free access to the Audit Committee at any time. The Audit Committee is responsible for recommending to the Board of Directors the engagement of the independent registered public accounting firm and the general oversight review of management’s discharge of its responsibilities with respect to the matters referred to above.
Terry J. Lundgren
Executive Chairman and Chairman of the Board
Jeff Gennette
PresidentChairman of the Board and Chief Executive Officer
Karen M. Hoguet
Chief Financial Officer
Felicia Williams
Executive Vice President, Controller and Enterprise Risk Officer
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Macy’s, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Macy’s, Inc. and subsidiaries (the Company) as of February 3, 2018 and January 28, 2017, and January 30, 2016, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended January 28, 2017.February 3, 2018, and the related notes (collectively, the consolidated financial statements). We also have audited Macy’s, Inc.’sthe Company’s internal control over financial reporting as of January 28, 2017,February 3, 2018, based on criteria established in Internal Control - Integrated Framework 2013 (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Macy’s, Inc.’sCommission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 3, 2018 and January 28, 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended February 3, 2018, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A(b), “Management’s Report Onon Internal Control over Financial Reporting.” Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements and an opinion on Macy’s, Inc.’sthe Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Macy’s, Inc. and subsidiaries as of January 28, 2017 and January 30, 2016, and the results of their operations and their cash flows for each of the years in the three-year period ended January 28, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Macy’s, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 28, 2017, based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
We have served as the Company’s auditor since 1988.
Cincinnati, Ohio
March 29, 2017April 4, 2018
MACY’S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(millions, except per share data)
| | | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Net sales | $ | 25,778 |
| | $ | 27,079 |
| | $ | 28,105 |
| $ | 24,837 |
| | $ | 25,778 |
| | $ | 27,079 |
|
| Cost of sales | (15,621 | ) | | (16,496 | ) | | (16,863 | ) | (15,152 | ) | | (15,621 | ) | | (16,496 | ) |
| Gross margin | 10,157 |
| | 10,583 |
| | 11,242 |
| 9,685 |
| | 10,157 |
| | 10,583 |
|
| Selling, general and administrative expenses | (8,265 | ) | | (8,256 | ) | | (8,355 | ) | (8,131 | ) | | (8,474 | ) | | (8,468 | ) |
| Impairments, store closing and other costs | (479 | ) | | (288 | ) | | (87 | ) | |
| Gains on sale of real estate | | 544 |
| | 209 |
| | 212 |
|
| Restructuring, impairment, store closing and other costs | | (186 | ) | | (479 | ) | | (288 | ) |
| Settlement charges | (98 | ) | | — |
| | — |
| (105 | ) | | (98 | ) | | — |
|
| Operating income | 1,315 |
| | 2,039 |
| | 2,800 |
| 1,807 |
| | 1,315 |
| | 2,039 |
|
| Interest expense | (367 | ) | | (363 | ) | | (395 | ) | (321 | ) | | (367 | ) | | (363 | ) |
| Premium on early retirement of debt | — |
| | — |
| | (17 | ) | |
| Net premiums on early retirement of debt | | 10 |
| | — |
| | — |
|
| Interest income | 4 |
| | 2 |
| | 2 |
| 11 |
| | 4 |
| | 2 |
|
| Income before income taxes | 952 |
| | 1,678 |
| | 2,390 |
| 1,507 |
| | 952 |
| | 1,678 |
|
| Federal, state and local income tax expense | (341 | ) | | (608 | ) | | (864 | ) | |
| Federal, state and local income tax benefit (expense) | | 29 |
| | (341 | ) | | (608 | ) |
| Net income | 611 |
| | 1,070 |
| | 1,526 |
| 1,536 |
| | 611 |
| | 1,070 |
|
| Net loss attributable to noncontrolling interest | 8 |
| | 2 |
| | — |
| 11 |
| | 8 |
| | 2 |
|
| Net income attributable to Macy's, Inc. shareholders | $ | 619 |
| | $ | 1,072 |
| | $ | 1,526 |
| $ | 1,547 |
| | $ | 619 |
| | $ | 1,072 |
|
Basic earnings per share attributable to Macy's, Inc. shareholders | $ | 2.01 |
| | $ | 3.26 |
| | $ | 4.30 |
| $ | 5.07 |
| | $ | 2.01 |
| | $ | 3.26 |
|
Diluted earnings per share attributable to
Macy's, Inc. shareholders | $ | 1.99 |
| | $ | 3.22 |
| | $ | 4.22 |
| $ | 5.04 |
| | $ | 1.99 |
| | $ | 3.22 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
MACY’S, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(millions)
| | | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Net income | $ | 611 |
| | $ | 1,070 |
| | $ | 1,526 |
| $ | 1,536 |
| | $ | 611 |
| | $ | 1,070 |
|
| Other comprehensive income (loss), net of taxes: | | | | | | |
Actuarial gain (loss) and prior service cost on post employment
and postretirement benefit plans, net of tax effect of
$42 million and $269 million | 65 |
| | — |
| | (422 | ) | |
| Other comprehensive income, net of taxes: | | | | | | |
Net actuarial gain and prior service credit on post employment
and postretirement benefit plans, net of tax effect of
$37 million and $42 million | | 82 |
| | 65 |
| | — |
|
| Reclassifications to net income: | | | | | | | | | | |
Net actuarial loss on post employment and postretirement
benefit plans, net of tax effect of $14 million, $19 million
and $10 million | 22 |
| | 29 |
| | 15 |
| |
| Settlement charges, net of tax effect of $38 million | 60 |
| | — |
| | — |
| |
| Total other comprehensive income (loss) | 147 |
| | 29 |
| | (407 | ) | |
| Net actuarial loss and prior service cost on post employment and postretirement benefit plans, net of tax effect of $13 million, $14 million and $19 million | | 22 |
| | 22 |
| | 29 |
|
| Settlement charges, net of tax effect of $37 million and $38 million | | 68 |
| | 60 |
| | — |
|
| Total other comprehensive income | | 172 |
| | 147 |
| | 29 |
|
| Comprehensive income | 758 |
| | 1,099 |
| | 1,119 |
| 1,708 |
| | 758 |
| | 1,099 |
|
| Comprehensive loss attributable to noncontrolling interest | 8 |
| | 2 |
| | — |
| 11 |
| | 8 |
| | 2 |
|
Comprehensive income attributable to Macy's, Inc. shareholders | $ | 766 |
| | $ | 1,101 |
| | $ | 1,119 |
| $ | 1,719 |
| | $ | 766 |
| | $ | 1,101 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
MACY’S, INC.
CONSOLIDATED BALANCE SHEETS
(millions)
| | | | | | | | | |
| | January 28, 2017 | | January 30, 2016 | February 3, 2018 | | January 28, 2017 |
| ASSETS | | | | | | |
| Current Assets: | | | | | | |
| Cash and cash equivalents | $ | 1,297 |
| | $ | 1,109 |
| $ | 1,455 |
| | $ | 1,297 |
|
| Receivables | 522 |
| | 558 |
| 363 |
| | 522 |
|
| Merchandise inventories | 5,399 |
| | 5,506 |
| 5,178 |
| | 5,399 |
|
| Prepaid expenses and other current assets | 408 |
| | 479 |
| 448 |
| | 408 |
|
| Total Current Assets | 7,626 |
| | 7,652 |
| 7,444 |
| | 7,626 |
|
| Property and Equipment – net | 7,017 |
| | 7,616 |
| 6,672 |
| | 7,017 |
|
| Goodwill | 3,897 |
| | 3,897 |
| 3,897 |
| | 3,897 |
|
| Other Intangible Assets – net | 498 |
| | 514 |
| 488 |
| | 498 |
|
| Other Assets | 813 |
| | 897 |
| 880 |
| | 813 |
|
| Total Assets | $ | 19,851 |
| | $ | 20,576 |
| $ | 19,381 |
| | $ | 19,851 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | |
| Current Liabilities: | | | | | | |
| Short-term debt | $ | 309 |
| | $ | 642 |
| $ | 22 |
| | $ | 309 |
|
| Merchandise accounts payable | 1,423 |
| | 1,526 |
| 1,590 |
| | 1,423 |
|
| Accounts payable and accrued liabilities | 3,563 |
| | 3,333 |
| 3,167 |
| | 3,563 |
|
| Income taxes | 352 |
| | 227 |
| 296 |
| | 352 |
|
| Total Current Liabilities | 5,647 |
| | 5,728 |
| 5,075 |
| | 5,647 |
|
| Long-Term Debt | 6,562 |
| | 6,995 |
| 5,861 |
| | 6,562 |
|
| Deferred Income Taxes | 1,443 |
| | 1,477 |
| 1,122 |
| | 1,443 |
|
| Other Liabilities | 1,877 |
| | 2,123 |
| 1,662 |
| | 1,877 |
|
| Shareholders’ Equity: | | | | | | |
| Common stock (304.1 and 310.3 shares outstanding) | 3 |
| | 3 |
| |
| Common stock (304.8 and 304.1 shares outstanding) | | 3 |
| | 3 |
|
| Additional paid-in capital | 617 |
| | 621 |
| 676 |
| | 617 |
|
| Accumulated equity | 6,088 |
| | 6,334 |
| 7,174 |
| | 6,088 |
|
| Treasury stock | (1,489 | ) | | (1,665 | ) | (1,456 | ) | | (1,489 | ) |
| Accumulated other comprehensive loss | (896 | ) | | (1,043 | ) | (724 | ) | | (896 | ) |
| Total Macy's, Inc. Shareholders’ Equity | 4,323 |
| | 4,250 |
| 5,673 |
| | 4,323 |
|
| Noncontrolling interest | (1 | ) | | 3 |
| (12 | ) | | (1 | ) |
| Total Shareholders' Equity | 4,322 |
| | 4,253 |
| 5,661 |
| | 4,322 |
|
| Total Liabilities and Shareholders’ Equity | $ | 19,851 |
| | $ | 20,576 |
| $ | 19,381 |
| | $ | 19,851 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
MACY’S, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Equity | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total Macy's, Inc. Shareholders’ Equity | | Non-controlling Interest | | Total Shareholders' Equity | Common Stock | | Additional Paid-In Capital | | Accumulated Equity | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total Macy's, Inc. Shareholders’ Equity | | Non-controlling Interest | | Total Shareholders' Equity |
| Balance at February 1, 2014 | $ | 4 |
| | $ | 2,522 |
| | $ | 6,235 |
| | $ | (1,847 | ) | | $ | (665 | ) | | $ | 6,249 |
| | $ | — |
| | $ | 6,249 |
| |
| Net income | | | | | 1,526 |
| | | | | | 1,526 |
| | | | 1,526 |
| |
| Other comprehensive income | | | | | | | | | (407 | ) | | (407 | ) | | | | (407 | ) | |
Common stock dividends ($1.1875 per share) | | | | | (421 | ) | | | | | | (421 | ) | | | | (421 | ) | |
| Stock repurchases | | | | | | | (1,901 | ) | | | | (1,901 | ) | | | | (1,901 | ) | |
Stock-based compensation expense | | | 72 |
| | | | | | | | 72 |
| | | | 72 |
| |
| Stock issued under stock plans | | | (66 | ) | | | | 324 |
| | | | 258 |
| | | | 258 |
| |
| Retirement of common stock | | | (1,480 | ) | | | | 1,480 |
| | | | — |
| | | | — |
| |
Deferred compensation plan distributions | | | | | | | 2 |
| | | | 2 |
| | | | 2 |
| |
| Balance at January 31, 2015 | 4 |
| | 1,048 |
| | 7,340 |
| | (1,942 | ) | | (1,072 | ) | | 5,378 |
| | — |
| | 5,378 |
| $ | 4 |
| | $ | 1,048 |
| | $ | 7,340 |
| | $ | (1,942 | ) | | $ | (1,072 | ) | | $ | 5,378 |
| | $ | — |
| | $ | 5,378 |
|
| Net income (loss) | | | | | 1,072 |
| | | | | | 1,072 |
| | (2 | ) | | 1,070 |
| | | | | 1,072 |
| | | | | | 1,072 |
| | (2 | ) | | 1,070 |
|
| Other comprehensive loss | | | | | | | | | 29 |
| | 29 |
| | | | 29 |
| |
| Other comprehensive income | | | | | | | | | | 29 |
| | 29 |
| | | | 29 |
|
| Common stock dividends ($1.3925 per share) | | | | | (456 | ) | | | | | | (456 | ) | | | | (456 | ) | | | | | (456 | ) | | | | | | (456 | ) | | | | (456 | ) |
| Stock repurchases | | | | | | | (2,001 | ) | | | | (2,001 | ) | | | | (2,001 | ) | | | | | | | (2,001 | ) | | | | (2,001 | ) | | | | (2,001 | ) |
Stock-based compensation
expense | | | 64 |
| | | | | | | | 64 |
| | | | 64 |
| | | 64 |
| | | | | | | | 64 |
| | | | 64 |
|
| Stock issued under stock plans | | | (64 | ) | | | | 226 |
| | | | 162 |
| | | | 162 |
| | | (64 | ) | | | | 226 |
| | | | 162 |
| | | | 162 |
|
| Retirement of common stock | (1 | ) | | (427 | ) | | (1,622 | ) | | 2,050 |
| | | | — |
| | | | — |
| (1 | ) | | (427 | ) | | (1,622 | ) | | 2,050 |
| | | | — |
| | | | — |
|
Deferred compensation plan distributions | | | | | | | 2 |
| | | | 2 |
| | | | 2 |
| | | | | | | 2 |
| | | | 2 |
| | | | 2 |
|
| Macy's China Limited | | | | | | | | | | | — |
| | 5 |
| | 5 |
| | | | | | | | | | | — |
| | 5 |
| | 5 |
|
| Balance at January 30, 2016 | 3 |
| | 621 |
| | 6,334 |
| | (1,665 | ) | | (1,043 | ) | | 4,250 |
| | 3 |
| | 4,253 |
| 3 |
| | 621 |
| | 6,334 |
| | (1,665 | ) | | (1,043 | ) | | 4,250 |
| | 3 |
| | 4,253 |
|
| Net income (loss) | | | | | 619 |
| | | | | | 619 |
| | (8 | ) | | 611 |
| | | | | 619 |
| | | | | | 619 |
| | (8 | ) | | 611 |
|
| Other comprehensive income | | | | | | | | | 147 |
| | 147 |
| | | | 147 |
| | | | | | | | | 147 |
| | 147 |
| | | | 147 |
|
| Common stock dividends ($1.4925 per share) | | | | | (459 | ) | | | | | | (459 | ) | | | | (459 | ) | | | | | (459 | ) | | | | | | (459 | ) | | | | (459 | ) |
| Stock repurchases | | | | | | | (316 | ) | | | | (316 | ) | | | | (316 | ) | | | | | | | (316 | ) | | | | (316 | ) | | | | (316 | ) |
Stock-based compensation
expense | | | 60 |
| | | | | | | | 60 |
| | | | 60 |
| | | 60 |
| | | | | | | | 60 |
| | | | 60 |
|
| Stock issued under stock plans | | | (64 | ) | | | | 81 |
| | | | 17 |
| | | | 17 |
| | | (64 | ) | | | | 81 |
| | | | 17 |
| | | | 17 |
|
| Retirement of common stock |
| |
|
| | (406 | ) | | 406 |
| | | | — |
| | | | — |
|
| |
| | (406 | ) | | 406 |
| | | | — |
| | | | — |
|
Deferred compensation plan distributions | | | | | | | 5 |
| | | | 5 |
| | | | 5 |
| | | | | | | 5 |
| | | | 5 |
| | | | 5 |
|
| Macy's China Limited | | | | | | | | | | | — |
| | 4 |
| | 4 |
| | | | | | | | | | | — |
| | 4 |
| | 4 |
|
| Balance at January 28, 2017 | $ | 3 |
| | $ | 617 |
| | $ | 6,088 |
| | $ | (1,489 | ) | | $ | (896 | ) | | $ | 4,323 |
| | $ | (1 | ) | | $ | 4,322 |
| 3 |
| | 617 |
| | 6,088 |
| | (1,489 | ) | | (896 | ) | | 4,323 |
| | (1 | ) | | 4,322 |
|
| Net income (loss) | | | | | | 1,547 |
| | | | | | 1,547 |
| | (11 | ) | | 1,536 |
|
| Other comprehensive income | | | | | | | | | | 172 |
| | 172 |
| | | | 172 |
|
| Common stock dividends ($1.51 per share) | | | | | | (461 | ) | | | | | | (461 | ) | | | | (461 | ) |
| Stock repurchases | | | | | | | | (1 | ) | | | | (1 | ) | | | | (1 | ) |
Stock-based compensation
expense | | | | 58 |
| | | | | | | | 58 |
| | | | 58 |
|
| Stock issued under stock plans | | | | (24 | ) | | | | 27 |
| | | | 3 |
| | | | 3 |
|
Deferred compensation plan distributions | | | | | | | | 7 |
| | | | 7 |
| | | | 7 |
|
| Other | | | | 25 |
| | | | | | | | 25 |
| | | | 25 |
|
| Balance at February 3, 2018 | | $ | 3 |
| | $ | 676 |
| | $ | 7,174 |
| | $ | (1,456 | ) | | $ | (724 | ) | | $ | 5,673 |
| | $ | (12 | ) | | $ | 5,661 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
MACY’S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
| | | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | | | | | | |
| Net income | $ | 611 |
| | $ | 1,070 |
| | $ | 1,526 |
| $ | 1,536 |
| | $ | 611 |
| | $ | 1,070 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Impairments, store closing and other costs | 479 |
| | 288 |
| | 87 |
| |
| Restructuring, impairment, store closing and other costs | | 186 |
| | 479 |
| | 288 |
|
| Settlement charges | 98 |
| | — |
| | — |
| 105 |
| | 98 |
| | — |
|
| Depreciation and amortization | 1,058 |
| | 1,061 |
| | 1,036 |
| 991 |
| | 1,058 |
| | 1,061 |
|
| Stock-based compensation expense | 61 |
| | 65 |
| | 73 |
| 58 |
| | 61 |
| | 65 |
|
| Gains on sale of real estate | (209 | ) | | (212 | ) | | (92 | ) | (544 | ) | | (209 | ) | | (212 | ) |
| Amortization of financing costs and premium on acquired debt | (14 | ) | | (14 | ) | | (5 | ) | (45 | ) | | (14 | ) | | (14 | ) |
| Changes in assets and liabilities: | | | | | | | | | | |
| (Increase) decrease in receivables | (1 | ) | | (45 | ) | | 22 |
| 120 |
| | (1 | ) | | (45 | ) |
| (Increase) decrease in merchandise inventories | 107 |
| | (60 | ) | | 44 |
| 221 |
| | 107 |
| | (60 | ) |
| Increase in prepaid expenses and other current assets | (8 | ) | | — |
| | (3 | ) | (14 | ) | | (8 | ) | | — |
|
| Increase in other assets not separately identified | — |
| | (1 | ) | | (61 | ) | |
| Decrease in merchandise accounts payable | (132 | ) | | (78 | ) | | (21 | ) | |
| Increase (decrease) in merchandise accounts payable | | 162 |
| | (132 | ) | | (78 | ) |
Increase (decrease) in accounts payable, accrued
liabilities and other items not separately identified | (162 | ) | | 68 |
| | 129 |
| (179 | ) | | (127 | ) | | 116 |
|
| Increase (decrease) in current income taxes | 125 |
| | (69 | ) | | (65 | ) | (114 | ) | | 125 |
| | (69 | ) |
| Increase (decrease) in deferred income taxes | (139 | ) | | (1 | ) | | 29 |
| |
| Increase (decrease) in other liabilities not separately identified | (73 | ) | | (88 | ) | | 10 |
| |
| Decrease in deferred income taxes | | (412 | ) | | (139 | ) | | (1 | ) |
| Change in other assets and liabilities not separately identified | | (127 | ) | | (108 | ) | | (137 | ) |
| Net cash provided by operating activities | 1,801 |
| | 1,984 |
| | 2,709 |
| 1,944 |
| | 1,801 |
| | 1,984 |
|
| Cash flows from investing activities: | | | | | | | | | | |
| Purchase of property and equipment | (596 | ) | | (777 | ) | | (770 | ) | (487 | ) | | (596 | ) | | (777 | ) |
| Capitalized software | (316 | ) | | (336 | ) | | (298 | ) | (273 | ) | | (316 | ) | | (336 | ) |
| Acquisition of Bluemercury, Inc., net of cash acquired | — |
| | (212 | ) | | — |
| — |
| | — |
| | (212 | ) |
| Disposition of property and equipment | 673 |
| | 204 |
| | 172 |
| 411 |
| | 673 |
| | 204 |
|
| Other, net | 52 |
| | 29 |
| | (74 | ) | (24 | ) | | 52 |
| | 29 |
|
| Net cash used by investing activities | (187 | ) | | (1,092 | ) | | (970 | ) | (373 | ) | | (187 | ) | | (1,092 | ) |
| Cash flows from financing activities: | | | | | | | | | | |
| Debt issued | 2 |
| | 499 |
| | 1,044 |
| |
| Financing costs | (3 | ) | | (4 | ) | | (9 | ) | |
| Debt repaid | (751 | ) | | (152 | ) | | (870 | ) | (954 | ) | | (751 | ) | | (152 | ) |
| Dividends paid | (459 | ) | | (456 | ) | | (421 | ) | (461 | ) | | (459 | ) | | (456 | ) |
| Debt issued | | — |
| | — |
| | 499 |
|
| Increase (decrease) in outstanding checks | 61 |
| | (83 | ) | | 133 |
| (15 | ) | | 61 |
| | (83 | ) |
| Acquisition of treasury stock | (316 | ) | | (2,001 | ) | | (1,901 | ) | (1 | ) | | (316 | ) | | (2,001 | ) |
| Issuance of common stock | 36 |
| | 163 |
| | 258 |
| 6 |
| | 36 |
| | 163 |
|
| Financing costs | | (1 | ) | | (3 | ) | | (4 | ) |
| Proceeds from noncontrolling interest | 4 |
| | 5 |
| | — |
| 13 |
| | 6 |
| | 5 |
|
| Net cash used by financing activities | (1,426 | ) | | (2,029 | ) | | (1,766 | ) | (1,413 | ) | | (1,426 | ) | | (2,029 | ) |
| Net increase (decrease) in cash and cash equivalents | 188 |
| | (1,137 | ) | | (27 | ) | 158 |
| | 188 |
| | (1,137 | ) |
| Cash and cash equivalents beginning of period | 1,109 |
| | 2,246 |
| | 2,273 |
| 1,297 |
| | 1,109 |
| | 2,246 |
|
| Cash and cash equivalents end of period | $ | 1,297 |
| | $ | 1,109 |
| | $ | 2,246 |
| $ | 1,455 |
| | $ | 1,297 |
| | $ | 1,109 |
|
| Supplemental cash flow information: | | | | | | | | | | |
| Interest paid | $ | 396 |
| | $ | 383 |
| | $ | 413 |
| $ | 361 |
| | $ | 396 |
| | $ | 383 |
|
| Interest received | 4 |
| | 2 |
| | 2 |
| 12 |
| | 4 |
| | 2 |
|
| Income taxes paid (net of refunds received) | 352 |
| | 635 |
| | 834 |
| 496 |
| | 352 |
| | 635 |
|
MACY’S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| 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)bluemercury) that sell a wide range of merchandise, including apparel and accessories (men's, women's and children's), cosmetics, home furnishings and other consumer goods. The Company has stores in 4544 states, the District of Columbia, Guam and Puerto Rico. As of January 28, 2017February 3, 2018, the Company’s operations and reportable segments were conducted through Macy’s, Bloomingdale’s, Bloomingdale’s The Outlet, Macy's Backstage, Bluemercurybluemercury and Macy's China Limited, which are aggregated into one reporting segment in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, “SegmentSegment Reporting.” The metrics used by management to assess the performance of the Company’s operating divisions include sales trends, gross margin rates, expense rates, and rates of earnings before interest and taxes (“EBIT”) and earnings before interest, taxes, depreciation and amortization (“EBITDA”). The Company’s operating divisions have historically had similar economic characteristics and are expected to have similar economic characteristics and long-term financial performance in future periods.
For 20162017, 20152016 and 20142015, the following merchandise constituted the following percentages of sales:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Women’s Accessories, Intimate Apparel, Shoes, Cosmetics and Fragrances | 38 | % | | 38 | % | | 38 | % | 38 | % | | 38 | % | | 38 | % |
| Women’s Apparel | 23 |
| | 23 |
| | 23 |
| 23 |
| | 23 |
| | 23 |
|
| Men’s and Children’s | 23 |
| | 23 |
| | 23 |
| 23 |
| | 23 |
| | 23 |
|
| Home/Miscellaneous | 16 |
| | 16 |
| | 16 |
| 16 |
| | 16 |
| | 16 |
|
| | 100 | % | | 100 | % | | 100 | % | 100 | % | | 100 | % | | 100 | % |
Fiscal Year
The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years 20162017, 20152016 and 20142015 ended on February 3, 2018, January 28, 2017, and January 30, 2016, respectively. Fiscal year 2017 includes 53 weeks and January 31,fiscal years 2016 and 2015, respectively, and each included 52 weeks. References to years in the Consolidated Financial Statements relate to fiscal years rather than calendar years.
Basis of Presentation
In August 2015, the Company established a joint venture, Macy's China Limited, of which the Company holds a sixty-five percent ownership interest and Hong Kong-based Fung Retailing Limited holds the remaining thirty-five percent ownership interest. Macy's China Limited sells merchandise in China through an e-commerce presence on Alibaba Group's Tmall Global. The Consolidated Financial Statements include the accounts of Macy's, Inc. and its 100%-owned subsidiaries and the newly established majority-owned subsidiary, Macy's China Limited. The noncontrolling interest represents the Fung Retailing Limited's thirty-five percent proportionate share of the results of Macy's China Limited. All significant intercompany transactions have been eliminated.
Certain reclassifications were made to prior years’year’s amounts to conform towith the classifications of such amounts forin the most recent year.years.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions are subject to inherent uncertainties, which may result in actual amounts differing from reported amounts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net Sales
Net sales include merchandise sales, licensed department income, shipping and handling fees, 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 delivery to the customer and are reported net of merchandise returns. The Company licenses third parties to operate certain departments in its stores. The Company receives commissions from these licensed departments based on a percentage of net sales. Commissions are recognized as income at the time merchandise is sold to customers. Sales taxes collected from customers are not considered revenue and are included in accounts payable and accrued liabilities until remitted to the taxing authorities.
Cost of Sales
Cost of sales consists of the cost of merchandise, including inbound freight, and shipping and handling costs.costs, and depreciation. An estimated allowance for future sales returns is recorded and cost of sales is adjusted accordingly.
Cash and Cash Equivalents
Cash and cash equivalents include cash and liquid investments with original maturities of three months or less. Cash and cash equivalents includes amounts due in respect of credit card sales transactions that are settled early in the following period in the amount of $102 million at February 3, 2018 and $119 million at January 28, 2017 and $128 million at January 30, 2016.
Investments
The Company from time to time invests in debt and equity securities, including companies engaged in complementary businesses. All marketable equity and debt securities held by the Company are accounted for under ASC Topic 320, “InvestmentsInvestments – Debt and Equity Securities.” Unrealized holding gains and losses on trading securities are recognized in the Consolidated Statements of Income and unrealized holding gains and losses on available-for-sale securities are included as a separate component of accumulated other comprehensive income, net of income tax effect, until realized. At January 28, 2017,February 3, 2018, the Company did not hold any held-to-maturity or available-for-sale securities.
Receivables
In connection with the sale of most of the Company’s credit assets to Citibank, the Company and Citibank entered into a long-term marketing and servicing alliance pursuant to the terms of a Credit Card Program Agreement (the “Program Agreement”). Income earned under the Program Agreement is treated as a reduction of selling, general and administrative ("SG&A") expenses on the Consolidated Statements of Income. Under the Program Agreement, Citibank offers proprietary and non-proprietary credit cards to the Company’s customers through previously existing and newly opened accounts.
Loyalty Programs
The Company maintains customer loyalty programs in which customers earn points based on their spending. Under the Macy's brand, the Company launched a new points-based loyalty program in October 2017 for proprietary cardholders. Under the Macy’s brand, the Company also currently participates in a coalition program (Plenti) whereby customers can earn points based on spending levels with bonus opportunities through various targeted offers and promotions at Macy's and other partners. Coalition partners currently include - American Express, AT&T, Direct Energy, Exxon Mobil, Hulu, Nationwide, and Rite Aid.The Company will no longer participate in Plenti as of May 3, 2018. Under the Bloomingdale’s brand, the Company offers a tender neutral points-based program. Benefits also include free delivery and gift wrap services. TheFor these programs, the Company recognizes the estimated net amount of the rewards that will be earned and redeemed as a reduction to net sales.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Merchandise Inventories
Merchandise inventories are valued at lower of cost or market using the last-in, first-out (LIFO) retail inventory method. Under the retail inventory method, inventory is segregated into departments of merchandise having similar characteristics, and is stated at its current retail selling value. Inventory retail values are converted to a cost basis by applying specific average cost factors for each merchandise department. Cost factors represent the average cost-to-retail ratio for each merchandise department based on beginning inventory and the annual purchase activity. At January 28, 2017February 3, 2018 and January 30, 201628, 2017, merchandise inventories valued at LIFO, including adjustments as necessary to record inventory at the lower of cost or market, approximated the cost of such inventories using the first-in, first-out (FIFO) retail inventory method. The application of the LIFO retail inventory method did not result in the recognition of any LIFO charges or credits affecting cost of sales for 20162017, 20152016 or 20142015. The retail inventory method inherently requires management judgments and estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation as well as gross margins.
Permanent markdowns designated for clearance activity are recorded when the utility of the inventory has diminished. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise and fashion trends. When a decision is made to permanently markdown merchandise, the resulting gross margin reduction is recognized in the period the markdown is recorded.
Physical inventories are generally taken within each merchandise department annually, and inventory records are adjusted accordingly, resulting in the recording of actual shrinkage. Physical inventories are taken at all store locations for substantially all merchandise categories approximately three weeks before the end of the year. Shrinkage is estimated as a percentage of sales at interim periods and for this approximate three-week period, based on historical shrinkage rates. While it is not possible to quantify the impact from each cause of shrinkage, the Company has loss prevention programs and policies that are intended to minimize shrinkage, including the use of radio frequency identification cycle counts and interim inventories to keep the Company's merchandise files accurate.
Vendor Allowances
The Company receives certain allowances as reimbursement for markdowns taken and/or to support the gross margins earned in connection with the sales of merchandise. These allowances are recognized when earned in accordance with ASC Subtopic 605-50, “CustomerCustomer Payments and Incentives.” The Company also receives advertising allowances from approximately 1,000980 of its merchandise vendors pursuant to cooperative advertising programs, with some vendors participating in multiple programs. These allowances represent reimbursements by vendors of costs incurred by the Company to promote the vendors’ merchandise and are netted against advertising and promotional costs when the related costs are incurred in accordance with ASC Subtopic 605-50. Advertising allowances in excess of costs incurred are recorded as a reduction of merchandise costs and, ultimately, through cost of sales when the merchandise is sold.
The arrangements pursuant to which the Company’s vendors provide allowances, while binding, are generally informal in nature and one year or less in duration. The terms and conditions of these arrangements vary significantly from vendor to vendor and are influenced by, among other things, the type of merchandise to be supported.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Advertising
Department store non-direct response advertisingAdvertising and promotional costs are generally expensed either as incurred or theat first time the advertising occurs. Direct response advertising and promotional costs are deferred and expensed over the period during which the sales are expected to occur, generally one to four months.showing. Advertising and promotional costs and cooperative advertising allowances were as follows:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| | (millions) | (millions) |
| Gross advertising and promotional costs | $ | 1,547 |
| | $ | 1,587 |
| | $ | 1,602 |
| $ | 1,397 |
| | $ | 1,547 |
| | $ | 1,587 |
|
| Cooperative advertising allowances | 394 |
| | 414 |
| | 425 |
| 289 |
| | 394 |
| | 414 |
|
Advertising and promotional costs, net of
cooperative advertising allowances | $ | 1,153 |
| | $ | 1,173 |
| | $ | 1,177 |
| $ | 1,108 |
| | $ | 1,153 |
| | $ | 1,173 |
|
| Net sales | $ | 25,778 |
| | $ | 27,079 |
| | $ | 28,105 |
| $ | 24,837 |
| | $ | 25,778 |
| | $ | 27,079 |
|
Advertising and promotional costs, net of cooperative
advertising allowances, as a percent to net sales | 4.5 | % | | 4.3 | % | | 4.2 | % | 4.5 | % | | 4.5 | % | | 4.3 | % |
Property and Equipment
Depreciation of owned properties is provided primarily on a straight-line basis over the estimated asset lives, which range from fifteen to fifty years for buildings and building equipment and three to fifteen years for fixtures and equipment. Real estate taxes and interest on construction in progress and land under development are capitalized. Amounts capitalized are amortized over the estimated lives of the related depreciable assets. The Company receives contributions from developers and merchandise vendors to fund building improvement and the construction of vendor shops. Such contributions are generally netted against the capital expenditures.
Buildings on leased land and leasehold improvements are amortized over the shorter of their economic lives or the lease term, beginning on the date the asset is put into use.
The carrying value of long-lived assets is periodically reviewed by the Company whenever events or changes in circumstances indicate that a potential impairment has occurred. For long-lived assets held for use, a potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of those assets in operations. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long-lived asset exceeds its fair value. The Company believes its estimated cash flows are sufficient to support the carrying value of its long-lived assets. If estimated cash flows significantly differ in the future, the Company may be required to record asset impairment write-downs.
If the Company commits to a plan to dispose of a long-lived asset before the end of its previously estimated useful life, estimated cash flows are revised accordingly, and the Company may be required to record an asset impairment write-down. Additionally, related liabilities arise such as severance, contractual obligations and other accruals associated with store closings from decisions to dispose of assets. The Company estimates these liabilities based on the facts and circumstances in existence for each restructuring decision. The amounts the Company will ultimately realize or disburse could differ from the amounts assumed in arriving at the asset impairment and restructuring charge recorded.
The Company classifies certain long-lived assets as held for disposal by sale and ceases depreciation when the particular criteria for such classification are met, including the probable sale within one year. For long-lived assets to be disposed of by sale, an impairment charge is recorded if the carrying amount of the asset exceeds its fair value less costs to sell. Such valuations include estimations of fair values and incremental direct costs to transact a sale.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Leases
The Company recognizes operating lease minimum rentals on a straight-line basis over the lease term. Executory costs such as real estate taxes and maintenance, and contingent rentals such as those based on a percentage of sales are recognized as incurred.
The lease term, which includes all renewal periods that are considered to be reasonably assured, begins on the date the Company has access to the leased property. The Company receives contributions from landlords to fund buildings and leasehold improvements. Such contributions are recorded as deferred rent and amortized as reductions to lease expense over the lease term.
Goodwill and Other Intangible Assets
The carrying value of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment in accordance with ASC Subtopic 350-20, “Goodwill.”Goodwill, including the adoption of Accounting Standards Update ("ASU") 2017-04, Simplifying the Test for Goodwill Impairment, in the fourth quarter of 2017. Goodwill and other intangible assets with indefinite lives have been assigned to reporting units for purposes of impairment testing. The reporting units are the Company’s retail operating divisions. Goodwill and other intangible assets with indefinite lives are tested for impairment annually at the end of the fiscal month of May. The Company evaluates qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value and whether it is necessary to perform the two-step goodwill impairment process. If required, the first stepCompany performs a quantitative impairment test which involves a comparison of each reporting unit’s fair value to its carrying value and the Company estimates fair value based on discounted cash flows. The reporting unit’s discounted cash flows require significant management judgment with respect to sales, gross margin and SG&A rates, capital expenditures and the selection and use of an appropriate discount rate. The projected sales, gross margin and SG&A expense rate assumptions and capital expenditures are based on the Company’s annual business plan or other forecasted results. Discount rates reflect market-based estimates of the risks associated with the projected cash flows directly resulting from the use of those assets in operations. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment. If the carrying value of a reporting unit exceeds its estimated fair value, an impairment loss will be recognized in the first step, a second step is performed, in which the reporting unit’s goodwill is written downan amount equal to its implied fair value. The second step requires the Company to allocate the fair value of the reporting unit derived in the first stepsuch excess, limited to the fair valuetotal amount of the reporting unit’s net assets, with any fair value in excess of amountsgoodwill allocated to such net assets representing the implied fair value of goodwill for that reporting unit. If the carrying value of an individual indefinite-lived intangible asset exceeds its fair value, such individual indefinite-lived intangible asset is written down by an amount equal to such excess.
Capitalized Software
The Company capitalizes purchased and internally developed software and amortizes such costs to expense on a straight-line basis generally over twothree to five years. Capitalized software is included in other assets on the Consolidated Balance Sheets.
Gift Cards
The Company only offers no-fee, non-expiring gift cards to its customers. At the time gift cards are sold, no revenue is recognized; rather, the Company records an accrued liability to customers. The liability is relieved and revenue is recognized equal to the amount redeemed at the time gift cards are redeemed for merchandise. The Company records incomeIncome from unredeemed gift cards (breakage) as a reduction of SG&A expenses, and income is recorded in proportion and over the time period gift cards are actually redeemed. At least three years of historical data, updated annually, is used to determine actual redemption patterns. Breakage income for certain non-purchased, non-expiring gift cards is recognized when the likelihood of redemption is deemed remote. The Company records breakage income as a reduction of SG&A expenses.
Self-Insurance Reserves
The Company, through its insurance subsidiary, is self-insured for workers compensation and general liability claims up to certain maximum liability amounts. Although the amounts accrued are actuarially determined based on analysis of historical trends of losses, settlements, litigation costs and other factors, the amounts the Company will ultimately disburse could differ from such accrued amounts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Post Employment and Postretirement Obligations
The Company, through its actuaries, utilizes assumptions when estimating the liabilities for pension and other employee benefit plans. These assumptions, where applicable, include the discount rates used to determine the actuarial present value of projected benefit obligations, the rate of increase in future compensation levels, the long-term rate of return on assets and the growth in health care costs. The Company measures post employment and postretirement assets and obligations using the month-end that is closest to the Company's fiscal year-end.year-end or an interim period quarter-end if a plan is determined to qualify for a remeasurement. The benefit expense is generally recognized in the Consolidated Financial Statements on an accrual basis over the average remaining lifetime of participants, and the accrued benefits are reported in other assets, accounts payable and accrued liabilities and other liabilities on the Consolidated Balance Sheets, as appropriate.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the Consolidated Statements of Income in the period that includes the enactment date. Deferred income tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred income tax assets will not be realized.
Derivatives
The Company records derivative transactions according to the provisions of ASC Topic 815, “DerivativesDerivatives and Hedging,” which establishes accounting and reporting standards for derivative instruments and hedging activities and requires recognition of all derivatives as either assets or liabilities and measurement of those instruments at fair value. The Company makes limited use of derivative financial instruments. The Company does not use financial instruments for trading or other speculative purposes and is not a party to any leveraged financial instruments. On the date that the Company enters into a derivative contract, the Company designates the derivative instrument as either a fair value hedge, a cash flow hedge or as a free-standing derivative instrument, each of which would receive different accounting treatment. Prior to entering into a hedge transaction, the Company formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. Derivative instruments that the Company may use as part of its interest rate risk management strategy include interest rate swap and interest rate cap agreements and Treasury lock agreements. At January 28, 2017February 3, 2018, the Company was not a party to any derivative financial instruments.
Stock Based Compensation
The Company records stock-based compensation expense according to the provisions of ASC Topic 718, “CompensationCompensation – Stock Compensation.” ASC Topic 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Under the provisions of ASC Topic 718, the Company determines the appropriate fair value model to be used for valuing share-based payments and the amortization method for compensation cost.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| 2. | Impairments,Restructuring, Impairment, Store Closing and Other Costs |
Impairments,Restructuring, impairment, store closing and other costs consist of the following:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| | (millions) | (millions) |
| Restructuring | | $ | 120 |
| | $ | 168 |
| | $ | 123 |
|
| Asset Impairments | $ | 265 |
| | $ | 148 |
| | $ | 33 |
| 53 |
| | 265 |
| | 148 |
|
| Severance | 168 |
| | 123 |
| | 46 |
| |
| Other | 46 |
| | 17 |
| | 8 |
| 13 |
| | 46 |
| | 17 |
|
| | $ | 479 |
| | $ | 288 |
| | $ | 87 |
| $ | 186 |
| | $ | 479 |
| | $ | 288 |
|
During 2017, the Company closed or announced the closure of sixteen Macy's stores, part of the approximately 100 planned closings announced in August 2016. During January 2018 and August 2017, the Company announced restructuring efforts, including the consolidation of three functions (merchandising, planning and private brands) into a single merchandising function as well as organizational changes for certain store and non-store functions. The Company recognized $120 million of severance and other human resource-related costs associated with this 2017 restructuring activity.
During January 2017, the Company announced a series of actions to streamline its store portfolio, intensify cost efficiency efforts and execute its real estate strategy. These actions are intended to support the Company's strategy to further invest in omnichannel capabilities, improve customer experience and create shareholder value. These actions includeincluded the announced closure of sixty-eight Macy's stores, part of the approximately 100 planned closings announced in August 2016, and the reorganization of the field structure that supports the remaining stores and a significant restructuring of the Company's operations to focus resources on strategic priorities, improve organizational agility and reduce expense.
During January 2016, the Company announced a series of cost-efficiency and process improvement measures, including organization changes that combinecombined certain region and district organizations of the My Macy's store management structure, adjusting staffing levels in each Macy's and Bloomingdale's store, implementing a voluntary separation opportunity for certain senior executives in stores, office and support functions who meet certain age and service requirements, reducing additional positions in back-office organizations, consolidating the four existing Macy's, Inc. credit and customer service center facilities into three, and decreasing non-payroll budgets company-wide.
During January 2015, the Company announced a series of initiatives to evolve its business model and invest in continued growth opportunities, including a restructuring of merchandising and marketing functions at Macy's and Bloomingdale's consistent with the Company's omnichannel approach to retailing, as well as a series of adjustments to its field and store operations to increase productivity and efficiency.
During January 2017, the Company announced the closure of sixty-eight Macy's stores, part of the approximately 100 planned closings announced in August 2016; during January 2016, the Company announced the closure of forty Macy's stores; and during January 2015, the Company announced the closure of fourteen Macy’s stores.
In connection with these announcements and the plans to dispose of these locations, the Company incurred severance and other human resource-related costs and other costs related to obligations and other store liabilities.
As a result of the Company’s projected undiscounted future cash flows related to certain store locations and other assets being less than their carrying value, the Company recorded impairment charges, including properties that were the subject of announced store closings. The fair values of these assets were calculated based on the projected cash flows and an estimated risk-adjusted rate of return that would be used by market participants in valuing these assets or based on prices of similar assets.
The Company expects to pay out the majority of the 20162017 accrued severance costs, which are included in accounts payable and accrued liabilities on the Consolidated Balance Sheets, prior to July 29, 2017.the end of the second quarter of 2018. The 20152016 and 20142015 accrued severance costs, which were included in accounts payable and accrued liabilities on the Consolidated Balance Sheets, were paid out in the year subsequent to incurring such severance costs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Receivables were $522$363 million at January 28, 2017,February 3, 2018, compared to $558522 million at January 30, 201628, 2017.
In January 2016, the Company completed a $270 million real estate transaction that will enable a re-creation of the Macy’s Brooklyn store. The Company will continue to own and operate the first four floors and lower level of its existing nine-story retail store, which will be reconfigured and remodeled. The remaining portion of the store and its nearby parking facility were sold to Tishman Speyer in a single sales transaction. The Company has received approximately $209$250 million of cash ($68 million in 2015, and $141 million in 2016)2016, and $41 million in 2017) from Tishman Speyer for these real estate assets and will receive $61$20 million of additional cash over the next two years,.year. This receivable is backed by a guarantee.
In connection with the sale of most of the Company's credit card accounts and related receivable balances to Citibank, the Company and Citibank entered into a long-term marketing and servicing alliance pursuant to the terms of a Credit Card Program Agreement with an initial term of 10 years which was to expire on July 17, 2016. During 2014, the Company entered into an amended and restated Credit Card Program Agreement (the “Program Agreement”) with substantially similar financial terms as the prior credit card program agreement.Agreement. The Program Agreement is now set to expireexpires March 31, 2025, subject to an additional renewal term of three years. The Program Agreement provides for, among other things, (i) the ownership by Citibank of the accounts purchased by Citibank, (ii) the ownership by Citibank of new accounts opened by the Company’s customers, (iii) the provision of credit by Citibank to the holders of the credit cards associated with the foregoing accounts, (iv) the servicing of the foregoing accounts, and (v) the allocation between Citibank and the Company of the economic benefits and burdens associated with the foregoing and other aspects of the alliance.
Pursuant to the Program Agreement, the Company continues to provide certain servicing functions related to the accounts and related receivables owned by Citibank and receives compensation from Citibank for these services. The amounts earned under the Program Agreement related to the servicing functions are deemed adequate compensation and, accordingly, no servicing asset or liability has been recorded on the Consolidated Balance Sheets.
Amounts received under the Program Agreement were $929 million for 2017, $912 million for 2016, and $1,026 million for 2015 and $975 million for 2014, and are treated as reductions of SG&A expenses on the Consolidated Statements of Income. The Company’s earnings from credit operations, net of servicing and other credit related expenses, were$768 million for 2017, $736 million for 2016, and $831 million for 2015,. Income from credit operations excludes costs related to new account originations and $776 million for 2014.fraudulent transactions incurred on the Company’s private label credit cards.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | January 28,
2017 | | January 30,
2016 | February 3,
2018 | | January 28,
2017 |
| | (millions) | (millions) |
| Land | $ | 1,541 |
| | $ | 1,629 |
| $ | 1,494 |
| | $ | 1,541 |
|
| Buildings on owned land | 4,212 |
| | 4,690 |
| 4,106 |
| | 4,212 |
|
| Buildings on leased land and leasehold improvements | 1,545 |
| | 1,672 |
| 1,444 |
| | 1,545 |
|
| Fixtures and equipment | 4,541 |
| | 4,910 |
| 4,204 |
| | 4,541 |
|
| Leased properties under capitalized leases | 34 |
| | 34 |
| 34 |
| | 34 |
|
| | 11,873 |
| | 12,935 |
| 11,282 |
| | 11,873 |
|
| Less accumulated depreciation and amortization | 4,856 |
| | 5,319 |
| 4,610 |
| | 4,856 |
|
| | $ | 7,017 |
| | $ | 7,616 |
| $ | 6,672 |
| | $ | 7,017 |
|
In connection with various shopping center agreements, the Company is obligated to operate certain stores within the centers for periods of up to twenty years. Some of these agreements require that the stores be operated under a particular name.
The Company leases a portion of the real estate and personal property used in its operations. Most leases require the Company to pay real estate taxes, maintenance and other executory costs; some also require additional payments based on percentages of sales and some contain purchase options. Certain of the Company’s real estate leases have terms that extend for significant numbers of years and provide for rental rates that increase or decrease over time. In addition, certain of these leases contain covenants that restrict the ability of the tenant (typically a subsidiary of the Company) to take specified actions (including the payment of dividends or other amounts on account of its capital stock) unless the tenant satisfies certain financial tests.
Minimum rental commitments (excluding executory costs) at January 28, 2017February 3, 2018, for noncancellable leases are:
| | | | Capitalized Leases | | Operating Leases | | Total | Capitalized Leases | | Operating Leases | | Total |
| | (millions) | (millions) |
| Fiscal year | | | | | | | | | | |
| 2017 | $ | 3 |
| | $ | 321 |
| | $ | 324 |
| |
| 2018 | 3 |
| | 304 |
| | 307 |
| $ | 3 |
| | $ | 327 |
| | $ | 330 |
|
| 2019 | 3 |
| | 283 |
| | 286 |
| 3 |
| | 312 |
| | 315 |
|
| 2020 | 3 |
| | 249 |
| | 252 |
| 3 |
| | 274 |
| | 277 |
|
| 2021 | 3 |
| | 237 |
| | 240 |
| 3 |
| | 259 |
| | 262 |
|
| After 2021 | 37 |
| | 2,289 |
| | 2,326 |
| |
| 2022 | | 3 |
| | 235 |
| | 238 |
|
| After 2022 | | 34 |
| | 2,139 |
| | 2,173 |
|
| Total minimum lease payments | 52 |
| | $ | 3,683 |
| | $ | 3,735 |
| 49 |
| | $ | 3,546 |
| | $ | 3,595 |
|
| Less amount representing interest | 24 |
| | | | | 22 |
| | | | |
| Present value of net minimum capitalized lease payments | $ | 28 |
| | | | | $ | 27 |
| | | | |
Capitalized leases are included in the Consolidated Balance Sheets as property and equipment while the related obligation is included in short-term ($1 million) and long-term ($2726 million) debt. Amortization of assets subject to capitalized leases is included in depreciation and amortization expense. Total minimum lease payments shown above have not been reduced by minimum sublease rentals of $173 million on operating leases.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company is a guarantor with respect to certain lease obligations associated with The May Department Stores Company and previously disposed subsidiaries or businesses. The leases, one of which includes potential extensions to 2070, have future minimum lease payments aggregating $284254 million and are offset by payments from existing tenants and subtenants. In addition, the Company is contingently liable for other expenses related to the above leases, such as property taxes and common area maintenance, which are also payable by existing tenants and subtenants. Potential liabilities related to these guarantees are subject to certain defenses by the Company. The Company believes that the risk of significant loss from the guarantees of these lease obligations is remote.
Rental expense consists of:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| | (millions) | (millions) |
| Real estate (excluding executory costs) | | | | | | | | | | |
| Capitalized leases – | | | | | | |
| Contingent rentals | $ | — |
| | $ | — |
| | $ | — |
| |
| Operating leases – | | | | | | | | | | |
| Minimum rentals | 312 |
| | 288 |
| | 265 |
| $ | 317 |
| | $ | 312 |
| | $ | 288 |
|
| Contingent rentals | 12 |
| | 19 |
| | 22 |
| 11 |
| | 12 |
| | 19 |
|
| | 324 |
| | 307 |
| | 287 |
| 328 |
| | 324 |
| | 307 |
|
| Less income from subleases – | | | | | | | | | | |
| Operating leases | (5 | ) | | (6 | ) | | (8 | ) | (3 | ) | | (5 | ) | | (6 | ) |
| | $ | 319 |
| | $ | 301 |
| | $ | 279 |
| $ | 325 |
| | $ | 319 |
| | $ | 301 |
|
| Personal property – Operating leases | $ | 11 |
| | $ | 12 |
| | $ | 12 |
| $ | 10 |
| | $ | 11 |
| | $ | 12 |
|
Included as a reduction to the expense above is deferred rent amortization of $914 million, $89 million and $78 million for 20162017, 20152016 and 20142015, respectively, related to contributions received from landlords.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| 5. | Goodwill and Other Intangible Assets |
The following summarizes the Company’s goodwill and other intangible assets:
|
| | | | | | | |
| | January 28,
2017 | | January 30,
2016 |
| | (millions) |
| Non-amortizing intangible assets | | | |
| Goodwill | $ | 9,279 |
| | $ | 9,279 |
|
| Accumulated impairment losses | (5,382 | ) | | (5,382 | ) |
| | 3,897 |
| | 3,897 |
|
| Tradenames | 403 |
| | 414 |
|
| | $ | 4,300 |
| | $ | 4,311 |
|
| Amortizing intangible assets | | | |
| Favorable leases and other contractual assets | $ | 141 |
| | $ | 149 |
|
| Tradenames | 43 |
| | 43 |
|
| | 184 |
| | 192 |
|
| Accumulated amortization | | | |
| Favorable leases and other contractual assets | (85 | ) | | (90 | ) |
| Tradenames | (4 | ) | | (2 | ) |
| | (89 | ) | | (92 | ) |
| | $ | 95 |
| | $ | 100 |
|
In March 2015, the Company completed its acquisition of Bluemercury, Inc., a luxury beauty products and spa retailer. Goodwill during 2015 increased as a result of this acquisition. Also as a result of the acquisition of Bluemercury, the Company established intangible assets relating to definite lived tradenames and favorable leases. |
| | | | | | | |
| | February 3,
2018 | | January 28,
2017 |
| | (millions) |
| Non-amortizing intangible assets | | | |
| Goodwill | $ | 9,279 |
| | $ | 9,279 |
|
| Accumulated impairment losses | (5,382 | ) | | (5,382 | ) |
| | 3,897 |
| | 3,897 |
|
| Tradenames | 403 |
| | 403 |
|
| | $ | 4,300 |
| | $ | 4,300 |
|
| Amortizing intangible assets | | | |
| Favorable leases and other contractual assets | $ | 136 |
| | $ | 141 |
|
| Tradenames | 43 |
| | 43 |
|
| | 179 |
| | 184 |
|
| Accumulated amortization | | | |
| Favorable leases and other contractual assets | (87 | ) | | (85 | ) |
| Tradenames | (7 | ) | | (4 | ) |
| | (94 | ) | | (89 | ) |
| | $ | 85 |
| | $ | 95 |
|
| | | | |
| Capitalized software | | | |
| Gross balance | $ | 1,364 |
| | $ | 1,396 |
|
| Accumulated amortization | (663 | ) | | (629 | ) |
| | $ | 701 |
| | $ | 767 |
|
Definite lived tradenames are being amortized over their respective useful lives of 20 years. Favorable lease intangible assets are being amortized over their respective lease terms (weighted average remaining life of approximately six years). Customer relationship intangible
Favorable leases, other contractual assets, relating to the acquisition of The May Department Stores Company were being amortized in 2015 and 2014 and were fully amortized as of January 30, 2016.
Intangibletradenames amortization expense amounted to $10$10 million for 2017 and 2016, and $23 million for 2015. Capitalized software amortization expense amounted to $301 million for 2017, $293 million for 2016, and $31$256 million for 2014.2015.
Future estimated intangible amortization expense for assets, excluding in-process capitalized software of $82 million not yet placed in service as of February 3, 2018, is shown below:
| | | | | | Amortizing intangible assets | | Capitalized Software |
| | (millions) | (millions) |
| Fiscal year | | | | |
| 2017 | $ | 10 |
| |
| 2018 | 10 |
| $ | 10 |
| | $ | 261 |
|
| 2019 | 9 |
| 9 |
| | 183 |
|
| 2020 | 8 |
| 8 |
| | 122 |
|
| 2021 | 6 |
| 6 |
| | 51 |
|
| 2022 | | 6 |
| | 2 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s debt is as follows:
| | | | January 28,
2017 | | January 30,
2016 | February 3,
2018 | | January 28,
2017 |
| | (millions) | (millions) |
| Short-term debt: | | | | | | |
| 7.45% Senior debentures due 2017 | $ | 300 |
| | $ | — |
| $ | — |
| | $ | 300 |
|
| 5.9% Senior notes due 2016 | — |
| | 577 |
| |
| 7.45% Senior debentures due 2016 | — |
| | 59 |
| |
| Capital lease and current portion of other long-term obligations | 9 |
| | 6 |
| 22 |
| | 9 |
|
| | $ | 309 |
| | $ | 642 |
| $ | 22 |
| | $ | 309 |
|
| Long-term debt: | | | | | | |
| 2.875% Senior notes due 2023 | $ | 750 |
| | $ | 750 |
| $ | 750 |
| | $ | 750 |
|
| 3.875% Senior notes due 2022 | 550 |
| | 550 |
| 550 |
| | 550 |
|
| 4.5% Senior notes due 2034 | 550 |
| | 550 |
| 550 |
| | 550 |
|
| 3.45% Senior notes due 2021 | 500 |
| | 500 |
| 500 |
| | 500 |
|
| 3.625% Senior notes due 2024 | 500 |
| | 500 |
| 500 |
| | 500 |
|
| 6.375% Senior notes due 2037 | 500 |
| | 500 |
| 269 |
| | 500 |
|
| 4.375% Senior notes due 2023 | 400 |
| | 400 |
| 400 |
| | 400 |
|
| 6.9% Senior debentures due 2029 | 400 |
| | 400 |
| 397 |
| | 400 |
|
| 6.7% Senior debentures due 2034 | 400 |
| | 400 |
| 264 |
| | 400 |
|
| 7.45% Senior debentures due 2017 | — |
| | 300 |
| |
| 6.65% Senior debentures due 2024 | 300 |
| | 300 |
| 296 |
| | 300 |
|
| 7.0% Senior debentures due 2028 | 300 |
| | 300 |
| 298 |
| | 300 |
|
| 6.9% Senior debentures due 2032 | 250 |
| | 250 |
| 31 |
| | 250 |
|
| 5.125% Senior debentures due 2042 | 250 |
| | 250 |
| 250 |
| | 250 |
|
| 4.3% Senior notes due 2043 | 250 |
| | 250 |
| 250 |
| | 250 |
|
| 6.7% Senior debentures due 2028 | 200 |
| | 200 |
| 197 |
| | 200 |
|
| 6.79% Senior debentures due 2027 | 165 |
| | 165 |
| 165 |
| | 165 |
|
| 7.875% Senior debentures due 2036 | — |
| | 108 |
| |
| 8.75% Senior debentures due 2029 | 61 |
| | 61 |
| 18 |
| | 61 |
|
| 8.5% Senior debentures due 2019 | 36 |
| | 36 |
| 36 |
| | 36 |
|
| 10.25% Senior debentures due 2021 | 33 |
| | 33 |
| 33 |
| | 33 |
|
| 7.6% Senior debentures due 2025 | 24 |
| | 24 |
| 24 |
| | 24 |
|
| 7.875% Senior debentures due 2030 | 18 |
| | 18 |
| 12 |
| | 18 |
|
| 9.5% amortizing debentures due 2021 | 14 |
| | 17 |
| 10 |
| | 14 |
|
| 9.75% amortizing debentures due 2021 | 8 |
| | 9 |
| 6 |
| | 8 |
|
| Unamortized debt issue costs | (29 | ) | | (32 | ) | (25 | ) | | (29 | ) |
| Unamortized debt discount | (16 | ) | | (16 | ) | (13 | ) | | (16 | ) |
Premium on acquired debt, using an effective
interest yield of 5.542% to 6.021% | 121 |
| | 143 |
| |
Premium on acquired debt, using an effective
interest yield of 5.542% to 7.144% | | 67 |
| | 121 |
|
| Capital lease and other long-term obligations | 27 |
| | 29 |
| 26 |
| | 27 |
|
| | $ | 6,562 |
| | $ | 6,995 |
| $ | 5,861 |
| | $ | 6,562 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest expense and premium on early retirement of debt is as follows:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| | (millions) | (millions) |
| Interest on debt | $ | 392 |
| | $ | 393 |
| | $ | 411 |
| $ | 332 |
| | $ | 392 |
| | $ | 393 |
|
| Amortization of debt premium | (22 | ) | | (21 | ) | | (12 | ) | (9 | ) | | (22 | ) | | (21 | ) |
| Amortization of financing costs and debt discount | 5 |
| | 6 |
| | 7 |
| 7 |
| | 5 |
| | 6 |
|
| Interest on capitalized leases | 2 |
| | 2 |
| | 2 |
| 2 |
| | 2 |
| | 2 |
|
| | 377 |
| | 380 |
| | 408 |
| 332 |
| | 377 |
| | 380 |
|
| Less interest capitalized on construction | 10 |
| | 17 |
| | 13 |
| 11 |
| | 10 |
| | 17 |
|
| Interest expense | $ | 367 |
| | $ | 363 |
| | $ | 395 |
| $ | 321 |
| | $ | 367 |
| | $ | 363 |
|
| Premium on early retirement of debt | $ | — |
| | $ | — |
| | $ | 17 |
| |
| Net premiums on early retirement of debt | | $ | (10 | ) | | $ | — |
| | $ | — |
|
OnDuring December 2017, the Company completed a tender offer and purchased $400 million in aggregate principal amount of certain senior unsecured notes and debentures. The purchased senior unsecured notes and debentures included $147 million of 6.9% senior debentures due 2032, $108 million of 6.7% senior debentures due 2034, $96 million of 6.375% senior notes due 2037, $43 million of 8.75% senior debentures due 2029, and $6 million of 7.875% senior debentures due 2030. The total cash cost for the tender offer was $423 million. The Company recognized $11 million of income related to the recognition of the unamortized debt premium partially offset by the redemption premium and other costs associated with this debt as net premiums on early retirement of debt on the Consolidated Statements of Income during 2017.
During the first and second quarters of 2017, the Company repurchased $247 million face value of senior notes and debentures. The debt repurchases were made in the open market for a total cash cost of $257 million, including expenses related to the transactions. Such repurchases resulted in the recognition of expense of $1 million during 2017 presented as net premiums on early retirement of debt on the Consolidated Statements of Income.
During August 15, 2016, the Company redeemed at par the principal amount of $108 million of 7.875% senior debentures due 2036, pursuant to the terms of the debentures. Interest expense in 2016 benefited from the recognition of unamortized debt premium associated with this debt.
OnDuring August 17, 2015, the Company redeemed at par the principal amount of $76 million of 8.125% senior debentures due 2035, pursuant to the terms of the debentures. Interest expense in 2015 benefited from the recognition of unamortized debt premium associated with this debt.
On November 14, 2014, the Company provided a notice of redemption related to all of the $407 million of 7.875% senior notes due 2015, as allowed under the terms of the indenture. The price for the redemption was calculated pursuant to the indenture and resulted in the recognition of additional interest expense of $17 million during 2014. This additional interest expense is presented as premium on early retirement of debt on the Consolidated Statements of Income.
Future maturities of long-term debt, other than capitalized leases, are shown below:
| | | | (millions) | (millions) |
| Fiscal year | | |
| 2018 | $ | 6 |
| |
| 2019 | 42 |
| $ | 42 |
|
| 2020 | 539 |
| 539 |
|
| 2021 | 553 |
| 553 |
|
| 2022 | — |
| — |
|
| After 2022 | 5,319 |
| |
| 2023 | | 1,150 |
|
| After 2023 | | 3,522 |
|
During 20162017, 20152016 and 20142015, the Company repaid $636300 million, $69636 million and $45369 million, respectively, of indebtedness at maturity.
On December 7, 2015, the Company issued $500 million aggregate principal amount of 3.45% senior notes due 2021, the proceeds of which were used for general corporate purposes.
On November 18, 2014, the Company issued $550 million aggregate principal amount of 4.5% senior notes due 2034. This debt was used to pay for the redemption of the $407 million of 7.875% senior notes due 2015 described above.
On May 23, 2014, the Company issued $500 million aggregate principal amount of 3.625% senior unsecured notes due 2024, the proceeds of which were used for general corporate purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table shows the detail of debt repayments:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| | (millions) | (millions) |
| 7.45% Senior debentures due 2017 | | $ | 300 |
| | $ | — |
| | $ | — |
|
| 6.375% Senior notes due 2037 | | 231 |
| | — |
| | — |
|
| 6.9% Senior debentures due 2032 | | 219 |
| | — |
| | — |
|
| 6.7% Senior debentures due 2034 | | 136 |
| | — |
| | — |
|
| 8.75% Senior debentures due 2029 | | 43 |
| | — |
| | — |
|
| 7.875% Senior debentures due 2030 | | 6 |
| | — |
| | — |
|
| 6.65% Senior debentures due 2024 | | 4 |
| | — |
| | — |
|
| 6.9% Senior debentures due 2029 | | 3 |
| | — |
| | — |
|
| 6.7% Senior debentures due 2028 | | 3 |
| | — |
| | — |
|
| 7.0% Senior debentures due 2028 | | 2 |
| | — |
| | — |
|
| 5.9% Senior notes due 2016 | $ | 577 |
| | $ | — |
| | $ | — |
| — |
| | 577 |
| | — |
|
| 7.875% Senior notes due 2036 | 108 |
| | — |
| | — |
| — |
| | 108 |
| | — |
|
| 7.45% Senior debentures due 2016 | 59 |
| | — |
| | — |
| — |
| | 59 |
| | — |
|
| 7.5% Senior debentures due 2015 | — |
| | 69 |
| | — |
| — |
| | — |
| | 69 |
|
| 8.125% Senior debentures due 2035 | — |
| | 76 |
| | — |
| — |
| | — |
| | 76 |
|
| 5.75% Senior notes due 2014 | — |
| | — |
| | 453 |
| |
| 7.875% Senior debentures due 2015 | — |
| | — |
| | 407 |
| |
| 9.5% amortizing debentures due 2021 | 4 |
| | 4 |
| | 4 |
| 4 |
| | 4 |
| | 4 |
|
| 9.75% amortizing debentures due 2021 | 2 |
| | 3 |
| | 2 |
| 2 |
| | 2 |
| | 3 |
|
| Capital leases and other obligations | 1 |
| | — |
| | 4 |
| 1 |
| | 1 |
| | — |
|
| | $ | 751 |
| | $ | 152 |
| | $ | 870 |
| $ | 954 |
| | $ | 751 |
| | $ | 152 |
|
The following summarizes certain components of the Company’s debt:
Bank Credit Agreement
The Company entered into a new credit agreement with certain financial institutions onas of May 6, 2016 providing for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing) outstanding at any particular time. The agreement is set to expire May 6, 2021 and replaced the prior agreement which was set to expire May 10, 2018.
As of January 28, 2017February 3, 2018, and January 30, 201628, 2017, there were no revolving credit loans outstanding under this credit agreement, and there were no borrowings under the agreement throughout all ofduring 20162017 and 20152016. In addition, there were no standby letters of credit outstanding at February 3, 2018 and January 28, 2017 and there were less than $1 million of standby letters of credit outstanding at January 30, 2016. Revolving loans under the credit agreement bear interest based on various published rates.
The Company's credit agreement, which is an obligation of a 100%-owned subsidiary of Macy’s, Inc. (“Parent”), is not secured. However, Parent has fully and unconditionally guaranteed this obligation, subject to specified limitations. The Company’s interest coverage ratio for 2016 was 7.36 and its leverage ratio at January 28, 2017 was 2.38, in each case as calculated in accordance with the credit agreement.obligation. The credit agreement requires the Company to maintain a specified interest coverage ratio for the latest four quarters of no less than 3.25 and a specified leverage ratio as of and for the latest four quarters of no more than 3.75. The Company’s interest coverage ratio for 3.752017. was 8.94 and its leverage ratio at February 3, 2018 was 2.04, in each case as calculated in accordance with the credit agreement. The interest coverage ratio is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) divided by net interest expense and the leverage ratio is defined as debt divided by EBITDA. For purposes of these calculations EBITDA is calculated as net income plus interest expense, taxes, depreciation, amortization, non-cash impairment of goodwill, intangibles and real estate, non-recurring cash charges not to exceed in the aggregate $300 million and extraordinary losses less interest income and non-recurring or extraordinary gains. Debt is adjusted to exclude the premium on acquired debt and net interest is adjusted to exclude the amortization of premium on acquired debt and premium on early retirement of debt.
A breach of a restrictive covenant in the Company’s credit agreement or the inability of the Company to maintain the financial ratios described above could result in an event of default under the credit agreement. In addition, an event of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
default would occur under the credit agreement if any indebtedness of the Company in excess of an aggregate principal amount of $150 million becomes due prior to its stated maturity or the holders of such indebtedness become able to cause it to become due prior to its stated maturity. Upon the occurrence of an event of default, the lenders could, subject to the terms and conditions of the credit agreement, elect to declare the outstanding principal, together with accrued interest, to be immediately due and payable. Moreover, most of the Company’s senior notes and debentures contain cross-default provisions based on the non-payment at maturity, or other default after an applicable grace period, of any other debt, the unpaid principal amount of which is not less than $100 million that could be triggered by an event of default under the credit agreement. In such an event, the Company’s senior notes and debentures that contain cross-default provisions would also be subject to acceleration.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Commercial Paper
The Company is a party to a $1,500 million unsecured commercial paper program. The Company may issue and sell commercial paper in an aggregate amount outstanding at any particular time not to exceed its then-current combined borrowing availability under the bank credit agreement described above. The issuance of commercial paper will have the effect, while such commercial paper is outstanding, of reducing the Company’s borrowing capacity under the bank credit agreement by an amount equal to the principal amount of such commercial paper. During 2016, and 2015, the Company utilized seasonal borrowings available under this commercial paper program. TheOver the past two fiscal years, the amount of borrowings under the commercial paper program increased to its highest level for 2016 of approximately $388 million during the fourth quarter.quarter of 2016. There were no borrowings under the program during 2017. As of February 3, 2018 and January 28, 2017, there were no remaining borrowings outstanding under the commercial paper program.
This program, which is an obligation of a 100%-owned subsidiary of Macy’s, Inc., is not secured. However, Parent has fully and unconditionally guaranteed the obligations.
Senior Notes and Debentures
The senior notes and the senior debentures are unsecured obligations of a 100%-owned subsidiary of Macy’s, Inc. and Parent has fully and unconditionally guaranteed these obligations (see Note 16, “Condensed Consolidating Financial Information”).
Other Financing Arrangements
At January 28, 2017February 3, 2018 and January 30, 201628, 2017, the Company had dedicated $37 million of cash, included in prepaid expenses and other current assets, which is used to collateralize the Company’s issuances of standby letters of credit. There were $3028 million and $21$30 million of other standby letters of credit outstanding at January 28, 2017February 3, 2018 and January 30, 201628, 2017, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| 7. | Accounts Payable and Accrued Liabilities |
| | | | January 28,
2017 | | January 30,
2016 | February 3,
2018 | | January 28,
2017 |
| | (millions) | (millions) |
| Accounts payable | $ | 754 |
| | $ | 814 |
| $ | 735 |
| | $ | 754 |
|
| Gift cards and customer rewards | 970 |
| | 920 |
| 967 |
| | 970 |
|
| Deferred real estate gains | 340 |
| | 104 |
| |
| Accrued wages and vacation | | 229 |
| | 215 |
|
| Current portion of post employment and postretirement benefits | 208 |
| | 257 |
| 194 |
| | 208 |
|
| Taxes other than income taxes | 166 |
| | 184 |
| 157 |
| | 166 |
|
| Lease related liabilities | 174 |
| | 165 |
| 189 |
| | 174 |
|
| Accrued wages and vacation | 215 |
| | 153 |
| |
| Current portion of workers’ compensation and general liability reserves | 119 |
| | 127 |
| 108 |
| | 119 |
|
| Severance and relocation | 166 |
| | 123 |
| |
| Restructuring accruals, including severance | | 93 |
| | 166 |
|
| Allowance for future sales returns | 96 |
| | 112 |
| 90 |
| | 96 |
|
| Accrued interest | 74 |
| | 88 |
| 70 |
| | 74 |
|
| Deferred real estate gains | | 65 |
| | 340 |
|
| Other | 281 |
| | 286 |
| 270 |
| | 281 |
|
| | $ | 3,563 |
| | $ | 3,333 |
| $ | 3,167 |
| | $ | 3,563 |
|
Adjustments to the allowance for future sales returns, which amounted to a creditcredits of $16$6 million and charges of $19 million and $816 million for 2017 and 2016,, respectively, and a charge of $19 million for 2015 and 2014, respectively, are reflected in cost of sales.
Changes in workers’ compensation and general liability reserves, including the current portion, are as follows:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| | (millions) | (millions) |
| Balance, beginning of year | $ | 508 |
| | $ | 505 |
| | $ | 497 |
| $ | 503 |
| | $ | 508 |
| | $ | 505 |
|
| Charged to costs and expenses | 145 |
| | 159 |
| | 160 |
| 144 |
| | 145 |
| | 159 |
|
| Payments, net of recoveries | (150 | ) | | (156 | ) | | (152 | ) | (150 | ) | | (150 | ) | | (156 | ) |
| Balance, end of year | $ | 503 |
| | $ | 508 |
| | $ | 505 |
| $ | 497 |
| | $ | 503 |
| | $ | 508 |
|
The non-current portion of workers’ compensation and general liability reserves is included in other liabilities on the Consolidated Balance Sheets. At January 28, 2017February 3, 2018 and January 30, 201628, 2017, workers’ compensation and general liability reserves included $112$112 million of liabilities which are covered by deposits and receivables included in current assets on the Consolidated Balance Sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income tax expense (benefit) is as follows:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| | Current | | Deferred | | Total | | Current | | Deferred | | Total | | Current | | Deferred | | Total | Current | | Deferred | | Total | | Current | | Deferred | | Total | | Current | | Deferred | | Total |
| | (millions) | (millions) |
| Federal | $ | 433 |
| | $ | (125 | ) | | $ | 308 |
| | $ | 536 |
| | $ | — |
| | $ | 536 |
| | $ | 743 |
| | $ | 28 |
| | $ | 771 |
| $ | 367 |
| | $ | (452 | ) | | $ | (85 | ) | | $ | 433 |
| | $ | (125 | ) | | $ | 308 |
| | $ | 536 |
| | $ | — |
| | $ | 536 |
|
| State and local | 37 |
| | (4 | ) | | 33 |
| | 72 |
| | — |
| | 72 |
| | 92 |
| | 1 |
| | 93 |
| 16 |
| | 40 |
| | 56 |
| | 37 |
| | (4 | ) | | 33 |
| | 72 |
| | — |
| | 72 |
|
| | $ | 470 |
| | $ | (129 | ) | | $ | 341 |
| | $ | 608 |
| | $ | — |
| | $ | 608 |
| | $ | 835 |
| | $ | 29 |
| | $ | 864 |
| $ | 383 |
| | $ | (412 | ) | | $ | (29 | ) | | $ | 470 |
| | $ | (129 | ) | | $ | 341 |
| | $ | 608 |
| | $ | — |
| | $ | 608 |
|
On December 22, 2017, H.R. 1 was enacted into law. This new tax legislation, among other things, reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018.
In applying the impacts of the new tax legislation to its 2017 income tax provision, the Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally a 21% federal tax rate and its related impact on the state tax rates. The resulting impact was the recognition of an income tax benefit of $571 million in the fourth quarter of 2017. In addition, applying the new U.S. federal corporate tax rate of 21% on January 1, 2018, resulted in a federal income tax statutory rate of 33.7% in 2017. Combining the impacts on the Company’s current income tax provision and the remeasurement of its deferred tax balances, the Company’s effective income tax rate was a benefit of 1.9% in 2017.
The income tax expense (benefit) reported differs from the expected tax computed by applying the federal income tax statutory rate of 33.7% for 2017 and 35% for 2016, and 2015 and 2014 to income before income taxes. The reasons for this difference and their tax effects are as follows:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| | (millions) | (millions) |
| Expected tax | $ | 333 |
| | $ | 587 |
| | $ | 836 |
| $ | 512 |
| | $ | 333 |
| | $ | 587 |
|
State and local income taxes, net of federal income tax benefit | 12 |
| | 43 |
| | 59 |
| 19 |
| | 12 |
| | 43 |
|
| Federal tax reform deferred tax remeasurement | | (571 | ) | | — |
| | — |
|
Tax impact of equity awards (a) | | 14 |
| | — |
| | — |
|
| Historic rehabilitation tax credit | (1 | ) | | (12 | ) | | (20 | ) | (5 | ) | | (1 | ) | | (12 | ) |
| Change in valuation allowance | 9 |
| | 3 |
| | 1 |
| 18 |
| | 9 |
| | 3 |
|
| Other | (12 | ) | | (13 | ) | | (12 | ) | (16 | ) | | (12 | ) | | (13 | ) |
| | $ | 341 |
| | $ | 608 |
| | $ | 864 |
| $ | (29 | ) | | $ | 341 |
| | $ | 608 |
|
(a) 2017 included the recognition of approximately $15 million of net tax deficiencies associated with share-based payment awards due to the adoption of Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting. Historically, the Company had recognized such amounts as an offset to accumulated excess tax benefits previously recognized in additional paid-in capital.
The Company participates in the Internal Revenue Service (“IRS”) Compliance Assurance Program ("CAP"). As part of the CAP, tax years are audited on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. The IRS has completed examinations of 20152016 and all prior tax years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
| | | | January 28,
2017 | | January 30,
2016 | February 3,
2018 | | January 28,
2017 |
| | (millions) | (millions) |
| Deferred tax assets | | | | | | |
| Post employment and postretirement benefits | $ | 405 |
| | $ | 536 |
| $ | 188 |
| | $ | 405 |
|
| Accrued liabilities accounted for on a cash basis for tax purposes | 379 |
| | 340 |
| 218 |
| | 379 |
|
| Long-term debt | 63 |
| | 73 |
| 25 |
| | 63 |
|
| Unrecognized state tax benefits and accrued interest | 76 |
| | 79 |
| 39 |
| | 76 |
|
| State operating loss and credit carryforwards | 79 |
| | 82 |
| 101 |
| | 79 |
|
| Other | 347 |
| | 206 |
| 165 |
| | 347 |
|
| Valuation allowance | (36 | ) | | (27 | ) | (65 | ) | | (36 | ) |
| Total deferred tax assets | 1,313 |
| | 1,289 |
| 671 |
| | 1,313 |
|
| Deferred tax liabilities | | | | | | |
| Excess of book basis over tax basis of property and equipment | (1,381 | ) | | (1,485 | ) | (923 | ) | | (1,381 | ) |
| Merchandise inventories | (604 | ) | | (606 | ) | (389 | ) | | (604 | ) |
| Intangible assets | (380 | ) | | (345 | ) | (276 | ) | | (380 | ) |
| Other | (391 | ) | | (330 | ) | (205 | ) | | (391 | ) |
| Total deferred tax liabilities | (2,756 | ) | | (2,766 | ) | (1,793 | ) | | (2,756 | ) |
| Net deferred tax liability | $ | (1,443 | ) | | $ | (1,477 | ) | $ | (1,122 | ) | | $ | (1,443 | ) |
The valuation allowance at January 28, 2017February 3, 2018 and January 30, 201628, 2017 relates to net deferred tax assets for state net operating loss and credit carryforwards. The net change in the valuation allowance amounted to an increase of $9$29 million for 20162017 andwhich includes $11 million due to the impact of the deferred tax remeasurement associated with the 2017 U.S. federal tax reform. In 2016, the net change in the valuation allowance amounted to an increase of $39 million for 2015.
As of January 28, 2017February 3, 2018, the Company had no federal net operating loss carryforwards, state net operating loss carryforwards, net of $374valuation allowances, of $138 million, and state credit carryforwards, net of valuation allowances, of $3116 million, which will expire between 20172018 and 2036.2037.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | January 28,
2017 | | January 30,
2016 | | January 31,
2015 | February 3,
2018 | | January 28,
2017 | | January 30,
2016 |
| | (millions) | (millions) |
| Balance, beginning of year | $ | 178 |
| | $ | 172 |
| | $ | 189 |
| $ | 167 |
| | $ | 178 |
| | $ | 172 |
|
| Additions based on tax positions related to the current year | 16 |
| | 30 |
| | 33 |
| 7 |
| | 16 |
| | 30 |
|
| Additions for tax positions of prior years | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
| Reductions for tax positions of prior years | (12 | ) | | (7 | ) | | (15 | ) | (23 | ) | | (12 | ) | | (7 | ) |
| Settlements | (4 | ) | | (3 | ) | | (23 | ) | (2 | ) | | (4 | ) | | (3 | ) |
| Statute expirations | (11 | ) | | (14 | ) | | (12 | ) | (9 | ) | | (11 | ) | | (14 | ) |
| Balance, end of year | $ | 167 |
| | $ | 178 |
| | $ | 172 |
| $ | 140 |
| | $ | 167 |
| | $ | 178 |
|
Amounts recognized in the Consolidated Balance Sheets at January 28, 2017, January 30, 2016 and January 31, 2015 | | | | | | |
Amounts recognized in the Consolidated Balance Sheets at February 3, 2018, January 28, 2017, and January 30, 2016 | | | | | | |
| Current income taxes | $ | 6 |
| | $ | 12 |
| | $ | 11 |
| $ | 11 |
| | $ | 6 |
| | $ | 12 |
|
| Long-term deferred income taxes | 4 |
| | 5 |
| | 6 |
| |
| Deferred income taxes | | 4 |
| | 4 |
| | 5 |
|
| Other liabilities | 157 |
| | 161 |
| | 155 |
| 125 |
| | 157 |
| | 161 |
|
| | $ | 167 |
| | $ | 178 |
| | $ | 172 |
| $ | 140 |
| | $ | 167 |
| | $ | 178 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of January 28, 2017February 3, 2018 and January 30, 201628, 2017, the amount of unrecognized tax benefits, net of deferred tax assets, that, if recognized would affect the effective income tax rate, was $109111 million and $115109 million, respectively.
The Company classifies unrecognized tax benefits not expected to be settled within one year as other liabilities on the Consolidated Balance Sheets.
The Company classifies federal, state and local interest and penalties not expected to be settled within one year as other liabilities on the Consolidated Balance Sheets and follows a policy of recognizing all interest and penalties related to unrecognized tax benefits in income tax expense. Federal, state and local interest and penalties, which amounted to a credit of $3 million for 2017, an expense of $2 million for 2016, and an expense of $1 million for 2015, and a credit of $3 million for 2014, are reflected in income tax expense.
The Company had $5551 million and $5355 million accrued for the payment of federal, state and local interest and penalties at January 28, 2017February 3, 2018 and January 30, 201628, 2017, respectively. The accrued federal, state and local interest and penalties primarily relates to state tax issues and the amount of penalties paid in prior periods, and the amount of penalties accrued at January 28, 2017February 3, 2018 and January 30, 201628, 2017 are insignificant. At January 28, 2017February 3, 2018, $5427 million of federal, state and local interest and penalties is included in other liabilities and $124 million is included in current income taxes on the Consolidated Balance Sheets.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2013.2014. With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for years before 2007.2008. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been accrued for any adjustments that are expected to result from the years still subject to examination.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
Retirement expenses, excluding settlement charges, included the following components:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| | (millions) | (millions) |
| 401(k) Qualified Defined Contribution Plan | $ | 94 |
| | $ | 88 |
| | $ | 89 |
| $ | 93 |
| | $ | 94 |
| | $ | 88 |
|
| Non-Qualified Defined Contribution Plan | 2 |
| | 2 |
| | 2 |
| 1 |
| | 2 |
| | 2 |
|
| Pension Plan | (83 | ) | | (54 | ) | | (64 | ) | (82 | ) | | (83 | ) | | (54 | ) |
| Supplementary Retirement Plan | 31 |
| | 41 |
| | 38 |
| 31 |
| | 31 |
| | 41 |
|
| | $ | 44 |
| | $ | 77 |
| | $ | 65 |
| $ | 43 |
| | $ | 44 |
| | $ | 77 |
|
In 2016, the Company changed the method used to estimate the service and interest cost components of net periodic benefit costs for the Pension Plan and SERP. The new method uses a full yield curve approach in the estimation of these components of net periodic benefit costs. Under this approach, the Company applies discounting using individual spot rates from the yield curve composed of the rates of return from a portfolio of high quality corporate debt securities available at the measurement date. These spot rates align to each of the projected benefit obligations and service cost cash flows. Historically, the Company estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligations.
The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest costs. The Company accounted for this change as a change in estimate prospectively starting in 2016. The discount rates that would have been used to measure the 2016 service and interest cost components of net periodic benefit costs as of the beginning of the year under the single weighted-average discount rate was 4.17% and 4.23%, respectively. The 2016 reduction in service cost and interest cost for the Pension Plan and SERP associated with this change was approximately $36 million.
Defined Contribution Plans
The Company has a qualified plan that permits participating associates to defer eligible compensation up to the maximum limits allowable under the Internal Revenue Code. Beginning January 1, 2014, the Company has a non-qualified plan which permits participating associates to defer eligible compensation above the limits of the qualified plan. The Company contributes a matching percentage of employee contributions under both the qualified and non-qualified plans. Effective January 1, 2014, the Company's matching contribution to the qualified plan was enhanced for all participating employees, with limited exceptions. Prior to January 1, 2014, the matching contribution rate under the qualified plan was higher for those employees not eligible for the Pension Plan than for employees eligible for the Pension Plan.
The liability related to the qualified plan matching contribution, which is reflected in accounts payable and accrued liabilities on the Consolidated Balance Sheets, was $101 million at February 3, 2018 and $102 million at January 28, 2017 and $97 million January 30, 2016.2017. Expense related to matching contributions for the qualified plan amounted to $93 million for 2017, $94 million for 2016 and $88 million for 2015 and $89 million for 2014.2015.
At February 3, 2018 and January 28, 2017, and January 30, 2016, the liability under the non-qualified plan, which is reflected in other liabilities on the Consolidated Balance Sheets, was $20$25 million and $13$20 million, respectively. The liability related to the non-qualified plan matching contribution, which is reflected in accounts payable and accrued liabilities on the Consolidated Balance Sheets, was $1 million at February 3, 2018 and $2 million at January 28, 2017 and January 30, 2016.2017. Expense related to matching contributions for the non-qualified plan amounted to $1 million for 2017 and $2 million for both 2016 and 2015. In connection with the non-qualified plan, the Company had mutual fund investments at February 3, 2018 and January 28, 2017 of $25 million and $20 million, respectively, which are included in prepaid expenses and other current assets on the Consolidated Balance Sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
had mutual fund investments at January 28, 2017 and January 30, 2016 of $20 million and $13 million, respectively, which are included in prepaid expenses and other current assets on the Consolidated Balance Sheets.
The Company has an additional deferred compensation plan wherein eligible executives elected to defer a portion of their compensation each year as either stock credits or cash credits. Effective January 1, 2015, no additional compensation is eligible for deferral. The Company has transferred shares to a trust to cover the number estimated for distribution on account of stock credits currently outstanding. At January 28, 2017 and January 30, 2016, the liability under the plan, which is reflected in other liabilities on the Consolidated Balance Sheets, was $37 million and $39 million, respectively. Expense for 2016, 2015 and 2014 was immaterial.
Pension Plan
The following provides a reconciliation of benefit obligations, plan assets, and funded status of the Pension Plan as of January 28, 2017February 3, 2018 and January 30, 201628, 2017:
| | | | 2016 | | 2015 | 2017 | | 2016 |
| | (millions) | (millions) |
| Change in projected benefit obligation | | | | | | |
| Projected benefit obligation, beginning of year | $ | 3,585 |
| | $ | 3,966 |
| $ | 3,469 |
| | $ | 3,585 |
|
| Service cost | 5 |
| | 6 |
| 6 |
| | 5 |
|
| Interest cost | 108 |
| | 137 |
| 104 |
| | 108 |
|
| Actuarial (gain) loss | 55 |
| | (282 | ) | |
| Actuarial loss | | 82 |
| | 55 |
|
| Benefits paid | (284 | ) | | (242 | ) | (390 | ) | | (284 | ) |
| Projected benefit obligation, end of year | 3,469 |
| | 3,585 |
| 3,271 |
| | 3,469 |
|
| Changes in plan assets | | | | | | |
| Fair value of plan assets, beginning of year | 3,256 |
| | 3,636 |
| 3,374 |
| | 3,256 |
|
| Actual return on plan assets | 402 |
| | (138 | ) | 425 |
| | 402 |
|
| Company contributions | — |
| | — |
| — |
| | — |
|
| Benefits paid | (284 | ) | | (242 | ) | (390 | ) | | (284 | ) |
| Fair value of plan assets, end of year | 3,374 |
| | 3,256 |
| 3,409 |
| | 3,374 |
|
| Funded status at end of year | $ | (95 | ) | | $ | (329 | ) | $ | 138 |
| | $ | (95 | ) |
Amounts recognized in the Consolidated Balance Sheets at
January 28, 2017 and January 30, 2016 | | | | |
| Other liabilities | $ | (95 | ) | | $ | (329 | ) | |
Amounts recognized in the Consolidated Balance Sheets at
February 3, 2018 and January 28, 2017 | | | | |
| Other assets (liabilities) | | $ | 138 |
| | $ | (95 | ) |
| |
| |
|
| |
|
Amounts recognized in accumulated other comprehensive loss at
January 28, 2017 and January 30, 2016 | | | | |
Amounts recognized in accumulated other comprehensive loss at
February 3, 2018 and January 28, 2017 | | | | |
| Net actuarial loss | $ | 1,232 |
| | $ | 1,451 |
| $ | 992 |
| | $ | 1,232 |
|
The accumulated benefit obligation for the Pension Plan was $3,268 million as of February 3, 2018 and $3,464 million as of January 28, 2017 and $3,574 million as of January 30, 2016.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net pension costs, settlement charges and other amounts recognized in other comprehensive loss for the Pension Plan included the following actuarially determined components:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| | (millions) | (millions) |
| Net Periodic Pension Cost | | | | | | | | | | |
| Service cost | $ | 5 |
| | $ | 6 |
| | $ | 6 |
| $ | 6 |
| | $ | 5 |
| | $ | 6 |
|
| Interest cost | 108 |
| | 137 |
| | 151 |
| 104 |
| | 108 |
| | 137 |
|
| Expected return on assets | (227 | ) | | (235 | ) | | (246 | ) | (223 | ) | | (227 | ) | | (235 | ) |
| Amortization of net actuarial loss | 31 |
| | 38 |
| | 25 |
| 31 |
| | 31 |
| | 38 |
|
| Amortization of prior service credit | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
| | (83 | ) | | (54 | ) | | (64 | ) | (82 | ) | | (83 | ) | | (54 | ) |
| | | | | | | | | | | |
| Settlement charges | 68 |
| | — |
| | — |
| 89 |
| | 68 |
| | — |
|
| | | | | | | | | | | |
Other Changes in Plan Assets and Projected Benefit Obligation
Recognized in Other Comprehensive Loss | | | | | | | | | | |
| Net actuarial (gain) loss | (120 | ) | | 92 |
| | 491 |
| (120 | ) | | (120 | ) | | 92 |
|
| Amortization of net actuarial loss | (31 | ) | | (38 | ) | | (25 | ) | (31 | ) | | (31 | ) | | (38 | ) |
| Amortization of prior service credit | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
| Settlement charges | (68 | ) | | — |
| | — |
| (89 | ) | | (68 | ) | | — |
|
| | (219 | ) | | 54 |
| | 466 |
| (240 | ) | | (219 | ) | | 54 |
|
| Total recognized | $ | (234 | ) | | $ | — |
| | $ | 402 |
| $ | (233 | ) | | $ | (234 | ) | | $ | — |
|
The estimated net actuarial loss for the Pension Plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 20172018 is $3332 million.
The following weighted average assumptions were used to determine the projected benefit obligations for the Pension Plan at January 28, 2017February 3, 2018 and January 30, 201628, 2017:
| | | | 2016 | | 2015 | 2017 | | 2016 |
| Discount rate | 4.00 | % | | 4.17 | % | 3.74 | % | | 4.00 | % |
| Rate of compensation increases | 4.10 | % | | 4.10 | % | 4.00 | % | | 4.10 | % |
The following weighted average assumptions were used to determine the net periodic pension cost for the Pension Plan:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Discount rate used to measure service cost | 3.79% - 4.26% |
| | 3.55 | % | | 4.50 | % | 3.75% - 4.06% |
| | 3.79% - 4.26% |
| | 3.55 | % |
| Discount rate used to measure interest cost | 2.96% - 3.30% |
| | 3.55 | % | | 4.50 | % | 3.12% - 3.31% |
| | 2.96% - 3.30% |
| | 3.55 | % |
| Expected long-term return on plan assets | 7.00 | % | | 7.00 | % | | 7.50 | % | 7.00 | % | | 7.00 | % | | 7.00 | % |
| Rate of compensation increases | 4.10 | % | | 4.10 | % | | 4.10 | % | 4.10 | % | | 4.10 | % | | 4.10 | % |
The Pension Plan’s assumptions are evaluated annually, and at interim re-measurements if required, and updated as necessary.
The discount rate used to determine the present value of the projected benefit obligation for the Pension Plan is based on a yield curve constructed from a portfolio of high quality corporate debt securities with various maturities. Each year’s expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate for the projected benefit obligation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Due to settlement accounting and re-measurements during 2017 and 2016, the discount rate used to measure service cost and the discount rate to measure interest cost varied between periods. The table above shows the range of rates used to determine net periodic expense for the Pension Plan.
The Company develops its expected long-term rate of return on plan asset assumption by evaluating input from several professional advisors taking into account the asset allocation of the portfolio and long-term asset class return expectations, as well as long-term inflation assumptions. Expected returns for each major asset class are considered along with their volatility and the expected correlations among them. These expectations are based upon historical relationships as well as forecasts of how future returns may vary from historical returns. Returns by asset class and correlations among asset classes are combined using the target asset allocation to derive an expected return for the portfolio as a whole. Long-term historical returns of the portfolio are also considered. Portfolio returns are calculated net of all expenses, therefore, the Company also analyzes expected costs and expenses, including investment management fees, administrative expenses, Pension Benefit Guaranty Corporation premiums and other costs and expenses. As of January 31, 2015,February 3, 2018, the Company lowered the assumed annual long-term rate of return for the Pension Plan's assets from 7.50%7.00% to 7.00%6.75% based on expected future returns on the portfolio of assets.
The Company develops its rate of compensation increase assumption based on recent experience and reflects an estimate of future compensation levels taking into account general increase levels, seniority, promotions and other factors. The salary increase assumption is used to project employees’ pay in future years and its impact on the projected benefit obligation for the Pension Plan.
The assets of the Pension Plan are managed by investment specialists with the primary objectives of payment of benefit obligations to Plan participants and an ultimate realization of investment returns over longer periods in excess of inflation. The Company employs a total return investment approach whereby a mix of domestic and foreign equity securities, fixed income securities and other investments is used to maximize the long-term return on the assets of the Pension Plan for a prudent level of risk. Risks are mitigated through asset diversification and the use of multiple investment managers. The target allocation for plan assets is currently 50%30% equity securities, 40%60% debt securities, 5% real estate and 5% private equities.
The Company generally employs investment managers to specialize in a specific asset class. These managers are chosen and monitored with the assistance of professional advisors, using criteria that include organizational structure, investment philosophy, investment process, performance compared to market benchmarks and peer groups.
The Company periodically conducts an analysis of the behavior of the Pension Plan’s assets and liabilities under various economic and interest rate scenarios to ensure that the long-term target asset allocation is appropriate given the liabilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values of the Pension Plan assets as of February 3, 2018, excluding interest and dividend receivables and pending investment purchases and sales, by asset category are as follows:
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements |
| | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (millions) |
| Short term investments | $ | 5 |
| | $ | — |
| | $ | 5 |
| | $ | — |
|
| Money market funds | 35 |
| | 35 |
| | — |
| | — |
|
| Equity securities: | | | | | | | |
| U.S. stocks | 157 |
| | 157 |
| | — |
| | — |
|
| U.S. pooled funds | 481 |
| | 481 |
| | — |
| | — |
|
International pooled funds (a) | 447 |
| | 114 |
| | — |
| | — |
|
| Fixed income securities: | | | | | | | |
| U. S. Treasury bonds | 44 |
| | — |
| | 44 |
| | — |
|
| Other Government bonds | 59 |
| | — |
| | 59 |
| | — |
|
| Agency backed bonds | 13 |
| | — |
| | 13 |
| | — |
|
| Corporate bonds | 538 |
| | — |
| | 538 |
| | — |
|
| Mortgage-backed securities | 15 |
| | — |
| | 15 |
| | — |
|
| Asset-backed securities | 6 |
| | — |
| | 6 |
| | — |
|
| Pooled funds | 1,310 |
| | 1,310 |
| | — |
| | — |
|
| Other types of investments: | | | | | | | |
Real estate (a) | 148 |
| | — |
| | — |
| | — |
|
Private equity (a) | 183 |
| | — |
| | — |
| | — |
|
| Derivatives in a positive position | 9 |
| | — |
| | 9 |
| | — |
|
| Derivatives in a negative position | (3 | ) | | — |
| | (3 | ) | | — |
|
| Total | $ | 3,447 |
| | $ | 2,097 |
| | $ | 686 |
| | $ | — |
|
(a) Certain investments that are measured at fair value using the net asset value per share as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the fair value of plan assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values of the Pension Plan assets as of January 28, 2017, excluding interest and dividend receivables and pending investment purchases and sales, by asset category are as follows:
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements |
| | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (millions) |
| Short term investments | $ | 14 |
| | $ | — |
| | $ | 14 |
| | $ | — |
|
| Money market funds | 74 |
| | 74 |
| | — |
| | — |
|
| Equity securities: |
|
| | | | | | |
| U.S. stocks | 309 |
| | 309 |
| | — |
| | — |
|
U.S. pooled funds (a) | 654 |
| | 446 |
| | — |
| | — |
|
International pooled funds (a) | 649 |
| | 131 |
| | — |
| | — |
|
| Fixed income securities: |
|
| | | | | | |
| U. S. Treasury bonds | 194 |
| | — |
| | 194 |
| | — |
|
| Other Government bonds | 40 |
| | — |
| | 40 |
| | — |
|
| Agency backed bonds | 24 |
| | — |
| | 24 |
| | — |
|
| Corporate bonds | 453 |
| | — |
| | 453 |
| | — |
|
| Mortgage-backed securities | 85 |
| | — |
| | 85 |
| | — |
|
| Asset-backed securities | 17 |
| | — |
| | 17 |
| | — |
|
| Pooled funds | 461 |
| | 461 |
| | — |
| | — |
|
| Other types of investments: |
|
| | | | | | |
Real estate (a) | 223 |
| | — |
| | — |
| | — |
|
Private equity (a) | 186 |
| | — |
| | — |
| | — |
|
| Derivatives in a positive position | 13 |
| | — |
| | 13 |
| | — |
|
| Derivatives in a negative position | (19 | ) | | — |
| | (19 | ) | | — |
|
| Total | $ | 3,377 |
| | $ | 1,421 |
| | $ | 821 |
| | $ | — |
|
(a) Certain investments that are measured at fair value using the net asset value per share as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the fair value of plan assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values of the Pension Plan assets as of January 30, 2016, excluding interest and dividend receivables and pending investment purchases and sales, by asset category are as follows:
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements |
| | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (millions) |
| Cash and cash equivalents | $ | 15 |
| | $ | 15 |
| | $ | — |
| | $ | — |
|
| Short term investments | 36 |
| | — |
| | 36 |
| | — |
|
| Money market funds | 46 |
| | 46 |
| | — |
| | — |
|
| Equity securities: | | | | | | | |
| U.S. stocks | 280 |
| | 280 |
| | — |
| | — |
|
| U.S. pooled funds (a) | 391 |
| | 207 |
| | — |
| | — |
|
| International pooled funds (a) | 575 |
| | 336 |
| | — |
| | — |
|
| Fixed income securities: | | | | | | | |
| U. S. Treasury bonds | 233 |
| | — |
| | 233 |
| | — |
|
| Other Government bonds | 41 |
| | — |
| | 41 |
| | — |
|
| Agency backed bonds | 31 |
| | — |
| | 31 |
| | — |
|
| Corporate bonds | 433 |
| | — |
| | 433 |
| | — |
|
| Mortgage-backed securities | 112 |
| | — |
| | 112 |
| | — |
|
| Asset-backed securities | 28 |
| | — |
| | 28 |
| | — |
|
| Pooled funds | 427 |
| | 427 |
| | — |
| | — |
|
| Other types of investments: | | | | | | | |
| Real estate (a) | 238 |
| | — |
| | — |
| | — |
|
| Hedge funds (a) | 179 |
| | — |
| | — |
| | — |
|
| Private equity (a) | 188 |
| | — |
| | — |
| | — |
|
| Derivatives in a positive position | 15 |
| | — |
| | 15 |
| | — |
|
| Derivatives in a negative position | (22 | ) | | — |
| | (22 | ) | | — |
|
| Total | $ | 3,246 |
| | $ | 1,311 |
| | $ | 907 |
| | $ | — |
|
(a) Certain investments that are measured at fair value using the net asset value per share as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the fair value of plan assets.
Corporate bonds consist primarily of investment grade bonds of U.S. issuers from diverse industries.
The fair value of certain pooled funds including equity securities, real estate, hedge funds and private equity investments represents the reported net asset value of shares or underlying assets of the investment as a practical expedient to estimate fair value. International equity pooled funds seek to provide long-term capital growth and income by investing in equity securities of non-U.S. companies located both in developed and emerging markets. There are generally no redemption restrictions or unfunded commitments related to these equity securities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Real estate investments include several funds which seek risk-adjusted return by providing a stable, income-driven rate of return over the long term with high potential for growth of net investment income and appreciation of value. The real estate investments are diversified across property types and geographical areas primarily in the United States of America. Private equity investments have an objective of realizing aggregate long-term returns in excess of those available from investments in the public equity markets. Private equity investments generally consist of limited partnerships in the United States of America, Europe and Asia. Private equity and real estate investments are valued using fair values per the most recent financial reports provided by the investment sponsor, adjusted as appropriate for any lag between the date of the financial reports and the Company’s reporting date. Hedge fund investments seek to provide strong downside protection qualities and to produce long-term risk-adjusted returns with low volatility through active asset management among a select group of U.S. and non-U.S. investment partnerships and companies, managed funds, separately managed accounts, securities and commodities held in segregated accounts and other investment vehicles.
Due to the nature of the underlying assets of the real estate hedge funds and private equity investments, changes in market conditions and the economic environment may significantly impact the net asset value of these investments and, consequently, the fair value of the Pension Plan’s investments. These investments are redeemable at net asset value to the extent provided in the documentation governing the investments. However, these redemption rights may be restricted in accordance with the governing documents. Redemption of these investments is subject to restrictions including lock-up periods where no redemptions are allowed, restrictions on redemption frequency and advance notice periods for redemptions. As of January 28, 2017February 3, 2018 and January 30, 201628, 2017, certain of these investments are generally subject to lock-up periods, ranging from twoone to fourteenten years, certain of these investments are subject to restrictions on redemption frequency, ranging from daily to twicefour times per year, and certain of these investments are subject to advance notice requirements, ranging from sixty-day notification to ninety-day notification.requirements. As of January 28, 2017February 3, 2018 and January 30, 201628, 2017, the Pension Plan had unfunded commitments related to certain of these investments totaling $7264 million and $9672 million, respectively.
The Company does not anticipate making funding contributions to the Pension Plan in 2017.2018.
The following benefit payments are estimated to be paid from the Pension Plan:
| | | | (millions) | (millions) |
| Fiscal year | | |
| 2017 | $ | 383 |
| |
| 2018 | 309 |
| $ | 335 |
|
| 2019 | 299 |
| 318 |
|
| 2020 | 286 |
| 257 |
|
| 2021 | 246 |
| 247 |
|
| 2022-2026 | 1,113 |
| |
| 2022 | | 233 |
|
| 2023-2027 | | 1,045 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Supplementary Retirement Plan
The following provides a reconciliation of benefit obligations, plan assets and funded status of the supplementary retirement plan as of January 28, 2017February 3, 2018 and January 30, 201628, 2017:
| | | | 2016 | | 2015 | 2017 | | 2016 |
| | (millions) | (millions) |
| Change in projected benefit obligation | | | | | | |
| Projected benefit obligation, beginning of year | $ | 823 |
| | $ | 920 |
| $ | 747 |
| | $ | 823 |
|
| Service cost | — |
| | — |
| — |
| | — |
|
| Interest cost | 22 |
| | 31 |
| 22 |
| | 22 |
|
| Actuarial (gain) loss | 26 |
| | (70 | ) | |
| Actuarial loss | | 20 |
| | 26 |
|
| Benefits paid | (124 | ) | | (58 | ) | (86 | ) | | (124 | ) |
| Projected benefit obligation, end of year | 747 |
| | 823 |
| 703 |
| | 747 |
|
| Change in plan assets | | | | | | |
| Fair value of plan assets, beginning of year | — |
| | — |
| — |
| | — |
|
| Company contributions | 124 |
| | 58 |
| 86 |
| | 124 |
|
| Benefits paid | (124 | ) | | (58 | ) | (86 | ) | | (124 | ) |
| Fair value of plan assets, end of year | — |
| | — |
| — |
| | — |
|
| Funded status at end of year | $ | (747 | ) | | $ | (823 | ) | $ | (703 | ) | | $ | (747 | ) |
Amounts recognized in the Consolidated Balance Sheets at
January 28, 2017 and January 30, 2016 | | | | |
Amounts recognized in the Consolidated Balance Sheets at
February 3, 2018 and January 28, 2017 | | | | |
| Accounts payable and accrued liabilities | $ | (86 | ) | | $ | (138 | ) | $ | (69 | ) | | $ | (86 | ) |
| Other liabilities | (661 | ) | | (685 | ) | (634 | ) | | (661 | ) |
| | $ | (747 | ) | | $ | (823 | ) | $ | (703 | ) | | $ | (747 | ) |
Amounts recognized in accumulated other comprehensive loss at
January 28, 2017 and January 30, 2016 | | | | |
Amounts recognized in accumulated other comprehensive loss at
February 3, 2018 and January 28, 2017 | | | | |
| Net actuarial loss | $ | 248 |
| | $ | 261 |
| $ | 244 |
| | $ | 248 |
|
| Prior service cost | 8 |
| | 8 |
| 7 |
| | 8 |
|
| | $ | 256 |
| | $ | 269 |
| $ | 251 |
| | $ | 256 |
|
The accumulated benefit obligation for the supplementary retirement plan was $703 million as of February 3, 2018 and $747 million as of January 28, 2017 and $823 million as of January 30, 2016.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net pension costs, settlement charges and other amounts recognized in other comprehensive loss for the supplementary retirement plan included the following actuarially determined components:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| | (millions) | (millions) |
| Net Periodic Pension Cost | | | | | | | | | | |
| Service cost | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
|
| Interest cost | 22 |
| | 31 |
| | 33 |
| 22 |
| | 22 |
| | 31 |
|
| Amortization of net actuarial loss | 9 |
| | 10 |
| | 5 |
| 8 |
| | 9 |
| | 10 |
|
| Amortization of prior service credit | — |
| | — |
| | — |
| |
| Amortization of prior service cost | | 1 |
| | — |
| | — |
|
| | 31 |
| | 41 |
| | 38 |
| 31 |
| | 31 |
| | 41 |
|
| | | | | | | | | | | |
| Settlement charges | 30 |
| | — |
| | — |
| 16 |
| | 30 |
| | — |
|
| | | | | | | | | | | |
Other Changes in Plan Assets and Projected Benefit Obligation
Recognized in Other Comprehensive Loss | | | | | | | | | | |
| Net actuarial (gain) loss | 26 |
| | (70 | ) | | 170 |
| 20 |
| | 26 |
| | (70 | ) |
| Prior service cost | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
| Amortization of net actuarial loss | (9 | ) | | (10 | ) | | (5 | ) | (8 | ) | | (9 | ) | | (10 | ) |
| Amortization of prior service credit | — |
| | — |
| | — |
| |
| Amortization of prior service cost | | (1 | ) | | — |
| | — |
|
| Settlement charges | (30 | ) | | — |
| | — |
| (16 | ) | | (30 | ) | | — |
|
| | (13 | ) | | (80 | ) | | 165 |
| (5 | ) | | (13 | ) | | (80 | ) |
| Total recognized | $ | 48 |
| | $ | (39 | ) | | $ | 203 |
| $ | 42 |
| | $ | 48 |
| | $ | (39 | ) |
The estimated net actuarial loss for the supplementary retirement plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 20172018 is $89 million.
The following weighted average assumption was used to determine the projected benefit obligations for the supplementary retirement plan at January 28, 2017February 3, 2018 and January 30, 201628, 2017:
|
| | | | | |
| | 2016 | | 2015 |
| Discount rate | 4.07 | % | | 4.23 | % |
|
| | | | | |
| | 2017 | | 2016 |
| Discount rate | 3.78 | % | | 4.07 | % |
The following weighted average assumption was used to determine net pension costs for the supplementary retirement plan:
|
| | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Discount rate used to measure interest cost | 2.65% - 3.16% | | 3.55 | % | | 4.50 | % |
|
| | | | | | |
| | 2017 | | 2016 | | 2015 |
| Discount rate used to measure interest cost | 3.10% - 3.26% | | 2.65% - 3.16% | | 3.55 | % |
The supplementary retirement plan’s assumptions are evaluated annually, and at interim re-measurements if required, and updated as necessary.
The discount rate used to determine the present value of the projected benefit obligation for the supplementary retirement plan is based on a yield curve constructed from a portfolio of high quality corporate debt securities with various maturities. Each year’s expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate for the projected benefit obligation.
Due to settlement accounting and re-measurements during 2017 and 2016, the discount rate used to measure interest cost varied between periods. The table above shows the range of rates used to determine net periodic expense for the supplementary retirement plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following benefit payments are estimated to be funded by the Company and paid from the supplementary retirement plan:
| | | | (millions) | (millions) |
| Fiscal year | | |
| 2017 | $ | 86 |
| |
| 2018 | 78 |
| $ | 69 |
|
| 2019 | 46 |
| 49 |
|
| 2020 | 48 |
| 48 |
|
| 2021 | 48 |
| 49 |
|
| 2022-2026 | 228 |
| |
| 2022 | | 48 |
|
| 2023-2027 | | 223 |
|
| |
| 10. | Postretirement Health Care and Life Insurance Benefits |
In addition to pension and other supplemental benefits, certain retired employees currently are provided with specified health care and life insurance benefits. Eligibility requirements for such benefits vary by division and subsidiary, 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.
In 2016, the Company changed the method used to estimate the service and interest cost components of net periodic benefit costs for the postretirement obligations. The new method uses a full yield curve approach in the estimation of these components of net periodic benefit costs. Under this approach, the Company applies discounting using individual spot rates from the yield curve composed of the rates of return from a portfolio of high quality corporate debt securities available at the measurement date. These spot rates align to each of the accumulated postretirement obligation and service cost cash flows. Historically, the Company estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligations.
The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest costs. The Company accounted for this change as a change in estimate prospectively starting in 2016. The discount rate that would have been used to measure the 2016 service and interest cost components of net periodic benefit cost as of the beginning of the year under the single weighted-average discount rate was 4.15%. The 2016 reduction in service cost and interest cost for the postretirement obligations associated with this change was approximately $2 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following provides a reconciliation of benefit obligations, plan assets, and funded status of the postretirement obligations as of January 28, 2017February 3, 2018 and January 30, 201628, 2017:
| | | | 2016 | | 2015 | 2017 | | 2016 |
| | (millions) | (millions) |
| Change in accumulated postretirement benefit obligation | | | | | | |
| Accumulated postretirement benefit obligation, beginning of year | $ | 212 |
| | $ | 243 |
| $ | 186 |
| | $ | 212 |
|
| Service cost | — |
| | — |
| — |
| | — |
|
| Interest cost | 6 |
| | 8 |
| 5 |
| | 6 |
|
| Plan amendment | | (10 | ) | | — |
|
| Actuarial gain | (13 | ) | | (22 | ) | (9 | ) | | (13 | ) |
| Medicare Part D subsidy | 1 |
| | 1 |
| 1 |
| | 1 |
|
| Benefits paid | (20 | ) | | (18 | ) | (17 | ) | | (20 | ) |
| Accumulated postretirement benefit obligation, end of year | 186 |
| | 212 |
| 156 |
| | 186 |
|
| Change in plan assets | | | | | | |
| Fair value of plan assets, beginning of year | — |
| | — |
| — |
| | — |
|
| Company contributions | 20 |
| | 18 |
| 17 |
| | 20 |
|
| Benefits paid | (20 | ) | | (18 | ) | (17 | ) | | (20 | ) |
| Fair value of plan assets, end of year | — |
| | — |
| — |
| | — |
|
| Funded status at end of year | $ | (186 | ) | | $ | (212 | ) | $ | (156 | ) | | $ | (186 | ) |
Amounts recognized in the Consolidated Balance Sheets at
January 28, 2017 and January 30, 2016 | | | | |
Amounts recognized in the Consolidated Balance Sheets at
February 3, 2018 and January 28, 2017 | | | | |
| Accounts payable and accrued liabilities | $ | (18 | ) | | $ | (20 | ) | $ | (17 | ) | | $ | (18 | ) |
| Other liabilities | (168 | ) | | (192 | ) | (139 | ) | | (168 | ) |
| | $ | (186 | ) | | $ | (212 | ) | $ | (156 | ) | | $ | (186 | ) |
Amounts recognized in accumulated other comprehensive loss at
January 28, 2017 and January 30, 2016 | | | | |
Amounts recognized in accumulated other comprehensive loss at
February 3, 2018 and January 28, 2017 | | | | |
| Net actuarial gain | $ | (31 | ) | | $ | (22 | ) | $ | (35 | ) | | $ | (31 | ) |
| Prior service credit | | (10 | ) | | — |
|
| | | $ | (45 | ) | | $ | (31 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net postretirement benefit costs and other amounts recognized in other comprehensive loss included the following actuarially determined components:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| | (millions) | (millions) |
| Net Periodic Postretirement Benefit Cost | | | | | | | | | | |
| Service cost | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
|
| Interest cost | 6 |
| | 8 |
| | 10 |
| 5 |
| | 6 |
| | 8 |
|
| Amortization of net actuarial gain | (4 | ) | | — |
| | (5 | ) | (5 | ) | | (4 | ) | | — |
|
| Amortization of prior service cost | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
| | 2 |
| | 8 |
| | 5 |
| — |
| | 2 |
| | 8 |
|
Other Changes in Plan Assets and Projected Benefit Obligation
Recognized in Other Comprehensive Loss | | | | | | | | | | |
| Net actuarial (gain) loss | (13 | ) | | (22 | ) | | 30 |
| |
| Net actuarial gain | | (9 | ) | | (13 | ) | | (22 | ) |
| Amortization of net actuarial gain | 4 |
| | — |
| | 5 |
| 5 |
| | 4 |
| | — |
|
| Amortization of prior service cost | — |
| | — |
| | — |
| |
| Prior service credit | | (10 | ) | | — |
| | — |
|
| | (9 | ) | | (22 | ) | | 35 |
| (14 | ) | | (9 | ) | | (22 | ) |
| Total recognized | $ | (7 | ) | | $ | (14 | ) | | $ | 40 |
| $ | (14 | ) | | $ | (7 | ) | | $ | (14 | ) |
The estimated net actuarial gain and prior service credit that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit cost during 20172018 is $4$6 million.
The following weighted average assumption was used to determine the accumulated postretirement benefit obligations at January 28, 2017February 3, 2018 and January 30, 201628, 2017:
|
| | | | | |
| | 2016 | | 2015 |
| Discount rate | 3.99 | % | | 4.15 | % |
|
| | | | | |
| | 2017 | | 2016 |
| Discount rate | 3.71 | % | | 3.99 | % |
The following weighted average assumption was used to determine the net postretirement benefit costs for the postretirement obligations:
|
| | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Discount rate used to measure interest cost | 3.14 | % | | 3.55 | % | | 4.50 | % |
|
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Discount rate used to measure interest cost | 3.17 | % | | 3.14 | % | | 3.55 | % |
The accumulated postretirement benefit obligation assumptions are evaluated annually, and at interim re-measurements if required, and updated as necessary.
The discount rate used to determine the present value of the Company’s accumulated postretirement benefit obligations is based on a yield curve constructed from a portfolio of high quality corporate debt securities with various maturities. Each year’s expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate for the accumulated postretirement benefit obligations.
The future medical benefits provided by the Company for certain employees are based on a fixed amount per year of service, and the accumulated postretirement benefit obligation is not affected by increases in health care costs. However, the future medical benefits provided by the Company for certain other employees are affected by increases in health care costs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following provides the assumed health care cost trend rates related to the Company’s accumulated postretirement benefit obligations at January 28, 2017February 3, 2018 and January 30, 201628, 2017:
| | | | 2016 | | 2015 | 2017 | | 2016 |
| Health care cost trend rates assumed for next year | 6.15% - 9.75% | | 6.25% - 10.0% | 5.50% - 10.50% | | 6.15% - 9.75% |
| Rates to which the cost trend rate is assumed to decline (the ultimate trend rate) | 5.0% | | 5.0% | 4.5% | | 5.0% |
| Year that the rate reaches the ultimate trend rate | 2027 | | 2027 | 2027 | | 2027 |
The assumed health care cost trend rates have an impact on the amounts reported for the accumulated postretirement benefit obligations. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:
| | | | 1 – Percentage Point Increase | | 1 – Percentage Point Decrease | 1 – Percentage Point Increase | | 1 – Percentage Point Decrease |
| | (millions) | (millions) |
| Effect on total of service and interest cost | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
|
| Effect on accumulated postretirement benefit obligations | $ | 11 |
| | $ | (10 | ) | $ | 9 |
| | $ | (8 | ) |
The following table reflects the benefit payments estimated to be funded by the Company and paid from the accumulated postretirement benefit obligations and estimated federal subsidies expected to be received under the Medicare Prescription Drug Improvement and Modernization Act of 2003:
| | | | Expected Benefit Payments | | Expected Federal Subsidy | Expected Benefit Payments | | Expected Federal Subsidy |
| | (millions) | (millions) |
| Fiscal Year | | | | | | |
| 2017 | $ | 17 |
| | $ | 1 |
| |
| 2018 | 17 |
| | 1 |
| $ | 16 |
| | $ | 1 |
|
| 2019 | 16 |
| | 1 |
| 15 |
| | — |
|
| 2020 | 16 |
| | — |
| 14 |
| | — |
|
| 2021 | 15 |
| | — |
| 13 |
| | — |
|
| 2022-2026 | 63 |
| | 1 |
| |
| 2022 | | 13 |
| | — |
|
| 2023-2027 | | 52 |
| | 1 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| 11. | Stock Based Compensation |
During 2009, the Company obtained shareholder approval for the Macy’s 2009 Omnibus Incentive Compensation Plan under which up to 51 million shares of Common Stock may be issued. This plan is intended to help the Company attract and retain directors, officers, other key executives and employees and is also intended to provide incentives and rewards relating to the Company’s business plans to encourage such persons to devote themselves to the business of the Company. Prior to 2009, the Company had two equity plans; the Macy's 1995 Executive Equity Incentive Plan and the Macy's 1994 Stock Incentive Plan. After shareholders approved the 2009 Omnibus Incentive Compensation Plan, Common Stock may no longer be granted under the Macy's 1995 Executive Equity Incentive Plan or the Macy's 1994 Stock Incentive Plan. The following disclosures present the Company’s equity plans on a combined basis. The equity plan isplans are administered by the Compensation and Management Development Committee of the Board of Directors (the “CMD Committee”). The CMD Committee is authorized to grant options, stock appreciation rights, restricted stock and restricted stock units to officers and key employees of the Company and its subsidiaries and to non-employee directors. The equity plans are intended to help the Company attract and retain directors, officers, other key executives and employees and is also intended to provide incentives and rewards relating to the Company’s business plans to encourage such persons to devote themselves to the business of the Company. There have been no grants of stock appreciation rights under the equity plans.
Stock option grants have an exercise price at least equal to the market value of the underlying common stockCommon Stock on the date of grant, have ten-year terms and typically vest ratably over four years of continued employment. Restricted stock and time-based restricted stock unit awards generally vest one to four years from the date of grant. Performance-based restricted stock units generally are earned based on the attainment of specified goals achieved over the performance period.
As of January 28, 2017February 3, 2018, approximately 1613 million shares of common stockCommon Stock were available for additional grants pursuant to the Company’s equity plan.plans. Shares awarded are generally issued from the Company's treasury stock.
Stock-based compensation expense included the following components:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| | (millions) | (millions) |
| Stock options | $ | 43 |
| | $ | 52 |
| | $ | 47 |
| $ | 34 |
| | $ | 43 |
| | $ | 52 |
|
| Restricted stock units | 18 |
| | 13 |
| | 26 |
| 24 |
| | 18 |
| | 13 |
|
| | $ | 61 |
| | $ | 65 |
| | $ | 73 |
| $ | 58 |
| | $ | 61 |
| | $ | 65 |
|
All stock-based compensation expense is recorded in SG&A expense in the Consolidated Statements of Income.
As of January 28, 2017, the Company had $63 million of unrecognized compensation costs related to nonvested stock options, which is expected to be recognized over a weighted average period of approximately 1.7 years, and $21 million of unrecognized compensation costs related to nonvested restricted stock units, which is expected to be recognized over a weighted average period of approximately 1.4 years.
During 2016, 2015 and 2014, the CMD Committee approved awards of performance-based restricted stock units to certain senior executives of the Company. Each award reflects a target number of shares (“Target Shares”) that may be issued to the award recipient. These awards may be earned upon the completion of three-year performance periods ending February 2, 2019, February 3, 2018 and January 28, 2017, respectively. Whether units are earned at the end of the performance period will be determined based on the achievement of certain performance objectives set by the CMD Committee in connection with the issuance of the units. The performance objectives are based on the Company’s business plan covering the performance period. The performance objectives include achieving a cumulative EBITDA level for the performance period and also include an EBITDA as a percent to sales ratio and a return on invested capital ratio. The performance-based restricted stock units also include a performance objective relating to relative total shareholder return (“TSR”). Relative TSR reflects the change in the value of the Company’s common stock over the performance period in relation to the change in the value of the common stock of a twelve-company executive compensation peer group over the performance period, assuming the reinvestment of dividends. Depending on the results achieved during the three-year performance periods, the actual number of shares that a grant recipient receives at the end of the period may range from 0% to 150% of the Target Shares granted.
Also during 2016, 2015 and 2014, the CMD Committee approved awards of time-based restricted stock units to certain senior executives and other employees of the Company and awards of time-based restricted stock units to the non-employee members of the Company’s board of directors.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Options
The fair value of stock options granted during 20162017, 20152016 and 20142015 and the weighted average assumptions used to estimate the fair value are as follows:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
Weighted average grant date fair value of stock options
granted during the period | $ | 12.14 |
| | $ | 20.78 |
| | $ | 19.07 |
| $ | 5.84 |
| | $ | 12.14 |
| | $ | 20.78 |
|
| Dividend yield | 3.8 | % | | 2.7 | % | | 2.5 | % | 6.2 | % | | 3.8 | % | | 2.7 | % |
| Expected volatility | 42.7 | % | | 43.3 | % | | 42.7 | % | 41.8 | % | | 42.7 | % | | 43.3 | % |
| Risk-free interest rate | 1.4 | % | | 1.7 | % | | 1.5 | % | 1.9 | % | | 1.4 | % | | 1.7 | % |
| Expected life | 5.7 years |
| | 5.7 years |
| | 5.7 years |
| 5.7 years |
| | 5.7 years |
| | 5.7 years |
|
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company estimates the expected volatility and expected option life assumption consistent with ASC Topic 718, “CompensationCompensation – Stock Compensation.” The expected volatility of the Company’s common stockCommon Stock at the date of grant is estimated based on a historic volatility rate and the expected option life is calculated based on historical stock option experience as the best estimate of future exercise patterns. The dividend yield assumption is based on historical and anticipated dividend payouts. The risk-free interest rate assumption is based on observed interest rates consistent with the expected life of each stock option grant. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. Compensation expense is recorded for all stock options expected to vest based on the amortization of the fair value at the date of grant on a straight-line basis primarily over the vesting period of the options.
Activity related to stock options for 2016 is as follows:
|
| | | | | | | | | | | | |
| | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value |
| | (thousands) | | | | (years) | | (millions) |
| Outstanding, beginning of period | 18,829.8 |
| | $ | 41.92 |
| | | | |
| Granted | 3,886.8 |
| | $ | 42.97 |
| | | | |
| Canceled or forfeited | (1,116.6 | ) | | $ | 51.33 |
| | | | |
| Exercised | (1,122.1 | ) | | $ | 31.30 |
| | | | |
| Outstanding, end of period | 20,477.9 |
| | $ | 42.18 |
| | | | |
| Exercisable, end of period | 12,541.5 |
| | $ | 36.48 |
| | 4.1 | | $ | 46 |
|
| Options expected to vest | 6,657.5 |
| | $ | 51.07 |
| | 8.3 | | $ | — |
|
Additional information relating to stock options is as follows:
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (millions) |
| Intrinsic value of options exercised | $ | 12 |
| | $ | 127 |
| | $ | 189 |
|
| Cash received from stock options exercised | 35 |
| | 125 |
| | 200 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Activity related to stock options for 2017 is as follows:
|
| | | | | | | | | | | | |
| | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value |
| | (thousands) | | | | (years) | | (millions) |
| Outstanding, beginning of period | 20,478 |
| | $ | 42.18 |
| | | | |
| Granted | 3,801 |
| | $ | 26.12 |
| | | | |
| Canceled or forfeited | (3,586 | ) | | $ | 46.46 |
| | | | |
| Exercised | (317 | ) | | $ | 19.09 |
| | | | |
| Outstanding, end of period | 20,376 |
| | $ | 38.80 |
| | | | |
| Exercisable, end of period | 12,810 |
| | $ | 38.38 |
| | 4.3 | | $ | 23 |
|
| Options expected to vest | 6,305 |
| | $ | 38.57 |
| | 8.4 | | $ | 4 |
|
Additional information relating to stock options is as follows:
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | (millions) |
| Intrinsic value of options exercised | $ | 3 |
| | $ | 12 |
| | $ | 127 |
|
| Cash received from stock options exercised | 6 |
| | 35 |
| | 125 |
|
As of February 3, 2018, the Company had $44 million of unrecognized compensation costs related to nonvested stock options, which is expected to be recognized over a weighted average period of approximately 2.2 years.
Restricted Stock Units
The weighted average grant date fair values of performance-based and time-based restricted stock units granted during 20162017, 20152016 and 20142015 are as follows:
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Restricted stock units | $ | 40.02 |
| | $ | 62.61 |
| | $ | 59.41 |
|
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Restricted stock units (performance-based) | $ | 27.16 |
| | $ | 43.72 |
| | $ | 61.51 |
|
| Restricted stock units (time-based) | 20.75 |
| | 35.61 |
| | 63.71 |
|
During 2017, 2016 and 2015, the CMD Committee approved awards of performance-based restricted stock units to certain senior executives of the Company. Each award reflects a target number of shares (“Target Shares”) that may be issued to the award recipient. These awards may be earned upon the completion of three-year performance periods ending February 1, 2020, February 2, 2019, and February 3, 2018, respectively. Whether units are earned at the end of the performance period will be determined based on the achievement of certain performance objectives over the performance period. The performance objectives include achieving a cumulative EBITDA level for the performance period, an EBITDA as a percent to sales ratio and a return on invested capital ratio. The performance-based restricted stock units also include a performance objective relating to relative total shareholder return (“TSR”). Relative TSR reflects the change in the value of the Company’s Common Stock over the performance period in relation to the change in the value of the Common Stock of a twelve-company executive compensation peer group over the performance period, assuming the reinvestment of dividends. Depending on the results achieved during the three-year performance periods, the actual number of shares that a grant recipient receives at the end of the period may range from 0% to 150% of the Target Shares granted.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value of the Target Shares and restricted stock awards are based on the fair value of the underlying shares on the date of grant. The fair value of the portion of the Target Shares that relate to a relative TSR performance objective was determined using a Monte Carlo simulation analysis to estimate the total shareholder return ranking of the Company among a twelve-company executive compensation peer group over the remaining performance periods. The expected volatility of the Company’s common stockCommon Stock at the date of grant was estimated based on a historical average volatility rate for the approximate three-year performance period. The dividend yield assumption was based on historical and anticipated dividend payouts. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate three-year performance measurement period.
The fair value of a restricted stock unit award at the grant date is equal to the market price of the Company's Common Stock on the grant date. Compensation expense is recorded for all restricted stock unit awards based on the amortization of the fair market value at the date of grant over the period the restrictions lapse or over the performance period of the performance-based restricted stock units. As of February 3, 2018, the Company had $38 million of unrecognized compensation costs related to nonvested restricted stock units, which is expected to be recognized over a weighted average period of approximately 2.2 years.
Activity related to restricted stock units for 20162017 is as follows:
| | | | Shares | | Weighted Average Grant Date Fair Value | Shares | | Weighted Average Grant Date Fair Value |
| | (thousands) | | | (thousands) | | |
| Nonvested, beginning of period | 1,497.0 |
| | $ | 57.06 |
| 1,818 |
| | $ | 49.04 |
|
| Granted – performance-based | 575.1 |
| | 43.72 |
| 971 |
| | 27.16 |
|
| Performance adjustment | (237.6 | ) | | 59.82 |
| (312 | ) | | 61.51 |
|
| Granted – time-based | 482.8 |
| | 35.61 |
| 1,307 |
| | 20.75 |
|
| Forfeited | (250.0 | ) | | 32.99 |
| (431 | ) | | 40.14 |
|
| Vested | (249.0 | ) | | 33.70 |
| (196 | ) | | 50.32 |
|
| Nonvested, end of period | 1,818.3 |
| | $ | 53.29 |
| 3,157 |
| | $ | 30.51 |
|
Other Information
The Company adopted Accounting Standards Update ("ASU") No. 2016-09, Improvements to Employee Share-Based Payment Accounting, effective January 29, 2017, on a prospective basis. Upon adoption, the Company began to recognize, all excess tax benefits and tax deficiencies as income tax benefit or expense, respectively, in its Consolidated Statements of Income. For awards that were exercised, vested or expired during 2017, approximately $15 million of additional income tax expense associated with net tax deficiencies was recognized. Additionally, these net tax deficiencies have been classified as an operating activity along with other income tax cash flows in the Consolidated Statements of Cash Flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The authorized shares of the Company consist of 125 million shares of preferred stock (“Preferred Stock”), par value of $.01 per share, with no shares issued, and 1,000 million shares of Common Stock, par value of $.01 per share, with 333.6 million shares of Common Stock issued and 304.8 million shares of Common Stock outstanding at February 3, 2018, and with 333.6 million shares of Common Stock issued and 304.1 million shares of Common Stock outstanding at January 28, 2017, and with 341.6 million shares of Common Stock issued and 310.3 million shares of Common Stock outstanding at January 30, 2016 (with shares held in the Company’s treasury being treated as issued, but not outstanding).
The Company retired 8.0 million, 38.0 million and 31.038.0 million shares of Common Stock during 2016 and 2015, and 2014, respectively. No shares of Common Stock were retired during 2017.
The Company's board of directors approved an additional authorization to purchase Common Stock of $1,500 million on February 26, 2016. Combined with previous authorizations commencingCommencing in January 2000, the Company’s board of directors has from time to time approved authorizations to purchase, in the aggregate, up to $18,000 million of Common Stock.Stock, which includes the Company's board of directors approval of an additional authorization to purchase Common Stock of $1,500 million on February 26, 2016. All authorizations are cumulative and do not have an expiration date. During 2016, the Company purchased approximately 7.9 million shares of Common Stock under its share repurchase program for a total of $316 million. During 2015, the Company purchased approximately 34.8 million shares of Common Stock under its share repurchase program for a total of $2,000 million. During 2014, the Company purchased approximately 31.9 million shares of Common Stock under its share repurchase program for a total of $1,900 million. As of January 28, 2017February 3, 2018, $1,716 million of authorization remained unused. The Company may continue or, from time to time, suspend repurchases of its shares under its share repurchase program, depending on prevailing market conditions, alternative uses of capital and other factors.
Common Stock
The holders of the Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Subject to preferential rights that may be applicable to any Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors in its discretion, out of funds legally available therefor.available.
Treasury Stock
Treasury stock contains shares repurchased under the share repurchase program, shares repurchased to cover employee tax liabilities related to stock plan activity and shares maintained in a trust related to deferred compensation plans. Under the deferred compensation plans, shares are maintained in a trust to cover the number estimated to be needed for distribution on account of stock credits currently outstanding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in the Company’s Common Stock issued and outstanding, including shares held by the Company’s treasury, are as follows:
| | | | | | Treasury Stock | | | | | Treasury Stock | | |
| | Common Stock Issued | | Deferred Compensation Plans | | Other | | Total | | Common Stock Outstanding | Common Stock Issued | | Deferred Compensation Plans | | Other | | Total | | Common Stock Outstanding |
| | | | | | (thousands) | | | | | | | | | (thousands) | | | | |
| Balance at February 1, 2014 | 410,605.8 |
| | (1,229.2 | ) | | (44,441.6 | ) | | (45,670.8 | ) | | 364,935.0 |
| |
| Stock issued under stock plans | | | (54.8 | ) | | 7,490.6 |
| | 7,435.8 |
| | 7,435.8 |
| |
| Stock repurchases | | | | | | | | | | |
| Repurchase program | | | | | (31,874.9 | ) | | (31,874.9 | ) | | (31,874.9 | ) | |
| Other | | | | | (27.0 | ) | | (27.0 | ) | | (27.0 | ) | |
| Deferred compensation plan distributions | | | 104.8 |
| | | | 104.8 |
| | 104.8 |
| |
| Retirement of common stock | (31,000.0 | ) | | | | 31,000.0 |
| | 31,000.0 |
| | — |
| |
| Balance at January 31, 2015 | 379,605.8 |
| | (1,179.2 | ) | | (37,852.9 | ) | | (39,032.1 | ) | | 340,573.7 |
| 379,606 |
| | (1,179 | ) | | (37,853 | ) | | (39,032 | ) | | 340,574 |
|
| Stock issued under stock plans | | | (60.4 | ) | | 4,493.5 |
| | 4,433.1 |
| | 4,433.1 |
| | | (60 | ) | | 4,493 |
| | 4,433 |
| | 4,433 |
|
| Stock repurchases | | | | | | | | | | | | | | | | | | |
| Repurchase program | | | | | (34,806.8 | ) | | (34,806.8 | ) | | (34,806.8 | ) | | | | | (34,807 | ) | | (34,807 | ) | | (34,807 | ) |
| Other | | | | | (12.7 | ) | | (12.7 | ) | | (12.7 | ) | | | | | (13 | ) | | (13 | ) | | (13 | ) |
| Deferred compensation plan distributions | | | 68.8 |
| | | | 68.8 |
| | 68.8 |
| | | 69 |
| | | | 69 |
| | 69 |
|
| Retirement of common stock | (38,000.0 | ) | | | | 38,000.0 |
| | 38,000.0 |
| | — |
| (38,000 | ) | | | | 38,000 |
| | 38,000 |
| | — |
|
| Balance at January 30, 2016 | 341,605.8 |
| | (1,170.8 | ) | | (30,178.9 | ) | | (31,349.7 | ) | | 310,256.1 |
| 341,606 |
| | (1,170 | ) | | (30,180 | ) | | (31,350 | ) | | 310,256 |
|
| Stock issued under stock plans | | | (87.0 | ) | | 1,611.7 |
| | 1,524.7 |
| | 1,524.7 |
| | | (87 | ) | | 1,612 |
| | 1,525 |
| | 1,525 |
|
| Stock repurchases | | | | | | | | | | | | | | | | | | |
| Repurchase program | | | | | (7,874.3 | ) | | (7,874.3 | ) | | (7,874.3 | ) | | | | | (7,874 | ) | | (7,874 | ) | | (7,874 | ) |
| Other | | | | | (4.6 | ) | | (4.6 | ) | | (4.6 | ) | | | | | (5 | ) | | (5 | ) | | (5 | ) |
| Deferred compensation plan distributions | | | 160.9 |
| | | | 160.9 |
| | 160.9 |
| | | 161 |
| | | | 161 |
| | 161 |
|
| Retirement of common stock | (8,000.0 | ) | | | | 8,000.0 |
| | 8,000.0 |
| | — |
| (8,000 | ) | | | | 8,000 |
| | 8,000 |
| | — |
|
| Balance at January 28, 2017 | 333,605.8 |
| | (1,096.9 | ) | | (28,446.1 | ) | | (29,543.0 | ) | | 304,062.8 |
| 333,606 |
| | (1,096 | ) | | (28,447 | ) | | (29,543 | ) | | 304,063 |
|
| Stock issued under stock plans | | | | (119 | ) | | 590 |
| | 471 |
| | 471 |
|
| Stock repurchases | | | | | | | | | | |
| Other | | | | | | (38 | ) | | (38 | ) | | (38 | ) |
| Deferred compensation plan distributions | | | | 269 |
| | | | 269 |
| | 269 |
|
| Balance at February 3, 2018 | | 333,606 |
| | (946 | ) | | (27,895 | ) | | (28,841 | ) | | 304,765 |
|
Accumulated Other Comprehensive Loss
For the Company, the only component of accumulated other comprehensive loss for 20162017, 20152016 and 20142015 relates to post employment and postretirement plan items. The net actuarial gains and losses and prior service costs and credits related to post employment and postretirement benefit plans are reclassified out of accumulated other comprehensive loss and included in the computation of net periodic benefit cost (income) and are included in SG&A expenses in the Consolidated Statements of Income. In addition, the Company incurred the pro-rata recognition of net actuarial losses associated with an increase in lump sum distributions associated with store closings, a voluntary separation program, organizational restructuring, and periodic distribution activity as settlement charges in the Consolidated Statements of Income. See Note 9, "Retirement Plans," and Note 10, "Postretirement Health Care and Life Insurance Benefits," for further information.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| 13. | Fair Value Measurements and Concentrations of Credit Risk |
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:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 28, 2017 | | January 30, 2016 |
| | | | Fair Value Measurements | | | | Fair Value Measurements |
| | Total | | Quoted Prices in Active Markets for Identical
Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets for Identical
Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (millions) |
Marketable
equity and
debt securities | $ | 112 |
| | $ | 20 |
| | $ | 92 |
| | $ | — |
| | $ | 132 |
| | $ | 13 |
| | $ | 119 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | February 3, 2018 | | January 28, 2017 |
| | | | Fair Value Measurements | | | | Fair Value Measurements |
| | Total | | Quoted Prices in Active Markets for Identical
Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets for Identical
Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (millions) |
Marketable
equity and
debt securities | $ | 117 |
| | $ | 25 |
| | $ | 92 |
| | $ | — |
| | $ | 112 |
| | $ | 20 |
| | $ | 92 |
| | $ | — |
|
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 approximates fair value because of the short maturity of these instruments. The fair values of long-term debt, excluding capitalized leases, are generally estimated based on quoted market prices for identical or similar instruments, and are classified as Level 2 measurements within the hierarchy as defined by applicable accounting standards.
The following table shows the estimated fair value of the Company’s long-term debt:debt, excluding capital leases and other obligations:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | January 28, 2017 | | January 30, 2016 |
| | Notional Amount | | Carrying Amount | | Fair Value | | Notional Amount | | Carrying Amount | | Fair Value |
| | (millions) |
| Long-term debt | $ | 6,459 |
| | $ | 6,535 |
| | $ | 6,438 |
| | $ | 6,871 |
| | $ | 6,966 |
| | $ | 6,756 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | February 3, 2018 | | January 28, 2017 |
| | Notional Amount | | Carrying Amount | | Fair Value | | Notional Amount | | Carrying Amount | | Fair Value |
| | (millions) |
| Long-term debt | $ | 5,806 |
| | $ | 5,835 |
| | $ | 5,751 |
| | $ | 6,459 |
| | $ | 6,535 |
| | $ | 6,438 |
|
The following table shows certain of the Company’s non-financiallong-lived assets, which includes tangible and intangible assets, that were measured at fair value on a nonrecurring basis during 20162017 and 20152016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 28, 2017 | | January 30, 2016 |
| | | | Fair Value Measurements | | | | Fair Value Measurements |
| | Total | | Quoted Prices in Active Markets for Identical
Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets for Identical
Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (millions) |
| Long-lived assets held and used | $ | 147 |
| | $ | — |
| | $ | — |
| | $ | 147 |
| | $ | 53 |
| | $ | — |
| | $ | — |
| | $ | 53 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | February 3, 2018 | | January 28, 2017 |
| | | | Fair Value Measurements | | | | Fair Value Measurements |
| | Total | | Quoted Prices in Active Markets for Identical
Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets for Identical
Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (millions) |
| Long-lived assets | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | 24 |
| | $ | 147 |
| | $ | — |
| | $ | — |
| | $ | 147 |
|
During 2017, long-lived assets with a carrying value of $77 million were written down to their fair value of $24 million, resulting in asset impairment charges of $53 million. During 2016, long-lived assets held and used with a carrying value of $405 million were written down to their fair value of $147 million, resulting in asset impairment charges of $258 million. During 2015, long-lived assets held and used with a carrying value of $201 million were written down to their fair value of $53 million, resulting in asset impairment charges of $148 million. The fair values of these locationsassets were calculated based on the projected cash flows and an estimated risk-adjusted rate of return that would be used by market participants in valuing these assets or prices of similar assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In connection with the May 30, 2016 annual impairment test of goodwill and other intangible assets with indefinite lives, the Company recognized approximately $7 million of asset impairment charges in relation to indefinite lived
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
tradenames. The fair values of these tradenames were calculated based on the projected cash flows and an estimated risk-adjusted rate of return that would be used by market participants in valuing these assets or prices of similar assets and are classified as Level 3 measurements within the hierarchy as defined by applicable accounting standards.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments. The Company places its temporary cash investments in what it believes to be high credit quality financial instruments.
| |
| 14. | Earnings Per Share Attributable to Macy's, Inc. Shareholders |
The following table sets forth the computation of basic and diluted earnings per share attributable to Macy's, Inc. shareholders:
| | | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| | Net Income | | | | Shares | | Net Income | | | | Shares | | Net Income | | | | Shares | Net Income | | | | Shares | | Net Income | | | | Shares | | Net Income | | | | Shares |
| | (millions, except per share data) | (millions, except per share data) |
Net income attributable to Macy's, Inc. shareholders and average number of shares outstanding | $ | 619 |
| | | | 307.6 |
| | $ | 1,072 |
| | | | 327.6 |
| | $ | 1,526 |
| | | | 354.3 |
| $ | 1,547 |
| | | | 304.5 |
| | $ | 619 |
| | | | 307.6 |
| | $ | 1,072 |
| | | | 327.6 |
|
Shares to be issued under deferred compensation
and other plans | | | | | 0.9 |
| | | | | | 0.8 |
| | | | | | 0.9 |
| | | | | 0.9 |
| | | | | | 0.9 |
| | | | | | 0.8 |
|
| | $ | 619 |
| | | | 308.5 |
| | $ | 1,072 |
| | | | 328.4 |
| | $ | 1,526 |
| | | | 355.2 |
| $ | 1,547 |
| | | | 305.4 |
| | $ | 619 |
| | | | 308.5 |
| | $ | 1,072 |
| | | | 328.4 |
|
| Basic earnings per share attributable to Macy's, Inc. shareholders | | | $ | 2.01 |
| | | | | | $ | 3.26 |
| | | | | | $ | 4.30 |
| | | | | $ | 5.07 |
| | | | | | $ | 2.01 |
| | | | | | $ | 3.26 |
| | |
| Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options, restricted stock and restricted
stock units | | | | | 2.3 |
| | | | | | 4.6 |
| | | | | | 6.5 |
| | | | | 1.4 |
| | | | | | 2.3 |
| | | | | | 4.6 |
|
| | $ | 619 |
| | | | 310.8 |
| | $ | 1,072 |
| | | | 333.0 |
| | $ | 1,526 |
| | | | 361.7 |
| $ | 1,547 |
| | | | 306.8 |
| | $ | 619 |
| | | | 310.8 |
| | $ | 1,072 |
| | | | 333.0 |
|
| Diluted earnings per share attributable to Macy's, Inc. shareholders | | | $ | 1.99 |
| | | | | | $ | 3.22 |
| | | | | | $ | 4.22 |
| | | | | $ | 5.04 |
| | | | | | $ | 1.99 |
| | | | | | $ | 3.22 |
| | |
In addition to the stock options and restricted stock units reflected in the foregoing table, stock options to purchase 16.6 million shares of Common Stock and restricted stock units relating to 0.9 million shares of Common Stock were outstanding at February 3, 2018, stock options to purchase 15.5 million of shares of common stockCommon Stock and restricted stock units relating to 1.1 million shares of common stockCommon Stock were outstanding at January 28, 2017, and stock options to purchase 12.6 million of shares of common stockCommon Stock and restricted stock units relating to 140,000 shares of common stockCommon Stock were outstanding at January 30, 2016, and stock options to purchase 3.2 million of shares of common stock and restricted stock units relating to 0.6 million shares of common stock were outstanding at January 31, 2015, but were not included in the computation of diluted earnings per share attributable to Macy's, Inc. shareholders for 20162017, 20152016 and 20142015, respectively, because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| 15. | Quarterly Results (unaudited) |
Unaudited quarterly results for the last two years were as follows:
| | | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | (millions, except per share data) | (millions, except per share data) |
| 2017: | | | | | | | | |
| Net sales | | $ | 5,338 |
| | $ | 5,552 |
| | $ | 5,281 |
| | $ | 8,666 |
|
| Cost of sales | | (3,306 | ) | | (3,313 | ) | | (3,175 | ) | | (5,358 | ) |
| Gross margin | | 2,032 |
| | 2,239 |
| | 2,106 |
| | 3,308 |
|
| Selling, general and administrative expenses | | (1,880 | ) | | (1,977 | ) | | (1,995 | ) | | (2,279 | ) |
| Gains on sale of real estate | | 68 |
| | 43 |
| | 65 |
| | 368 |
|
| Restructuring, impairment, store closing and other costs | | — |
| | — |
| | (33 | ) | | (152 | ) |
| Settlement charges | | — |
| | (51 | ) | | (22 | ) | | (32 | ) |
| Net income attributable to Macy's, Inc. shareholders | | 71 |
| | 116 |
| | 36 |
| | 1,325 |
|
Basic earnings per share attributable to Macy's, Inc. shareholders | | .23 |
| | .38 |
| | .12 |
| | 4.34 |
|
Diluted earnings per share attributable to Macy's, Inc. shareholders | | .23 |
| | .38 |
| | .12 |
| | 4.31 |
|
| 2016: | | | | | | | | | | | | | | |
| Net sales | $ | 5,771 |
| | $ | 5,866 |
| | $ | 5,626 |
| | $ | 8,515 |
| $ | 5,771 |
| | $ | 5,866 |
| | $ | 5,626 |
| | $ | 8,515 |
|
| Cost of sales | (3,516 | ) | | (3,468 | ) | | (3,386 | ) | | (5,251 | ) | (3,516 | ) | | (3,468 | ) | | (3,386 | ) | | (5,251 | ) |
| Gross margin | 2,255 |
| | 2,398 |
| | 2,240 |
| | 3,264 |
| 2,255 |
| | 2,398 |
| | 2,240 |
| | 3,264 |
|
| Selling, general and administrative expenses | (1,966 | ) | | (2,026 | ) | | (2,071 | ) | | (2,202 | ) | (1,980 | ) | | (2,047 | ) | | (2,112 | ) | | (2,335 | ) |
| Impairments, store closing and other costs | — |
| | (249 | ) | | — |
| | (230 | ) | |
| Gains on sale of real estate | | 14 |
| | 21 |
| | 41 |
| | 133 |
|
| Impairment, store closing and other costs | | — |
| | (249 | ) | | — |
| | (230 | ) |
| Settlement charges | (13 | ) | | (6 | ) | | (62 | ) | | (17 | ) | (13 | ) | | (6 | ) | | (62 | ) | | (17 | ) |
| Net income attributable to Macy's, Inc. shareholders | 116 |
| | 11 |
| | 17 |
| | 475 |
| 116 |
| | 11 |
| | 17 |
| | 475 |
|
Basic earnings per share attributable to Macy's, Inc. shareholders | .37 |
| | .03 |
| | .05 |
| | 1.56 |
| .37 |
| | .03 |
| | .05 |
| | 1.56 |
|
Diluted earnings per share attributable to Macy's, Inc. shareholders | .37 |
| | .03 |
| | .05 |
| | 1.54 |
| .37 |
| | .03 |
| | .05 |
| | 1.54 |
|
| 2015: | | | | | | | | |
| Net sales | $ | 6,232 |
| | $ | 6,104 |
| | $ | 5,874 |
| | $ | 8,869 |
| |
| Cost of sales | (3,800 | ) | | (3,610 | ) | | (3,537 | ) | | (5,549 | ) | |
| Gross margin | 2,432 |
| | 2,494 |
| | 2,337 |
| | 3,320 |
| |
| Selling, general and administrative expenses | (2,023 | ) | | (2,058 | ) | | (1,968 | ) | | (2,207 | ) | |
| Impairments, store closing and other costs | — |
| | — |
| | (111 | ) | | (177 | ) | |
| Net income attributable to Macy's, Inc. shareholders | 193 |
| | 217 |
| | 118 |
| | 544 |
| |
Basic earnings per share attributable to
Macy's, Inc. shareholders | .57 |
| | .65 |
| | .36 |
| | 1.74 |
| |
Diluted earnings per share attributable to
Macy's, Inc. shareholders | .56 |
| | .64 |
| | .36 |
| | 1.73 |
| |
Note: Annual results may not equal the sum of the quarterly results for the respective periods due to rounding conventions.
| |
| 16. | Condensed Consolidating Financial Information |
Certain debt obligations of the Company described in Note 6, "Financing," which constitute debt obligations of Parent’s 100%-owned subsidiary, Macy’s Retail Holdings, Inc. (“Subsidiary Issuer”), 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 its majority-owned subsidiary Macy's China Limited. “Subsidiary Issuer” includes operating divisions and non-guarantor subsidiaries of the Subsidiary Issuer on an equity basis. The assets and liabilities and results of operations of the non-guarantor subsidiaries of the Subsidiary Issuer are also reflected in “Other Subsidiaries.”
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statements of Comprehensive Income for 2017, 2016 2015 and 2014,2015, Consolidating Balance Sheets as of January 28, 2017February 3, 2018 and January 30, 201628, 2017, and the related Condensed Consolidating Statements of Cash Flows for 20162017, 20152016, and 20142015 are presented on the following pages.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
MACY’S, INC.
Condensed Consolidating Statement of Comprehensive Income
For 2017
(millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Net sales | $ | — |
| | $ | 9,441 |
| | $ | 23,264 |
| | $ | (7,868 | ) | | $ | 24,837 |
|
| Cost of sales | — |
| | (6,101 | ) | | (16,919 | ) | | 7,868 |
| | (15,152 | ) |
| Gross margin | — |
| | 3,340 |
| | 6,345 |
| | — |
| | 9,685 |
|
| Selling, general and administrative expenses | — |
| | (3,386 | ) | | (4,745 | ) | | — |
| | (8,131 | ) |
| Gains on sale of real estate | — |
| | 201 |
| | 343 |
| | — |
| | 544 |
|
| Restructuring, impairment, store closing and other costs | — |
| | (40 | ) | | (146 | ) | | — |
| | (186 | ) |
| Settlement charges | — |
| | (35 | ) | | (70 | ) | | — |
| | (105 | ) |
| Operating income | — |
| | 80 |
| | 1,727 |
| | — |
| | 1,807 |
|
| Interest (expense) income, net: | | | | | | | | | |
| External | — |
| | (313 | ) | | 3 |
| | — |
| | (310 | ) |
| Intercompany | — |
| | (139 | ) | | 139 |
| | — |
| | — |
|
| Net premiums on early retirement of debt | — |
| | 10 |
| | — |
| | — |
| | 10 |
|
| Equity in earnings of subsidiaries | 1,555 |
| | 767 |
| | — |
| | (2,322 | ) | | — |
|
| Income before income taxes | 1,555 |
| | 405 |
| | 1,869 |
| | (2,322 | ) | | 1,507 |
|
Federal, state and local income
tax benefit (expense) | (8 | ) | | 350 |
| | (313 | ) | | — |
| | 29 |
|
| Net income | 1,547 |
| | 755 |
| | 1,556 |
| | (2,322 | ) | | 1,536 |
|
| Net loss attributable to noncontrolling interest | — |
| | — |
| | 11 |
| | — |
| | 11 |
|
Net income attributable to Macy's, Inc. shareholders | $ | 1,547 |
| | $ | 755 |
| | $ | 1,567 |
| | $ | (2,322 | ) | | $ | 1,547 |
|
| Comprehensive income | $ | 1,719 |
| | $ | 915 |
| | $ | 1,668 |
| | $ | (2,594 | ) | | $ | 1,708 |
|
Comprehensive loss attributable to noncontrolling interest | — |
| | — |
| | 11 |
| | — |
| | 11 |
|
Comprehensive income attributable to Macy's, Inc. shareholders | $ | 1,719 |
| | $ | 915 |
| | $ | 1,679 |
| | $ | (2,594 | ) | | $ | 1,719 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
MACY’S, INC.
Condensed Consolidating Statement of Comprehensive Income
For 2016
(millions)
| | | | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Net sales | $ | — |
| | $ | 10,677 |
| | $ | 23,436 |
| | $ | (8,335 | ) | | $ | 25,778 |
| $ | — |
| | $ | 10,677 |
| | $ | 23,436 |
| | $ | (8,335 | ) | | $ | 25,778 |
|
| Cost of sales | — |
| | (6,787 | ) | | (17,169 | ) | | 8,335 |
| | (15,621 | ) | — |
| | (6,787 | ) | | (17,169 | ) | | 8,335 |
| | (15,621 | ) |
| Gross margin | — |
| | 3,890 |
| | 6,267 |
| | — |
| | 10,157 |
| — |
| | 3,890 |
| | 6,267 |
| | — |
| | 10,157 |
|
| Selling, general and administrative expenses | (2 | ) | | (3,739 | ) | | (4,524 | ) | | — |
| | (8,265 | ) | (2 | ) | | (3,834 | ) | | (4,638 | ) | | — |
| | (8,474 | ) |
| Impairments, store closing and other costs | — |
| | (295 | ) | | (184 | ) | | — |
| | (479 | ) | |
| Gains on sale of real estate | | — |
| | 95 |
| | 114 |
| | — |
| | 209 |
|
| Impairment, store closing and other costs | | — |
| | (295 | ) | | (184 | ) | | — |
| | (479 | ) |
| Settlement charges | — |
| | (34 | ) | | (64 | ) | | — |
| | (98 | ) | — |
| | (34 | ) | | (64 | ) | | — |
| | (98 | ) |
| Operating income (loss) | (2 | ) | | (178 | ) | | 1,495 |
| | — |
| | 1,315 |
| (2 | ) | | (178 | ) | | 1,495 |
| | — |
| | 1,315 |
|
| Interest (expense) income, net: | | | | | | | | | | | | | | | | | | |
| External | 2 |
| | (366 | ) | | 1 |
| | — |
| | (363 | ) | 2 |
| | (366 | ) | | 1 |
| | — |
| | (363 | ) |
| Intercompany | — |
| | (200 | ) | | 200 |
| | — |
| | — |
| — |
| | (200 | ) | | 200 |
| | — |
| | — |
|
| Equity in earnings of subsidiaries | 619 |
| | 255 |
| | — |
| | (874 | ) | | — |
| 619 |
| | 255 |
| | — |
| | (874 | ) | | — |
|
| Income (loss) before income taxes | 619 |
| | (489 | ) | | 1,696 |
| | (874 | ) | | 952 |
| 619 |
| | (489 | ) | | 1,696 |
| | (874 | ) | | 952 |
|
Federal, state and local income
tax benefit (expense) | — |
| | 281 |
| | (622 | ) | | — |
| | (341 | ) | — |
| | 281 |
| | (622 | ) | | — |
| | (341 | ) |
| Net income (loss) | 619 |
| | (208 | ) | | 1,074 |
| | (874 | ) | | 611 |
| 619 |
| | (208 | ) | | 1,074 |
| | (874 | ) | | 611 |
|
| Net loss attributable to noncontrolling interest | — |
| | — |
| | 8 |
| | — |
| | 8 |
| — |
| | — |
| | 8 |
| | — |
| | 8 |
|
Net income (loss) attributable to Macy's, Inc. shareholders | $ | 619 |
| | $ | (208 | ) | | $ | 1,082 |
| | $ | (874 | ) | | $ | 619 |
| $ | 619 |
| | $ | (208 | ) | | $ | 1,082 |
| | $ | (874 | ) | | $ | 619 |
|
| Comprehensive income (loss) | $ | 766 |
| | $ | (61 | ) | | $ | 1,153 |
| | $ | (1,100 | ) | | $ | 758 |
| $ | 766 |
| | $ | (61 | ) | | $ | 1,153 |
| | $ | (1,100 | ) | | $ | 758 |
|
Comprehensive loss attributable to noncontrolling interest | — |
| | — |
| | 8 |
| | — |
| | 8 |
| — |
| | — |
| | 8 |
| | — |
| | 8 |
|
Comprehensive income (loss) attributable to Macy's, Inc. shareholders | $ | 766 |
| | $ | (61 | ) | | $ | 1,161 |
| | $ | (1,100 | ) | | $ | 766 |
| $ | 766 |
| | $ | (61 | ) | | $ | 1,161 |
| | $ | (1,100 | ) | | $ | 766 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
MACY’S, INC.
Condensed Consolidating Statement of Comprehensive Income
For 2015
(millions)
| | | | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Net sales | $ | — |
| | $ | 11,959 |
| | $ | 24,037 |
| | $ | (8,917 | ) | | $ | 27,079 |
| $ | — |
| | $ | 11,959 |
| | $ | 24,037 |
| | $ | (8,917 | ) | | $ | 27,079 |
|
| Cost of sales | — |
| | (7,670 | ) | | (17,743 | ) | | 8,917 |
| | (16,496 | ) | — |
| | (7,670 | ) | | (17,743 | ) | | 8,917 |
| | (16,496 | ) |
| Gross margin | — |
| | 4,289 |
| | 6,294 |
| | — |
| | 10,583 |
| — |
| | 4,289 |
| | 6,294 |
| | — |
| | 10,583 |
|
| Selling, general and administrative expenses | (2 | ) | | (3,980 | ) | | (4,274 | ) | | — |
| | (8,256 | ) | (2 | ) | | (4,090 | ) | | (4,376 | ) | | — |
| | (8,468 | ) |
| Impairments, store closing and other costs | — |
| | (170 | ) | | (118 | ) | | — |
| | (288 | ) | |
| Gains on sale of real estate | | — |
| | 110 |
| | 102 |
| | — |
| | 212 |
|
| Impairment, store closing and other costs | | — |
| | (170 | ) | | (118 | ) | | — |
| | (288 | ) |
| Operating income (loss) | (2 | ) | | 139 |
| | 1,902 |
| | — |
| | 2,039 |
| (2 | ) | | 139 |
| | 1,902 |
| | — |
| | 2,039 |
|
| Interest (expense) income, net: | | | | | | | | | | | | | | | | | | |
| External | 1 |
| | (361 | ) | | (1 | ) | | — |
| | (361 | ) | 1 |
| | (361 | ) | | (1 | ) | | — |
| | (361 | ) |
| Intercompany | — |
| | (230 | ) | | 230 |
| | — |
| | — |
| — |
| | (230 | ) | | 230 |
| | — |
| | — |
|
| Equity in earnings of subsidiaries | 1,072 |
| | 421 |
| | — |
| | (1,493 | ) | | — |
| 1,072 |
| | 421 |
| | — |
| | (1,493 | ) | | — |
|
| Income (loss) before income taxes | 1,071 |
| | (31 | ) | | 2,131 |
| | (1,493 | ) | | 1,678 |
| 1,071 |
| | (31 | ) | | 2,131 |
| | (1,493 | ) | | 1,678 |
|
Federal, state and local income
tax benefit (expense) | 1 |
| | 120 |
| | (729 | ) | | — |
| | (608 | ) | 1 |
| | 120 |
| | (729 | ) | | — |
| | (608 | ) |
| Net income | 1,072 |
| | 89 |
| | 1,402 |
| | (1,493 | ) | | 1,070 |
| 1,072 |
| | 89 |
| | 1,402 |
| | (1,493 | ) | | 1,070 |
|
| Net loss attributable to noncontrolling interest | — |
| | — |
| | 2 |
| | — |
| | 2 |
| — |
| | — |
| | 2 |
| | — |
| | 2 |
|
Net income attributable to
Macy's, Inc. shareholders | $ | 1,072 |
| | $ | 89 |
| | $ | 1,404 |
| | $ | (1,493 | ) | | $ | 1,072 |
| $ | 1,072 |
| | $ | 89 |
| | $ | 1,404 |
| | $ | (1,493 | ) | | $ | 1,072 |
|
| Comprehensive income | $ | 1,101 |
| | $ | 118 |
| | $ | 1,415 |
| | $ | (1,535 | ) | | $ | 1,099 |
| $ | 1,101 |
| | $ | 118 |
| | $ | 1,415 |
| | $ | (1,535 | ) | | $ | 1,099 |
|
Comprehensive loss attributable to
noncontrolling interest | — |
| | — |
| | 2 |
| | — |
| | 2 |
| — |
| | — |
| | 2 |
| | — |
| | 2 |
|
Comprehensive income attributable to
Macy's, Inc. shareholders | $ | 1,101 |
| | $ | 118 |
| | $ | 1,417 |
| | $ | (1,535 | ) | | $ | 1,101 |
| $ | 1,101 |
| | $ | 118 |
| | $ | 1,417 |
| | $ | (1,535 | ) | | $ | 1,101 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
MACY’S, INC.
Condensed Consolidating Statement of Comprehensive Income
For 2014
(millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Net sales | $ | — |
| | $ | 13,078 |
| | $ | 23,522 |
| | $ | (8,495 | ) | | $ | 28,105 |
|
| Cost of sales | — |
| | (8,127 | ) | | (17,231 | ) | | 8,495 |
| | (16,863 | ) |
| Gross margin | — |
| | 4,951 |
| | 6,291 |
| | — |
| | 11,242 |
|
| Selling, general and administrative expenses | (3 | ) | | (4,351 | ) | | (4,001 | ) | | — |
| | (8,355 | ) |
| Impairments, store closing and other costs | — |
| | (45 | ) | | (42 | ) | | — |
| | (87 | ) |
| Operating income (loss) | (3 | ) | | 555 |
| | 2,248 |
| | — |
| | 2,800 |
|
| Interest (expense) income, net: | | | | | | | | | |
| External | 1 |
| | (394 | ) | | — |
| | — |
| | (393 | ) |
| Intercompany | — |
| | (230 | ) | | 230 |
| | — |
| | — |
|
| Premium on early retirement of debt | — |
| | (17 | ) | | — |
| | — |
| | (17 | ) |
| Equity in earnings of subsidiaries | 1,528 |
| | 624 |
| | — |
| | (2,152 | ) | | — |
|
| Income before income taxes | 1,526 |
| | 538 |
| | 2,478 |
| | (2,152 | ) | | 2,390 |
|
Federal, state and local income
tax benefit (expense) | — |
| | 25 |
| | (889 | ) | | — |
| | (864 | ) |
| Net income | 1,526 |
| | 563 |
| | 1,589 |
| | (2,152 | ) | | 1,526 |
|
| Net loss attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
|
Net income attributable to
Macy's, Inc. shareholders | $ | 1,526 |
| | $ | 563 |
| | $ | 1,589 |
| | $ | (2,152 | ) | | $ | 1,526 |
|
| Comprehensive income | $ | 1,119 |
| | $ | 156 |
| | $ | 1,338 |
| | $ | (1,494 | ) | | $ | 1,119 |
|
Comprehensive loss attributable to
noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
|
Comprehensive income attributable to
Macy's, Inc. shareholders | $ | 1,119 |
| | $ | 156 |
| | $ | 1,338 |
| | $ | (1,494 | ) | | $ | 1,119 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
MACY’S, INC.
Condensed Consolidating Balance Sheet
As of January 28, 2017February 3, 2018
(millions)
| | | | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
| ASSETS: | | | | | | | | | | | | | | | | | | |
| Current Assets: | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 938 |
| | $ | 81 |
| | $ | 278 |
| | $ | — |
| | $ | 1,297 |
| $ | 1,109 |
| | $ | 58 |
| | $ | 288 |
| | $ | — |
| | $ | 1,455 |
|
| Receivables | — |
| | 169 |
| | 353 |
| | — |
| | 522 |
| — |
| | 85 |
| | 278 |
| | — |
| | 363 |
|
| Merchandise inventories | — |
| | 2,565 |
| | 2,834 |
| | — |
| | 5,399 |
| — |
| | 2,344 |
| | 2,834 |
| | — |
| | 5,178 |
|
| Prepaid expenses and other current assets | — |
| | 84 |
| | 324 |
| | — |
| | 408 |
| — |
| | 103 |
| | 345 |
| | — |
| | 448 |
|
| Total Current Assets | 938 |
| | 2,899 |
| | 3,789 |
| | — |
| | 7,626 |
| 1,109 |
| | 2,590 |
| | 3,745 |
| | — |
| | 7,444 |
|
| Property and Equipment – net | — |
| | 3,397 |
| | 3,620 |
| | — |
| | 7,017 |
| — |
| | 3,349 |
| | 3,323 |
| | — |
| | 6,672 |
|
| Goodwill | — |
| | 3,315 |
| | 582 |
| | — |
| | 3,897 |
| — |
| | 3,315 |
| | 582 |
| | — |
| | 3,897 |
|
| Other Intangible Assets – net | — |
| | 51 |
| | 447 |
| | — |
| | 498 |
| — |
| | 44 |
| | 444 |
| | — |
| | 488 |
|
| Other Assets | — |
| | 47 |
| | 766 |
| | — |
| | 813 |
| 1 |
| | 89 |
| | 790 |
| | — |
| | 880 |
|
| Deferred Income Taxes | 26 |
| | — |
| | — |
| | (26 | ) | | — |
| 11 |
| | — |
| | — |
| | (11 | ) | | — |
|
| Intercompany Receivable | 375 |
| | — |
| | 2,428 |
| | (2,803 | ) | | — |
| 884 |
| | — |
| | 2,382 |
| | (3,266 | ) | | — |
|
| Investment in Subsidiaries | 3,137 |
| | 3,540 |
| | — |
| | (6,677 | ) | | — |
| 3,960 |
| | 4,061 |
| | — |
| | (8,021 | ) | | — |
|
| Total Assets | $ | 4,476 |
| | $ | 13,249 |
| | $ | 11,632 |
| | $ | (9,506 | ) | | $ | 19,851 |
| $ | 5,965 |
| | $ | 13,448 |
| | $ | 11,266 |
| | $ | (11,298 | ) | | $ | 19,381 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY: | | | | | | | | | | | | | | | | | | |
| Current Liabilities: | | | | | | | | | | | | | | | | | | |
| Short-term debt | $ | — |
| | $ | 306 |
| | $ | 3 |
| | $ | — |
| | $ | 309 |
| $ | — |
| | $ | 6 |
| | $ | 16 |
| | $ | — |
| | $ | 22 |
|
| Merchandise accounts payable | — |
| | 590 |
| | 833 |
| | — |
| | 1,423 |
| — |
| | 653 |
| | 937 |
| | — |
| | 1,590 |
|
| Accounts payable and accrued liabilities | 15 |
| | 1,064 |
| | 2,484 |
| | — |
| | 3,563 |
| 159 |
| | 948 |
| | 2,060 |
| | — |
| | 3,167 |
|
| Income taxes | 71 |
| | 16 |
| | 265 |
| | — |
| | 352 |
| 113 |
| | 30 |
| | 153 |
| | — |
| | 296 |
|
| Total Current Liabilities | 86 |
| | 1,976 |
| | 3,585 |
| | — |
| | 5,647 |
| 272 |
| | 1,637 |
| | 3,166 |
| | — |
| | 5,075 |
|
| Long-Term Debt | — |
| | 6,544 |
| | 18 |
| | — |
| | 6,562 |
| — |
| | 5,844 |
| | 17 |
| | — |
| | 5,861 |
|
| Intercompany Payable | — |
| | 2,803 |
| | — |
| | (2,803 | ) | | — |
| — |
| | 3,266 |
| | — |
| | (3,266 | ) | | — |
|
| Deferred Income Taxes | — |
| | 688 |
| | 781 |
| | (26 | ) | | 1,443 |
| — |
| | 541 |
| | 592 |
| | (11 | ) | | 1,122 |
|
| Other Liabilities | 66 |
| | 500 |
| | 1,311 |
| | — |
| | 1,877 |
| 20 |
| | 430 |
| | 1,212 |
| | — |
| | 1,662 |
|
| Shareholders’ Equity: | | | | | | | | |
|
| | | | | | | | |
|
|
| Macy's, Inc. | 4,323 |
| | 738 |
| | 5,939 |
| | (6,677 | ) | | 4,323 |
| 5,673 |
| | 1,730 |
| | 6,291 |
| | (8,021 | ) | | 5,673 |
|
| Noncontrolling Interest | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) |
| Total Shareholders’ Equity | 4,323 |
| | 738 |
| | 5,938 |
| | (6,677 | ) | | 4,322 |
| 5,673 |
| | 1,730 |
| | 6,279 |
| | (8,021 | ) | | 5,661 |
|
| Total Liabilities and Shareholders’ Equity | $ | 4,475 |
| | $ | 13,249 |
| | $ | 11,633 |
| | $ | (9,506 | ) | | $ | 19,851 |
| $ | 5,965 |
| | $ | 13,448 |
| | $ | 11,266 |
| | $ | (11,298 | ) | | $ | 19,381 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
MACY’S, INC.
Condensed Consolidating Balance Sheet
As of January 30, 201628, 2017
(millions)
| | | | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
| ASSETS: | | | | | | | | | | | | | | | | | | |
| Current Assets: | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 741 |
| | $ | 91 |
| | $ | 277 |
| | $ | — |
| | $ | 1,109 |
| $ | 938 |
| | $ | 81 |
| | $ | 278 |
| | $ | — |
| | $ | 1,297 |
|
| Receivables | — |
| | 217 |
| | 341 |
| | — |
| | 558 |
| — |
| | 169 |
| | 353 |
| | — |
| | 522 |
|
| Merchandise inventories | — |
| | 2,702 |
| | 2,804 |
| | — |
| | 5,506 |
| — |
| | 2,565 |
| | 2,834 |
| | — |
| | 5,399 |
|
| Prepaid expenses and other current assets | — |
| | 135 |
| | 344 |
| | — |
| | 479 |
| — |
| | 84 |
| | 324 |
| | — |
| | 408 |
|
| Income taxes | 44 |
| | — |
| | — |
| | (44 | ) | | — |
| — |
| | — |
| | — |
| | — |
| | — |
|
| Total Current Assets | 785 |
| | 3,145 |
| | 3,766 |
| | (44 | ) | | 7,652 |
| 938 |
| | 2,899 |
| | 3,789 |
| | — |
| | 7,626 |
|
| Property and Equipment – net | — |
| | 3,925 |
| | 3,691 |
| | — |
| | 7,616 |
| — |
| | 3,583 |
| | 3,434 |
| | — |
| | 7,017 |
|
| Goodwill | — |
| | 3,315 |
| | 582 |
| | — |
| | 3,897 |
| — |
| | 3,315 |
| | 582 |
| | — |
| | 3,897 |
|
| Other Intangible Assets – net | — |
| | 52 |
| | 462 |
| | — |
| | 514 |
| — |
| | 51 |
| | 447 |
| | — |
| | 498 |
|
| Other Assets | — |
| | 154 |
| | 743 |
| | — |
| | 897 |
| — |
| | 47 |
| | 766 |
| | — |
| | 813 |
|
| Deferred Income Taxes | 14 |
| | — |
| | — |
| | (14 | ) | | — |
| 26 |
| | — |
| | — |
| | (26 | ) | | — |
|
| Intercompany Receivable | — |
| | — |
| | 3,800 |
| | (3,800 | ) | | — |
| 375 |
| | — |
| | 2,614 |
| | (2,989 | ) | | — |
|
| Investment in Subsidiaries | 4,725 |
| | 3,804 |
| | — |
| | (8,529 | ) | | — |
| 3,137 |
| | 3,540 |
| | — |
| | (6,677 | ) | | — |
|
| Total Assets | $ | 5,524 |
| | $ | 14,395 |
| | $ | 13,044 |
| | $ | (12,387 | ) | | $ | 20,576 |
| $ | 4,476 |
| | $ | 13,435 |
| | $ | 11,632 |
| | $ | (9,692 | ) | | $ | 19,851 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY: | | | | | | | | | | | | | | | | | | |
| Current Liabilities: | | | | | | | | | | | | | | | | | | |
| Short-term debt | $ | — |
| | $ | 641 |
| | $ | 1 |
| | $ | — |
| | $ | 642 |
| $ | — |
| | $ | 306 |
| | $ | 3 |
| | $ | — |
| | $ | 309 |
|
| Merchandise accounts payable | — |
| | 667 |
| | 859 |
| | — |
| | 1,526 |
| — |
| | 590 |
| | 833 |
| | — |
| | 1,423 |
|
| Accounts payable and accrued liabilities | 35 |
| | 1,439 |
| | 1,859 |
| | — |
| | 3,333 |
| 16 |
| | 1,064 |
| | 2,483 |
| | — |
| | 3,563 |
|
| Income taxes | — |
| | 41 |
| | 230 |
| | (44 | ) | | 227 |
| 71 |
| | 16 |
| | 265 |
| | — |
| | 352 |
|
| Total Current Liabilities | 35 |
| | 2,788 |
| | 2,949 |
| | (44 | ) | | 5,728 |
| 87 |
| | 1,976 |
| | 3,584 |
| | — |
| | 5,647 |
|
| Long-Term Debt | — |
| | 6,976 |
| | 19 |
| | — |
| | 6,995 |
| — |
| | 6,544 |
| | 18 |
| | — |
| | 6,562 |
|
| Intercompany Payable | 1,218 |
| | 2,582 |
| | — |
| | (3,800 | ) | | — |
| — |
| | 2,989 |
| | — |
| | (2,989 | ) | | — |
|
| Deferred Income Taxes | — |
| | 693 |
| | 798 |
| | (14 | ) | | 1,477 |
| — |
| | 688 |
| | 781 |
| | (26 | ) | | 1,443 |
|
| Other Liabilities | 21 |
| | 558 |
| | 1,544 |
| | — |
| | 2,123 |
| 66 |
| | 500 |
| | 1,311 |
| | — |
| | 1,877 |
|
| Shareholders’ Equity: | | | | | | | | | | | | | | | | | | |
| Macy's, Inc. | 4,250 |
| | 798 |
| | 7,731 |
| | (8,529 | ) | | 4,250 |
| 4,323 |
| | 738 |
| | 5,939 |
| | (6,677 | ) | | 4,323 |
|
| Noncontrolling Interest | — |
| | — |
| | 3 |
| | — |
| | 3 |
| — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Total Shareholders’ Equity | 4,250 |
| | 798 |
| | 7,734 |
| | (8,529 | ) | | 4,253 |
| 4,323 |
| | 738 |
| | 5,938 |
| | (6,677 | ) | | 4,322 |
|
| Total Liabilities and Shareholders’ Equity | $ | 5,524 |
| | $ | 14,395 |
| | $ | 13,044 |
| | $ | (12,387 | ) | | $ | 20,576 |
| $ | 4,476 |
| | $ | 13,435 |
| | $ | 11,632 |
| | $ | (9,692 | ) | | $ | 19,851 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
MACY’S, INC.
Condensed Consolidating Statement of Cash Flows
For 2017
(millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Cash flows from operating activities: | | | | | | | | | |
| Net income | $ | 1,547 |
| | $ | 755 |
| | $ | 1,556 |
| | $ | (2,322 | ) | | $ | 1,536 |
|
| Restructuring, impairment, store closing and other costs | — |
| | 40 |
| | 146 |
| | — |
| | 186 |
|
| Settlement charges | — |
| | 35 |
| | 70 |
| | — |
| | 105 |
|
| Gains on sale of real estate | — |
| | (201 | ) | | (343 | ) | | — |
| | (544 | ) |
| Equity in earnings of subsidiaries | (1,555 | ) | | (767 | ) | | — |
| | 2,322 |
| | — |
|
| Dividends received from subsidiaries | 903 |
| | 450 |
| | — |
| | (1,353 | ) | | — |
|
| Depreciation and amortization | — |
| | 354 |
| | 637 |
| | — |
| | 991 |
|
| (Increase) decrease in working capital | 40 |
| | 344 |
| | (188 | ) | | — |
| | 196 |
|
| Other, net | (26 | ) | | (261 | ) | | (239 | ) | | — |
| | (526 | ) |
Net cash provided by
operating activities | 909 |
| | 749 |
| | 1,639 |
| | (1,353 | ) | | 1,944 |
|
| Cash flows from investing activities: | | | | | | | | | |
| Purchase of property and equipment and capitalized software, net | — |
| | (118 | ) | | (231 | ) | | — |
| | (349 | ) |
| Other, net | — |
| | (15 | ) | | (9 | ) | | — |
| | (24 | ) |
| Net cash used by investing activities | — |
| | (133 | ) | | (240 | ) | | — |
| | (373 | ) |
| Cash flows from financing activities: | | | | | | | | | |
| Debt repaid | — |
| | (953 | ) | | (1 | ) | | — |
| | (954 | ) |
| Dividends paid | (461 | ) | | — |
| | (1,353 | ) | | 1,353 |
| | (461 | ) |
| Issuance of common stock, net of common stock acquired | 5 |
| | — |
| | — |
| | — |
| | 5 |
|
| Proceeds from noncontrolling interest | — |
| | — |
| | 13 |
| | — |
| | 13 |
|
| Intercompany activity, net | (427 | ) | | 412 |
| | 15 |
| | — |
| | — |
|
| Other, net | 145 |
| | (98 | ) | | (63 | ) | | — |
| | (16 | ) |
Net cash used by
financing activities | (738 | ) | | (639 | ) | | (1,389 | ) | | 1,353 |
| | (1,413 | ) |
Net increase (decrease) in cash
and cash equivalents | 171 |
| | (23 | ) | | 10 |
| | — |
| | 158 |
|
Cash and cash equivalents at
beginning of period | 938 |
| | 81 |
| | 278 |
| | — |
| | 1,297 |
|
Cash and cash equivalents at
end of period | $ | 1,109 |
| | $ | 58 |
| | $ | 288 |
| | $ | — |
| | $ | 1,455 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
MACY’S, INC.
Condensed Consolidating Statement of Cash Flows
For 2016
(millions)
| | | | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
| Net income (loss) | $ | 619 |
| | $ | (208 | ) | | $ | 1,074 |
| | $ | (874 | ) | | $ | 611 |
| $ | 619 |
| | $ | (208 | ) | | $ | 1,074 |
| | $ | (874 | ) | | $ | 611 |
|
| Impairments, store closing and other costs | — |
| | 295 |
| | 184 |
| | — |
| | 479 |
| — |
| | 295 |
| | 184 |
| | — |
| | 479 |
|
| Settlement charges | — |
| | 34 |
| | 64 |
| | — |
| | 98 |
| — |
| | 34 |
| | 64 |
| | — |
| | 98 |
|
| Gains on sale of real estate | | — |
| | (95 | ) | | (114 | ) | | — |
| | (209 | ) |
| Equity in earnings of subsidiaries | (619 | ) | | (255 | ) | | — |
| | 874 |
| | — |
| (619 | ) | | (255 | ) | | — |
| | 874 |
| | — |
|
| Dividends received from subsidiaries | 957 |
| | 575 |
| | — |
| | (1,532 | ) | | — |
| 957 |
| | 575 |
| | — |
| | (1,532 | ) | | — |
|
| Depreciation and amortization | — |
| | 407 |
| | 651 |
| | — |
| | 1,058 |
| — |
| | 407 |
| | 651 |
| | — |
| | 1,058 |
|
| (Increase) decrease in working capital | 110 |
| | (482 | ) | | 92 |
| | — |
| | (280 | ) | 110 |
| | (373 | ) | | 227 |
| | — |
| | (36 | ) |
| Other, net | 28 |
| | 51 |
| | (244 | ) | | — |
| | (165 | ) | 28 |
| | 37 |
| | (265 | ) | | — |
| | (200 | ) |
Net cash provided by
operating activities | 1,095 |
| | 417 |
| | 1,821 |
| | (1,532 | ) | | 1,801 |
| 1,095 |
| | 417 |
| | 1,821 |
| | (1,532 | ) | | 1,801 |
|
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | |
| Purchase of property and equipment and capitalized software, net | — |
| | 12 |
| | (251 | ) | | — |
| | (239 | ) | |
| Disposition (purchase) of property and equipment and capitalized software, net | | — |
| | 13 |
| | (252 | ) | | — |
| | (239 | ) |
| Other, net | — |
| | 32 |
| | 20 |
| | — |
| | 52 |
| — |
| | 32 |
| | 20 |
| | — |
| | 52 |
|
| Net cash provided (used) by investing activities | — |
| | 44 |
| | (231 | ) | | — |
| | (187 | ) | — |
| | 45 |
| | (232 | ) | | — |
| | (187 | ) |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | |
| Debt repaid, net of debt issued | — |
| | (750 | ) | | 1 |
| | — |
| | (749 | ) | |
| Debt repaid | | — |
| | (750 | ) | | (1 | ) | | — |
| | (751 | ) |
| Dividends paid | (459 | ) | | — |
| | (1,532 | ) | | 1,532 |
| | (459 | ) | (459 | ) | | — |
| | (1,532 | ) | | 1,532 |
| | (459 | ) |
Common stock acquired, net of
issuance of common stock | (280 | ) | | — |
| | — |
| | — |
| | (280 | ) | (280 | ) | | — |
| | — |
| | — |
| | (280 | ) |
| Proceeds from noncontrolling interest | — |
| | — |
| | 4 |
| | — |
| | 4 |
| — |
| | — |
| | 6 |
| | — |
| | 6 |
|
| Intercompany activity, net | (144 | ) | | 255 |
| | (111 | ) | | — |
| | — |
| (144 | ) | | 254 |
| | (110 | ) | | — |
| | — |
|
| Other, net | (15 | ) | | 24 |
| | 49 |
| | — |
| | 58 |
| (15 | ) | | 24 |
| | 49 |
| | — |
| | 58 |
|
Net cash used by
financing activities | (898 | ) | | (471 | ) | | (1,589 | ) | | 1,532 |
| | (1,426 | ) | (898 | ) | | (472 | ) | | (1,588 | ) | | 1,532 |
| | (1,426 | ) |
Net increase (decrease) in cash
and cash equivalents | 197 |
| | (10 | ) | | 1 |
| | — |
| | 188 |
| 197 |
| | (10 | ) | | 1 |
| | — |
| | 188 |
|
Cash and cash equivalents at
beginning of period | 741 |
| | 91 |
| | 277 |
| | — |
| | 1,109 |
| 741 |
| | 91 |
| | 277 |
| | — |
| | 1,109 |
|
Cash and cash equivalents at
end of period | $ | 938 |
| | $ | 81 |
| | $ | 278 |
| | $ | — |
| | $ | 1,297 |
| $ | 938 |
| | $ | 81 |
| | $ | 278 |
| | $ | — |
| | $ | 1,297 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
MACY’S, INC.
Condensed Consolidating Statement of Cash Flows
For 2015
(millions)
| | | | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
| Net income | $ | 1,072 |
| | $ | 89 |
| | $ | 1,402 |
| | $ | (1,493 | ) | | $ | 1,070 |
| $ | 1,072 |
| | $ | 89 |
| | $ | 1,402 |
| | $ | (1,493 | ) | | $ | 1,070 |
|
| Impairments, store closing and other costs | — |
| | 170 |
| | 118 |
| | — |
| | 288 |
| — |
| | 170 |
| | 118 |
| | — |
| | 288 |
|
| Gains on sale of real estate | | — |
| | (110 | ) | | (102 | ) | | — |
| | (212 | ) |
| Equity in earnings of subsidiaries | (1,072 | ) | | (421 | ) | | — |
| | 1,493 |
| | — |
| (1,072 | ) | | (421 | ) | | — |
| | 1,493 |
| | — |
|
| Dividends received from subsidiaries | 1,086 |
| | — |
| | — |
| | (1,086 | ) | | — |
| 1,086 |
| | — |
| | — |
| | (1,086 | ) | | — |
|
| Depreciation and amortization | — |
| | 440 |
| | 621 |
| | — |
| | 1,061 |
| — |
| | 440 |
| | 621 |
| | — |
| | 1,061 |
|
| (Increase) decrease in working capital | 25 |
| | (340 | ) | | (81 | ) | | — |
| | (396 | ) | 25 |
| | (211 | ) | | 50 |
| | — |
| | (136 | ) |
| Other, net | (8 | ) | | (78 | ) | | 47 |
| | — |
| | (39 | ) | (8 | ) | | (97 | ) | | 18 |
| | — |
| | (87 | ) |
Net cash provided (used) by
operating activities | 1,103 |
| | (140 | ) | | 2,107 |
| | (1,086 | ) | | 1,984 |
| 1,103 |
| | (140 | ) | | 2,107 |
| | (1,086 | ) | | 1,984 |
|
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | |
| Purchase of property and equipment and capitalized software, net | — |
| | (88 | ) | | (821 | ) | | — |
| | (909 | ) | — |
| | (180 | ) | | (729 | ) | | — |
| | (909 | ) |
| Other, net | — |
| | 83 |
| | (266 | ) | | — |
| | (183 | ) | — |
| | 83 |
| | (266 | ) | | — |
| | (183 | ) |
Net cash used by
investing activities | — |
| | (5 | ) | | (1,087 | ) | | — |
| | (1,092 | ) | — |
| | (97 | ) | | (995 | ) | | — |
| | (1,092 | ) |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | |
| Debt issued, net of debt repaid | — |
| | 348 |
| | (1 | ) | | — |
| | 347 |
| — |
| | 348 |
| | (1 | ) | | — |
| | 347 |
|
| Dividends paid | (456 | ) | | — |
| | (1,086 | ) | | 1,086 |
| | (456 | ) | (456 | ) | | — |
| | (1,086 | ) | | 1,086 |
| | (456 | ) |
Common stock acquired, net of
issuance of common stock | (1,838 | ) | | — |
| | — |
| | — |
| | (1,838 | ) | (1,838 | ) | | — |
| | — |
| | — |
| | (1,838 | ) |
| Proceeds from noncontrolling interest | — |
| | — |
| | 5 |
| | — |
| | 5 |
| — |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Intercompany activity, net | 12 |
| | (243 | ) | | 231 |
| | — |
| | — |
| 12 |
| | (151 | ) | | 139 |
| | — |
| | — |
|
| Other, net | 12 |
| | 37 |
| | (136 | ) | | — |
| | (87 | ) | 12 |
| | 37 |
| | (136 | ) | | — |
| | (87 | ) |
| Net cash provided (used) by financing activities | (2,270 | ) | | 142 |
| | (987 | ) | | 1,086 |
| | (2,029 | ) | (2,270 | ) | | 234 |
| | (1,079 | ) | | 1,086 |
| | (2,029 | ) |
Net increase (decrease) in
cash and cash equivalents | (1,167 | ) | | (3 | ) | | 33 |
| | — |
| | (1,137 | ) | (1,167 | ) | | (3 | ) | | 33 |
| | — |
| | (1,137 | ) |
Cash and cash equivalents at
beginning of period | 1,908 |
| | 94 |
| | 244 |
| | — |
| | 2,246 |
| 1,908 |
| | 94 |
| | 244 |
| | — |
| | 2,246 |
|
Cash and cash equivalents at
end of period | $ | 741 |
| | $ | 91 |
| | $ | 277 |
| | $ | — |
| | $ | 1,109 |
| $ | 741 |
| | $ | 91 |
| | $ | 277 |
| | $ | — |
| | $ | 1,109 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
MACY’S, INC.
Condensed Consolidating Statement of Cash Flows
For 2014
(millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Issuer | | Other Subsidiaries | | Consolidating Adjustments | | Consolidated |
| Cash flows from operating activities: | | | | | | | | | |
| Net income | $ | 1,526 |
| | $ | 563 |
| | $ | 1,589 |
| | $ | (2,152 | ) | | $ | 1,526 |
|
| Impairments, store closing and other costs | — |
| | 45 |
| | 42 |
| | — |
| | 87 |
|
| Equity in earnings of subsidiaries | (1,528 | ) | | (624 | ) | | — |
| | 2,152 |
| | — |
|
| Dividends received from subsidiaries | 1,088 |
| | 1 |
| | — |
| | (1,089 | ) | | — |
|
| Depreciation and amortization | — |
| | 454 |
| | 582 |
| | — |
| | 1,036 |
|
| Increase (decrease) in working capital | 9 |
| | 74 |
| | (69 | ) | | — |
| | 14 |
|
| Other, net | (20 | ) | | (177 | ) | | 243 |
| | — |
| | 46 |
|
Net cash provided by
operating activities | 1,075 |
| | 336 |
| | 2,387 |
| | (1,089 | ) | | 2,709 |
|
| Cash flows from investing activities: | | | | | | | | | |
| Purchase (disposition) of property and equipment and capitalized software, net | — |
| | (260 | ) | | (636 | ) | | — |
| | (896 | ) |
| Other, net | — |
| | (12 | ) | | (62 | ) | | — |
| | (74 | ) |
Net cash used by
investing activities | — |
| | (272 | ) | | (698 | ) | | — |
| | (970 | ) |
| Cash flows from financing activities: | | | | | | | | | |
| Debt repaid, net of debt issued | — |
| | 177 |
| | (3 | ) | | — |
| | 174 |
|
| Dividends paid | (421 | ) | | — |
| | (1,089 | ) | | 1,089 |
| | (421 | ) |
Common stock acquired, net of
issuance of common stock | (1,643 | ) | | — |
| | — |
| | — |
| | (1,643 | ) |
| Proceeds from noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
|
| Intercompany activity, net | 927 |
| | (283 | ) | | (644 | ) | | — |
| | — |
|
| Other, net | 15 |
| | 52 |
| | 57 |
| | — |
| | 124 |
|
Net cash used by
financing activities | (1,122 | ) | | (54 | ) | | (1,679 | ) | | 1,089 |
| | (1,766 | ) |
Net increase (decrease) in cash
and cash equivalents | (47 | ) | | 10 |
| | 10 |
| | — |
| | (27 | ) |
Cash and cash equivalents at
beginning of period | 1,955 |
| | 84 |
| | 234 |
| | — |
| | 2,273 |
|
Cash and cash equivalents at
end of period | $ | 1,908 |
| | $ | 94 |
| | $ | 244 |
| | $ | — |
| | $ | 2,246 |
|
