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

For the fiscal year ended February 1, 2020
OR
For the Fiscal Year Ended
January 28, 2017
☐
Commission File Number:TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
1-13536
For the transition period from    to
7 West Seventh StreetCommission file number: 1-13536
Cincinnati, Ohio 45202macysinclogoa01.jpg
(513) 579-7000Macy's, Inc.
and
151 West 34th Street
New York, New York 10001
(212) 494-1602(Exact name of registrant as specified in its charter)
Incorporated in Delaware 13-3324058
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No. 13-3324058)

151 West 34th Street, New York, New York10001                    (212)494-1602
(Address of Principal Executive Offices, including Zip Code)    (Registrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s) Name of Each Exchange on Which Registered
Common Stock, $.01 par value $.01 per shareM New York Stock Exchange

Securities registered pursuantRegistered 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.
Large Accelerated Filer ☒ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting Company ☐Emerging Growth Company ☐
Large accelerated filer  ý
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨☐    No ý
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter (July 30, 2016)(August 3, 2019) was approximately $11,052,402,000.$6,576,798,072.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class Outstanding at February 24, 201729, 2020
Common Stock, $0.01$.01 par value per share 304,258,647309,645,426 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Parts Into
Which Incorporated
Proxy Statement for the Annual Meeting of Stockholders to be held May 19, 2017 (Proxy Statement)15, 2020Part III
 






Unless the context requires otherwise, references to “Macy’s” or the “Company” are references to Macy’s and its subsidiaries and references to “2016,“2019,” “2015,“2018,” “2014,“2017,” “2013”“2016” and “2012”“2015” are references to the Company’s fiscal years ended February 1, 2020, February 2, 2019, February 3, 2018, January 28, 2017 and January 30, 2016, January 31, 2015, February 1, 2014 and February 2, 2013, respectively. Fiscal year 2017 included 53 weeks; fiscal years 2019, 2018, 2016 2015, 2014 and 20132015 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 effects of the weather, natural disasters, and health pandemics, including the novel coronavirus (COVID-19), on customer demand, our supply chain as well as our consolidated results of operation, financial position and cash flows;
the possible invalidity of the underlying beliefs and assumptions;
the Company's ability to successfully implement its Polaris strategy, including the ability to realize the anticipated benefits within the expected time frame or at all;
the success of the Company’s operational decisions, such as product sourcing, merchandise mix and pricing, and marketing, and strategic initiatives, such as Growth stores, Backstage on-mall off-price business, and vendor direct expansion;
general consumer-spending levels, including the impact of changes in general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, and the costs of basic necessities and other goods;
competitive pressures from department andstores, specialty stores, general merchandise stores, manufacturers’ outlets, off-price and discount stores, and all other retail channels, including the Internet, catalogs and television;
general consumer-spending levels,the Company’s ability to remain competitive and relevant as consumers’ shopping behaviors migrate to other shopping channels and to maintain its brand and reputation;
possible systems failures and/or security breaches, including any security breach that results in the impacttheft, transfer or unauthorized disclosure of general economic conditions, consumer disposable income levels, consumer confidence levels,customer, employee or company information, or the availability,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 level of consumer debt, mall vacancy issues,retaining quality employees;
transactions and strategy involving the costs of basic necessities and other goods and Company's real estate portfolio;
the effectsseasonal nature of the weather or natural disasters;Company’s business;
conditions to, or changes in the timing of, proposed transactions, and changes in expected synergies, cost savings and non-recurring charges;
transactions involving the Company's real estate portfolio;potential for the incurrence of charges in connection with the impairment of intangible assets, including goodwill;
possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions;
possible actions taken or omitted to be taken by third parties, including customers, suppliers, business partners, competitors and legislative, regulatory, judicial and other governmental authorities and officials;
changes in relationships with vendors and other product and service providers;


currency, interest and exchange rates and other capital market, economic and geo-political conditions;
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 and global health pandemics, and regional political and economic conditions; and
duties, taxes, other charges and quotas on imports; and
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.imports.
In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the statements in the immediately preceding sentence and the statements under captions such as “Risk Factors” in reports, statements and information filed by the Company with the SEC from time to time constitute cautionary statements identifying important factors that could cause actual amounts, results, events and circumstances to differ materially from those expressed in or implied by such forward-looking statements.







Item 1.Business.
General
The Company is a corporation organized under the laws of the State of Delaware in 1985. The Company and its predecessors have been operating department stores since 1830. The Company operates 829 stores775 store locations in 4543 states, the District of Columbia, GuamPuerto Rico and Puerto Rico.Guam. As of January 28, 2017,February 1, 2020, the Company's operations were conducted through Macy's, Bloomingdale's, Bloomingdale’s The Outlet, Macy’s Backstage, Bluemercury and Macy’s China Limited.bluemercury. In addition, Bloomingdale's in Dubai, United Arab Emirates and Al Zahra, Kuwait are operated under license agreements with Al Tayer Insignia, a company of Al Tayer Group, LLC.
The Company sells a wide range of merchandise, including apparel and accessories (men’s, women’s and children’s)kids'), cosmetics, home furnishings and other consumer goods. The specific assortments vary by size of store, merchandising assortments and character of customers in the trade areas. Most stores are located at urban or suburban sites, principally in densely populated areas across the United States.
For 2016, 2015Disaggregation of the Company's net sales by family of business for 2019, 2018 and 2014, the following2017 were as follows:
 2019 2018 2017
Women’s Accessories, Intimate Apparel, Shoes, Cosmetics and Fragrances$9,454
 $9,457
 $9,444
Women’s Apparel5,411
 5,642
 5,765
Men’s and Kids’5,628
 5,699
 5,610
Home/Other (a)4,067
 4,173
 4,120
Total$24,560
 $24,971
 $24,939
(a) Other primarily includes restaurant sales, allowance for merchandise constituted the following percentages of sales:returns adjustments, certain loyalty program income and breakage income from unredeemed gift cards.

 2016 2015 2014
Women’s Accessories, Intimate Apparel, Shoes, Cosmetics and Fragrances38% 38% 38%
Women’s Apparel23
 23
 23
Men’s and Children’s23
 23
 23
Home/Miscellaneous16
 16
 16
 100% 100% 100%

In 2016,2019, the Company’s subsidiaries provided various support functions to the Company’s retail operations on an integrated, company-wide basis.
The Company’s wholly-owned bank subsidiary, FDS Bank, provides 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 Bluemercury and Macy's China Limited.bluemercury.
Macy’s Merchandising Group, Inc. (“MMG”), a wholly-owned direct subsidiary of the Company, and its subsidiary Macy's Merchandising Group International, LLC, are responsible for the design, development and marketing of Macy’s private label brands and certain licensed brands. Bloomingdale’s uses MMG for a


small portion of its private label merchandise. The Company believes that its private label merchandise differentiates its merchandise assortments from those of its competitors and delivers exceptional value to its customers. MMG also offers its services, either directly or indirectly, to unrelated third parties.
Macy’s Logistics and Operations (“Macy’s Logistics”), a division of a wholly-owned indirect subsidiary of the Company, provides warehousing and merchandise distribution services for the Company’s operations and digital customer fulfillment.
The Company’s principal executive offices areoffice is 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 1, 2020, excluding seasonal employees, the Company had approximately 148,300123,000 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%8% of the Company’s employees as of January 28, 2017were represented by unions.unions as of February 1, 2020.



Seasonality
The retail business is seasonal in nature with a high proportion of sales and operating income generated in the months of November and December. Working capital requirements fluctuate during the year, increasing in mid-summer in anticipation of the fall merchandising season and increasing substantially prior to the holiday season when the Company carries significantly higher inventory levels.
Purchasing
The Company purchases merchandise from many suppliers, no one of which accounted for more than 5% of the Company’s net purchases during 20162019. 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., Sun + Stone, Sutton Studio, Tasso Elba, Thalia Sodi, the cellar, andThe Cellar, Tools of the Trade.Trade and Wild Pair.
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 suchthe brands to Macy’s pursuant to agreements. The agreements which have renewal rights that extendfor American Rag, Greg Norman, Material Girl, and Thalia Sodi expired at the end of 2019, while the Martha Stewart agreement extends through 2050, 2020, 2027, 2030 and 2030, respectively.2022.
Competition
The retailingretail industry is intenselyhighly competitive. The Company’s operations compete with many retailingretail formats on the national and local level, including department stores, specialty stores, general merchandise stores, manufacturers' outlets, 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,compelling, high-quality products, great prices and distinctive marketing intrusted service across all channels. Macy’s stores that are located in premier locations and by providing an exciting shopping environment andthe Company provides a superior service through an omnichannel fashion experience. Other retailers may compete for customers on some or all of these bases, or on other bases, and may be perceived by some potential customers as being better aligned with their particular preferences.


Available Information
The Company makes its annual reportsreport on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") available free of charge through its internet website at http:https://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


internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Company’s filings;SEC; the address of that site is http:https://www.sec.gov. In addition, the Company has made the following available free of charge through its website at http:https://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 Person Transactions Policy,
Method to Facilitate Receipt, Retention and Treatment of Communications, and
Proxy Access By-Laws.
Any of these items are also available in print to any shareholder who requests them. Requests should be sent to the Corporate Secretary of Macy’s, Inc. at 7151 West 734th Street, Cincinnati, OH 45202.New York, New York 10001.
Information about our Executive Officers of the Registrant
The following table sets forth certain information as of March 24, 201719, 2020 regarding the executive officersExecutive Officers of the Company:
Name Age Position with the Company
Terry J. Lundgren65
Executive Chairman and Chairman of the Board; Director
Jeff Gennette 55
President, Chief Executive Officer; Director
Timothy Baxter47
58		 Chief MerchandisingExecutive Officer, Chairman of the Board and Director
Paula A. Price58Executive Vice President and Chief Financial Officer
Elisa D. Garcia 59
62		 Executive Vice President, Chief Legal Officer and Secretary
Robert B. HarrisonJohn T. Harper 53
60		 Executive Vice President and Chief Omnichannel and Operations Officer
Karen M. Hoguet60
Chief Financial Officer
Jeffrey A. Kantor58
Chief Stores and Human Resources Officer
Molly Langenstein53
Chief Private Brands Officer
Richard A. Lennox51
Chief Marketing Officer
Justin S. MacFarlaneDanielle L. Kirgan 44
Chief Strategy, Analytics and Innovation Officer
Patti H. Ongman61
Chief Merchandise Planning Officer
Tony Spring52
ChairmanExecutive Vice President and Chief ExecutiveTransformation Officer Bloomingdale's
Felicia Williams 51
54		 ExecutiveSenior 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 2014.2014, Chairman and Chief Executive Officer of Macy’s West in San Francisco from February 2008 to February 2009 and Chairman and Chief Executive Officer of Seattle-based Macy’s Northwest from February 2006 through February 2008.
Tim BaxterPaula A. Price has been Executive Vice President and Chief MerchandisingFinancial Officer of the Company since February 2015;July 2018; prior thereto heshe was a full-time lecturer in the Accounting and Management Unit at Harvard Business School from January 2014 to July 2018 and Executive Vice President GMM - Ready to Wearand Chief Financial Officer of Ahold USA from March 2013 to February 2015; as Executive Vice President - Fashion Office, Licensed Businesses and Multicultural Business Development 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 MarchMay 2009 to July 2010.January 2014.
Elisa D. Garcia has been Executive Vice President, Chief Legal Officer and Secretary of the Company since September 2016; prior thereto she served as Chief Legal Officer of Office Depot, Inc. from December 2013 to September 2016, and as Executive Vice President General Counsel and Secretary from July 2007 to September 2016 and General Counsel from July 2007 to December 2013.
Robert B. HarrisonJohn T. Harper has been Executive Vice President, 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. Kantor has been Chief Stores and Human Resources Officer of the Company since February 2017;2020; prior thereto he served as Chief Stores Officer from February 2015September 2017 to February 2017; as ChairmanJanuary 2020, President 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 HomeStore Operations from May 2009 to August 2010 and asSeptember 2017, President for furniture forof Macy’s Home Store from February2007 to 2009, Vice Chairman of Macy’s Midwest from 2006 to May 2009.2007 and Chairman of Hecht’s department stores from 2004 to 2006.
Molly Langenstein

Danielle L. Kirgan has been Executive Vice President and Chief Private BrandsTransformation Officer of the Company since February 2015;2020 and Chief Human Resources Officer since October 2017; prior thereto she served as Executive Vice President - Men’s and Kids at Macy’s Private Brands from April 2014 to February 2015; as Executive Vice President GMM - Millennial from March 2012 to March 2014; as Executive Vice President Fashion and New Business Development from July 2010 to March 2012 and as Group Vice President DMM Neo, Impulse and Bridge Sportswear from March 2009 to July 2010.
Richard A. Lennox has been Chief Marketing Officer of the Company since September 2016; prior thereto he served as Senior Vice President, andPeople at American Airlines Group, Inc. from October 2016 to October 2017, Chief Marketing Officer of Toys “R” Us from mid-2014 to September 2016; and as Executive Vice President/Chief Marketing and E-CommerceHuman Resources Officer at Zale’s CorporationDarden Restaurants, Inc. from August 2009January 2015 to July 2014.


Justin MacFarlane has been Chief Strategy, AnalyticsOctober 2016 and Innovation Officer since February 2016; prior thereto he served as Senior Vice President - Corporate Strategy for ANN, Inc., a women's multichannel fashion retailer, from JulyMay 2010, to August 2015 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 Officer of the Company since February 2015; prior thereto she served as Executive Vice President, - Omnichannel StrategiesGlobal Human Resources at ACI Worldwide, Inc. from June 2014 - February 2015; as ExecutiveJanuary 2009 to December 2009, and Vice President, GMM - Center CoreHuman Resources at Conagra Foods, Inc. from October 20102004 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 2005.2008.
Felicia Williams has been ExecutiveSenior 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.


Item 1A.Risk Factors.
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 facesrecent outbreak of COVID-19 may have a significant competition in the retail industry and dependsnegative impact on its ability to differentiate itself in retail's ever-changing environment.
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 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 effectively could negatively affect the Company's business and financial results
In December 2019, there was an outbreak of COVID-19 in China that has since spread to many other regions of the world. The outbreak was subsequently labeled as a global pandemic by the World Health Organization in March 2020. As the pandemic continues to spread throughout the United States, businesses as well as federal, state and local governments have implemented significant actions to attempt to mitigate this public health crisis. Although the ultimate severity of the COVID-19 outbreak is uncertain at this time, the pandemic may have adverse impacts on the Company's financial condition and results of operations.operations, including, but not limited to:
As consumersThe Company may experience significant reductions or volatility in demand for its retail products as customers may not be able to purchase merchandise due to illness, quarantine or government or self-imposed restrictions placed on our stores' operations. Currently all of our stores are closed and will remain closed until it is safe to reopen. Additionally, social distancing measures or changes in consumer spending behaviors due to COVID-19 may continue to migrate online,impact traffic in our stores after they resume normal operations and such actions could result in a loss of sales and profit.
The Company may experience temporary or long-term disruptions in its supply chain, as the outbreak has resulted in travel disruptions and has impacted manufacturing and distribution throughout the world. We anticipate that the receipt of products or raw material sourced from impacted areas will be slowed or disrupted in the coming months and our brand partners are expected to face similar challenges in fulfilling our orders for their merchandise. Furthermore, transportation delays and cost increases, more extensive travel restrictions, closures or disruptions of businesses and facilities or social, economic, political or labor instability in the affected areas, may impact our or our suppliers' operations or our customers.
The Company may be required to change its plan for inventory receipts which would place financial pressure on our brand partners. Such actions may negatively impact our relationships with our brand partners or adversely impact their financial performance and position. If this occurs, our current brand partners' ability to meet their obligations to the Company faces pressuresmay be impacted or we may also be required to identify new brand partner relationships.
The Company's liquidity may be negatively impacted if its stores do not only compete from a price perspective withresume normal operations and the Company may be required to pursue additional sources of financing to meet its competitors, some of whom sell the same products, but also must differentiate itselffinancial obligations. Obtaining such financing is not guaranteed and is largely dependent upon market conditions and other factors. Further actions may be required 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 betweenimprove the Company's brickcash position, including but not limited to, monetizing Company assets, implementing employee furloughs, and mortar locationsforegoing capital expenditures and its onlineother discretionary expenses.
The extent of the impact of COVID-19 on the Company's operations and mobile environments. Insufficient, untimelyfinancial results depends on future developments and is highly uncertain due to the unknown duration and severity of the outbreak. The situation is changing rapidly and future impacts may materialize that are not yet known.



Strategic, Operational and Competitive Risks

Our strategic initiatives may not be successful, which could negatively affect our profitability and growth.
In February 2020, we announced the Polaris strategy, a three-year plan designed to stabilize profitability and position the Company for sustainable, profitable growth. Our ability to achieve sustainable, profitable growth is subject to the successful implementation of our strategic plans, including the Polaris strategy, and realization of anticipated benefits and savings. If these investments or misguided investments in this area could significantly impact the Company'sinitiatives do not perform as expected or create implementation or operational challenges, we may incur impairment charges and our 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 satisfyattract and retain 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 costscost of basic necessities and other goods, the strength of the U.S. Dollar relative to foreign currencies and the effects of the weather, natural disasters or natural disasters.health pandemics. These factors can have psychological or economic impacts on consumers that affect their discretionary spending habits. Any decline in discretionary spending by consumers could negatively affect the Company'sour business and results of operations.

We face significant competition in the retail industry.

We conduct our retail merchandising business under highly competitive conditions. Although Macy's is one of the nation’s largest retailers, we have numerous and varied competitors at the national and local levels, including department stores, specialty stores, general merchandise stores, manufacturers’ outlets, off-price and discount stores, online retailers, catalogs and television shopping, among others. Competition is characterized by many factors, including assortment, advertising, price, quality, service, location, reputation and credit availability. Any failure by us to compete effectively could negatively affect our business and results of operations.
We face challenges as consumers migrate to online shopping and we depend on our ability to differentiate Macy's in retail's ever-changing environment.
As consumers continue to migrate online, we face pressures to not only compete from a price perspective with our competitors, some of whom sell the Company reliessame products, but also to differentiate Macy's to stay relevant in retail's ever-changing environment. We continue to significantly invest in our omnichannel capabilities to provide a seamless shopping experience to our customers between our store locations and our online and mobile environments. Insufficient, untimely or misguided investments in this area could significantly impact our profitability and growth and affect our ability to attract new customers, as well as maintain our existing ones.
In addition, declining customer store traffic and migration of sales from brick and mortar stores to digital platforms could lead to additional store closures, restructuring and other costs that could adversely impact our results of operations and cash flows.
Our ability to grow depends in part on our stores remaining relevant to customers.
We are investing in facilities and fixtures upgrades, merchandise assortment and customer service in selected stores to improve customer retention rates and overall customer satisfaction. Some stores are receiving targeted local marketing plans to drive customer traffic. While these stores with the "Growth Treatment" have outperformed the remainder of our store fleet, there can be no assurance that we will be able to achieve continued improvement in our store business.
Because we rely on the ability of itsour physical retail locations to remain relevant to customers, providing desirable and sought-out shopping experiences is paramountcritical 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 mallon- and off-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 other unrelated third-parties. Due to the cyclical nature of real estate markets, the performance of our real estate strategy is inherently volatile and could have a significant impact on our results of operations or financial condition.
Our revenues and cash requirements are affected by the seasonal nature of our business.
Our business is seasonal, with a high proportion of revenues and operating cash flows generated during the second half of the year, which includes the fall and holiday selling seasons. A disproportionate amount of our revenues is in the fourth quarter, which coincides with the holiday season. Should holiday sales fall below our expectations, a disproportionately negative impact on our results of operations could occur.
We incur significant additional expenses in the period leading up to the months of November and December in anticipation of higher sales volume in those periods, including costs for additional inventory, advertising and employees. If we are not successful in selling inventory, we may have to sell the inventory at significantly reduced prices or may not be able to sell the inventory at all, which could have a material adverse effect on our results of operations and cash flows.
We depend on our ability to attract, train, develop and retain quality employees.
Our business is dependent upon attracting, training, developing and retaining quality employees. Macy's has a large number of employees, many of whom are in entry level or part-time positions with historically high rates of turnover. The Company’sability to meet our labor needs while controlling costs associated with hiring and training new employees is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics. In addition, as a large and complex enterprise operating in a highly competitive and challenging business environment, Macy's is highly dependent upon management personnel to develop and effectively execute successful business strategies and tactics. Any circumstances that adversely impact our ability to attract, train, develop and retain quality employees throughout the organization could negatively affect our business and results of operations.
We depend on the success of advertising and marketing programs.
Our business depends on effective marketing to create high customer traffic at stores and online. Macy's has many initiatives in this area, and we often change advertising and marketing programs to attract customers and increase sales. There can be no assurance as to our continued ability to effectively execute our advertising and marketing programs, and any failure to do so could negatively affect our business and results of operations.
If cash flows from our private label credit card decrease, our financial and operational results may be negatively impacted.
We previously sold most of our credit accounts and related receivables to Citibank. Following the sale, we share in the economic performance of the credit card program with Citibank. Deterioration in economic or political conditions could adversely affect the volume of new credit accounts, the amount of credit card program balances and the ability of credit card holders to pay their balances. These conditions could result in Macy’s receiving lower payments under the credit card program.
Credit card operations are subject to many federal and state laws that may impose certain requirements and limitations on credit card providers. Citibank and our subsidiary bank, FDS Bank, may be required to comply with regulations that may negatively impact the operation of our private label credit card. This negative impact may affect our revenue streams derived from the sale of such credit card accounts and our financial results.
Gross margins could suffer if we are unable to effectively manage our inventory.
Our profitability depends on our ability to manage inventory levels and respond to shifts in consumer demand patterns. Overestimating customer demand for merchandise will likely result in the need to record inventory markdowns and sell excess inventory at clearance prices which would negatively impact our gross margins and operating results. Underestimating customer demand for merchandise can lead to inventory shortages, missed sales opportunities and negative customer experiences.
Our defined benefit plan funding requirements or plan settlement expense could impact our financial results and cash flow.
Significant changes in interest rates, decreases in the fair value of plan assets and timing and amount of benefit payments could affect the funded status of our plans and could increase future funding requirements of the plans. A


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


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


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



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



Our business could be affected by extreme weather conditions, natural disasters or regional or global health pandemics.
Extreme weather conditions in the areas in which our stores are located could negatively affect our business and results of operations. For example, frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather conditions over a prolonged period could make it difficult for our customers to travel to our stores and thereby reduce our sales and profitability. Our business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could reduce demand for a portion of our inventory and thereby reduce our sales and profitability. In addition, extreme weather conditions could result in disruption or delay of production and delivery of materials and products in our supply chain and cause staffing shortages in our stores.
Natural disasters such as hurricanes, tornadoes and earthquakes, or a combination of these or other factors, could damage or destroy our facilities or make it difficult for customers to travel to our stores, thereby negatively affecting our business and results of operations.
Our business and results of operations could also be negatively affected if a regional or global health pandemic were to occur, depending upon its location, duration and severity. Customers might avoid public places, such as our stores, or in extreme cases governments might limit or ban public gatherings or travel, resulting in temporary store closures or changes in consumer spending behavior. A regional or global health pandemic might also result in disruption or delay of production and delivery of materials and products in our supply chain and cause staffing shortages in our stores.
Litigation, legislation or regulatory developments could adversely affect our business and results of operations.
We are subject to various federal, state and local laws, rules, regulations, inquiries and initiatives in connection with both our core business operations and our credit card and other ancillary operations (including the Credit Card Act of 2009 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010). Recent and future developments relating to such matters could increase our compliance costs and adversely affect the profitability of our credit card and other operations. Our effective tax rate is impacted by a number of factors, including changes in federal or state tax law, interpretation of existing laws and the ability to defend and support the tax positions taken on historical tax returns. Certain changes in any of these factors could materially impact the effective tax rate and the Company's net income.
The Company’s revenues and cash requirementsWe 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’s 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’s stores are located could negatively affect the Company’s 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’s customers to travel to its stores and thereby reduce the Company’s sales and profitability. The Company’s business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could reduce demand for a portion of the Company’s inventory and thereby reduce the Company's 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's supply chain and cause staffing shortages in the Company's stores.
The Company's 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's 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's supply chain and cause staffing shortages in the Company's stores.
In addition, natural disasters such as hurricanes, tornadoes and earthquakes, or a combination of these or other factors, could damage or destroy the Company’s facilities or make it difficult for customers to travel to its stores, thereby negatively affecting the Company’s 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’s business and results of operations.
The Company is subject to various federal, state and local laws, rules, regulations, inquiries and initiatives in connection with both its core business operations and its 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”)).


Recent and future developments relating to such matters could increase the Company's compliance costs and adversely affect the profitability of its credit card and other operations. The Company is 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;
adverse business announcements by our competitors;
variations in the Company’sour quarterly results of operations;
future sales or purchases of the Company’sMacy’s common stock; and
investor perceptions of the investment opportunity associated with the Company’sMacy’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 thatwho 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’sMacy’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’sMacy’s common stock.


Item 1B.Unresolved Staff Comments.
None.
 


Item 2.Properties.
The properties of the Company consist primarily of stores and related facilities, including 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 1, 2020, the operations of the Company were reviewed by management using store locations which combines multi-box properties into a single location, whereas the previous property information was provided solely by number of individual store boxes.
As of February 1, 2020, the operations of the Company included 829 stores775 store locations in 4543 states, the District of Columbia, Puerto Rico and Guam, comprising a total of approximately130approximately 120 million square feet. Of such stores, 382 wereAt these locations, store boxes consisted of 342 owned 330 wereboxes, 384 leased 113 stores wereboxes, 108 boxes operated under arrangements where the Company owned the building and leased the land and 4 stores were comprisedfive boxes of partly owned and partly leased buildings. All owned properties are held free and clear of mortgages. Pursuant to various shopping center agreements, the Company is obligated to operate certain stores for periods of up to 2015 years. Some of these agreements require that the stores be operated under a particular name. Most leases require the Company to pay real estate taxes, maintenance and other costs; some also require additional payments based on percentages of sales and some contain purchase options. Certain of the Company’s real estate leases have terms that extend for a significant number of years and provide for rental rates that increase or decrease over time.


The Company's operations were conducted through the following branded store locations:
2019
2016 2015 2014Boxes Locations
Macy's673
 737
 773
613
 551
Bloomingdale's55
 54
 50
55
 53
Bluemercury101
 77
 —
bluemercury171
 171
829
 868
 823
839
 775


Store count activity was as follows:
2019
2016 2015 2014Boxes Locations
Store count at beginning of fiscal year868
 823
 840
867
 800
Stores opened27
 26
 5
12
 12
Acquisition of Bluemercury stores—
 62
 —
Stores closed or consolidated into existing centers(66) (43) (22)
Stores closed, consolidated into or relocated from existing centers(40) (37)
Store count at end of fiscal year829
 868
 823
839
 775
Additional information about the Company’s storesstore boxes as of January 28, 2017February 1, 2020 is as follows:
 
Geographic Region Total Owned Leased 

Subject to
a Ground
Lease
 
Partly Owned and Partly
Leased
North Central 142
 84
 38
 20
 —
Northeast 250
 90
 132
 28
 —
Northwest 131
 44
 62
 22
 3
South 179
 116
 42
 21
 —
Southwest 127
 48
 56
 22
 1
  829
 382
 330
 113
 4
By Brand Total Owned Leased 

Subject to
a Ground
Lease
 
Partly Owned and Partly
Leased
Macy's 613
 329
 178
 101
 5
Bloomingdale's 55
 13
 35
 7
 —
bluemercury 171
 —
 171
 —
 —
  839
 342
 384
 108
 5




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 1, 2020 is as follows:
Location Primary Function Owned or Leased Square Footage (thousands)
Cheshire, CT Direct to customer Owned 565725

Chicago, IL Stores Owned 861

Columbus, OHStoresLeased673
Dayton, OHStoresLeased107
Denver, CO Stores Leased 20

Goodyear, AZ Direct to customer Owned 9601,560

Hayward, CA Stores Owned 386310

Houston, TX Stores Owned 1,124992

Joppa, MD Stores Owned 850

Kapolei, HI Stores OwnedLeased 260

Los Angeles, CA Stores Owned 1,1781,529

Martinsburg, WV Direct to customer Owned 1,3002,200

Miami, FL Stores Leased 535

Portland, TN Direct to customer Owned 9501,455

Raritan, NJ Stores Owned 980

Sacramento, CA Direct to customer Leased 385

Secaucus, NJ Stores Leased 675

South Windsor, CT Stores Owned 510595

Stone Mountain, GA Stores Owned 1,000920

Tampa, FL Stores Owned 670585

Tulsa, OK Direct to customer Owned 1,3002,195

Tukwila, WA Stores Leased 500

Union City, CA Stores Leased 165

Youngstown, OH Stores Owned 851645





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




Item 4.Mine Safety Disclosures.
Not applicable.



PART II
 
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Common StockCompany's common stock is listed on the NYSENew York Stock Exchange under the trading symbol “M.” As of January 28, 2017February 1, 2020, the Company had approximately 16,20014,000 stockholders of record. The following table sets forth for each quarter during 2016 and 2015 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
 Low High Dividend Low High Dividend
1st Quarter37.71
 45.50
 0.3600
 61.10
 69.98
 0.3125
2nd Quarter29.94
 40.15
 0.3775
 62.80
 73.61
 0.3600
3rd Quarter31.02
 40.98
 0.3775
 47.10
 70.12
 0.3600
4th Quarter28.55
 45.41
 0.3775
 34.05
 52.48
 0.3600


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 Stockcommon stock during the fourth quarter of 20162019.
 
 
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, 2016727
 42.90
 727
 1,763
November 27, 2016 – December 31, 20161,152
 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 Paid per
Share ($)
Number of Shares
Purchased as Part of Publicly Announced Plans or Programs (1)
Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs ($)(1)
(thousands)(thousands)(millions)
November 3, 2019 - November 30, 2019—
—
—
1,716
December 1, 2019 - January 4, 2020—
—
—
1,716
January 5, 2020 - February 1, 2020—
—
—
1,716
—
—
—
 ___________________
(1)
CommencingBeginning in January 2000, the Company’s Board of Directors has from time to time approved various authorizations to purchase, in the aggregate, up to $18 billion of Common Stock. All authorizations are cumulative and do not have an expiration date.common stock. As of January 28, 2017February 1, 2020, $1,716 million of authorization remained unused. The Company may continue, discontinue or resume purchasesOn March 26, 2020, the Company's Board of Common Stock under these or possible future authorizations inDirectors rescinded its authorization of the open market, in privately negotiated transactions or otherwise at any time and from time to time without prior notice.remaining unused amount.



The following graph compares the cumulative total stockholder return on the Common StockCompany's common stock with the Standard & Poor's 500 Composite Index and the Company's peer group for the period from January 28, 201231, 2015 through January 28, 2017,February 1, 2020, assuming an initial investment of $100 and the reinvestment of all dividends, if any.
chart-c7544aa5aac05f6cb98.jpg


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



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








Item 6.Selected Financial Data.
The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and the notes thereto and the other information contained elsewhere in this report. The Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), on February 3, 2019, using a modified retrospective approach that allowed for transition in the period of adoption. Therefore, results prior to 2019 have not been recast for the adoption of this standard. Additionally, the Company adopted the ASU No. 2014-09, Revenue from Contracts with Customers, on February 4, 2018 using the full retrospective transition method and recast results from 2017 and 2016. Results from 2015 have not been recast for the adoption of this standard.
 
2016 2015 2014 2013 2012*2019 2018 2017* 2016 2015
(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
$24,560
 $24,971
 $24,939
 $25,908
 $27,079
Cost of sales(15,621) (16,496) (16,863) (16,725) (16,538)
Gross margin10,157
 10,583
 11,242
 11,206
 11,148
Selling, general and administrative expenses(8,265) (8,256) (8,355) (8,440) (8,482)
Impairments, store closing and other costs(479) (288) (87) (88) (5)
Settlement charges(98) —
 —
 —
 —
Gross margin (a)9,389
 9,756
 9,758
 10,242
 10,583
Operating income1,315
 2,039
 2,800
 2,678
 2,661
970
 1,738
 1,864
 1,371
 2,028
Interest expense(367) (363) (395) (390) (425)
Premium on early retirement of debt—
 —
 (17) —
 (137)
Interest income4
 2
 2
 2
 3
Income before income taxes952
 1,678
 2,390
 2,290
 2,102
Federal, state and local income tax expense(341) (608) (864) (804) (767)
Net income611
 1,070
 1,526
 1,486
 1,335
564
 1,098
 1,555
 619
 1,070
Net loss attributable to noncontrolling interest8
 2
 —
 —
 —
Net income attributable to Macy's, Inc. shareholders$619
 $1,072
 $1,526
 $1,486
 $1,335
564
 1,108
 1,566
 627
 1,072
                  
Basic earnings per share attributable to
Macy's, Inc. shareholders		$2.01
 $3.26
 $4.30
 $3.93
 $3.29
$1.82
 $3.60
 $5.13
 $2.03
 $3.26
Diluted earnings per share attributable to
Macy's, Inc. shareholders		$1.99
 $3.22
 $4.22
 $3.86
 $3.24
$1.81
 $3.56
 $5.10
 $2.02
 $3.22
Average number of shares outstanding308.5
 328.4
 355.2
 378.3
 405.5
309.7
 307.7
 305.4
 308.5
 328.4
Cash dividends paid per share$1.4925
 $1.3925
 $1.1875
 $.9500
 $.8000
$1.51
 $1.51
 $1.51
 $1.49
 $1.39
Depreciation and amortization$1,058
 $1,061
 $1,036
 $1,020
 $1,049
$981
 $962
 $991
 $1,058
 $1,061
Capital expenditures$912
 $1,113
 $1,068
 $863
 $942
$1,157
 $932
 $760
 $912
 $1,113
Balance Sheet Data (at year end):                  
Cash and cash equivalents$1,297
 $1,109
 $2,246
 $2,273
 $1,836
$685
 $1,162
 $1,455
 $1,297
 $1,109
Property and equipment - net6,633
 6,637
 6,672
 7,017
 7,616
Total assets19,851
 20,576
 21,330
 21,499
 20,858
21,172
 19,194
 19,583
 20,082
 20,576
Short-term debt309
 642
 76
 463
 124
539
 43
 22
 309
 642
Long-term debt6,562
 6,995
 7,233
 6,688
 6,768
3,621
 4,708
 5,861
 6,562
 6,995
Total Shareholders’ equity4,322
 4,253
 5,378
 6,249
 6,051
6,377
 6,436
 5,733
 4,375
 4,253
 ___________________
*53 weeks

(a) Gross margin is defined as net sales less cost of sales.













Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The discussion in this Item 7 should be read in conjunction with the Consolidated Financial Statements and the related notes included elsewhere in this report. The discussion in this Item 7 contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in “Risk Factors” and “Forward-Looking Statements.”
Company Overview


The Company is an omnichannel retail organization operating stores, websites and mobile applications under three brands (Macy's, Bloomingdale's and Bluemercury)bluemercury) that sell a wide range of merchandise, including apparel and accessories (men's, women's and children's)kids'), cosmetics, home furnishings and other consumer goods. The Company operates 829 stores in 45 states, the District of Columbia, Guam and Puerto Rico. As of January 28, 2017,February 1, 2020, the Company's operations were conducted through Macy's, Bloomingdale's, Macy’s Backstage, Bloomingdale’s The Outlet Macy’s Backstage, Bluemercury and Macy’s China Limitedbluemercury, which are aggregated into one reporting segment in accordance with the Financial Accounting Standards Board (“FASB”)FASB Accounting Standards Codification (“ASC”) Topic 280, “SegmentSegment Reporting.”


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

Continuing with its 3-year plan introduced in 2017, the Company continuescontinued the implementation of its North Star strategy to be focused on key strategies for growth in sales, earnings and cash flow in the years ahead that include:
Transforming thetransform its omnichannel business and focusingfocus on key growth areas,
Embracing embrace customer centricity, including a simplified value proposition, and
Optimizing value in the real estate portfolio.

These strategies continue 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.

The Company remains focused on driving additional profitable sales growth through a series of organic and new business initiatives. The initiatives include a focus on fine jewelry, watches and women’s shoes, a reinvention of the beauty business that includes 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, 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.

In 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. 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.







The Company’s 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, the Company had property and equipment sales, primarily related to real estate, totaling $673 million in cash proceeds and recognized real estate gains of $209 million. This includes the sale of its 248,000 square-foot Union Square Men’s building 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.
In January 2017, the Company finalized the formation of a strategic alliance with Brookfield Asset Management, a leading global alternative asset manager, to create increasedoptimize value in its real estate portfolio. UnderThe key components to this strategy were:
1.
FromFamiliar to Favorite included everything the Company does to further its brand awareness and identity to its core customers.
2.
It Must Be Macy’s encompassed delivering the products and experiences customers love and are exclusive to the Company.
3.
Every Experience Matters, in-store and online leveraged the Company's competitive advantage in combining the human touch in its physical stores with cutting-edge technology in its mobile applications and websites.
4.
Funding our Future represented the decisions and actions the Company took to identify and realize resourcesto fuel growth.
5.
What’s New, What’s Next explored and developed innovation ideas to turn consumer and technology trends to the Company's advantage and to drive growth.

During 2019, the alliance, Brookfield hasCompany executed its five 2019 key strategic initiatives underlying components of the North Star strategy. The following summarizes how these initiatives contributed to 2019 results.
In 2019, the Company expanded the growth treatment to an exclusive right for up to 24 months to create a “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 breadth of opportunity within the portfolio rangesadditional 100 locations, from the additional development onoriginal 50 locations in 2018. The Growth150 locations (a mix of stores where the Company accelerated a portionnumber of an asset (suchsuccessful store initiatives, such as a Company-controlled land parcel adjacent to a store)facility upgrades, merchandising strategies, and localized marketing) contributed to the complete redevelopmentoperating results for 2019, with sales results outperforming the other Macy's store locations.
Continued the expansion of an existing store.  Once a "pre-development plan" is created, the Company has the option to contribute the asset into a joint venture for the development plan to commence or sell the asset to Brookfield. If the Company chooses to contribute the asset into a joint venture, the Company may elect to participate as a funding or non-funding partner. After development, the joint venture may sell the asset and distribute proceeds accordingly.
On February 28, 2017, the Company sold its downtown Minneapolis store and parking facility for $59 million of proceeds and a gain of approximately $47 million that is expected to be recognized in the first quarter of 2017. The downtown Minneapolis store will close in early 2017.

In 2015,Backstage, Macy's mall-based off-price business, the Company opened the first six freestanding pilot stores in Macy's50 new off-price business, Macy's Backstage, in the New York City metro area. The Macy's Backstage locations average about 30,000 square feet and sell an assortment of women's, men's and children's apparel, cosmetics, shoes, fashion accessories, housewares, home textiles, toys intimate apparel and jewelry. The Company is now focused on opening Macy's Backstagewithin Macy’s stores within existing Macy's store locations as a way of increasing store productivity, increasingduring 2019. This expansion brings the number of shopping trips to Macy's and attracting new customers. As of January 28, 2017, the Company is operating 22 Macy'stotal Backstage locations (7to 218 (six freestanding and 15212 inside Macy's stores). as of February 1, 2020.
The Company's vendor direct program (merchandise purchased from the Company's websites and digital applications and shipped directly to customers from the respective vendor) continued its expansion during 2019, adding more than 1 million SKUs and 1,000 new vendors.
The mobile-first strategy has continued to create an improved omnichannel experience for customers through the enhancement of app features, such as My Wallet, My Store and My Stylist. Mobile remains the Company's fastest growing channel, with downloads and mobile active users experiencing significant growth during 2019.

In March 2015,
Sales at the Company's destination businesses (six merchandise categories: dresses, fine jewelry, big ticket, men's tailored, women's shoes and beauty) grew in 2019 as the Company completedinvested in these categories through merchandise assortment, customer service, improved store environments, and enhanced marketing.

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

The Company continued to grow its luxury beauty products and spa retailer. The Company is focused on accelerating the growth of sales inretailer, bluemercury, by opening nine 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 brand also launched its first loyalty program, Bluerewards, during 2019. As of February 1, 2020, the Company opened 24 new freestanding Bluemercury stores and 15 new Bluemercuryoperated 191 bluemercury locations inside existing Macy's stores and as of January 28, 2017, the Company is operating 120 Bluemercury locations (101(171 freestanding and 1920 inside Macy's stores).


In August 2015, the Company established a joint venture,2019 Financial Results
Specific 2019 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 theInc. financial operations of Macy's China Limited, with the thirty-five percent ownership reported as a noncontrolling interest.performance included:



In early 2017, the Company opened a Macy’s store at Fashion Place in Murray, UT and plansNet sales decreased 1.6% compared 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.
Selected results of 2016 include:
Comparable sales on an owned basis decreased 3.5%0.8% and comparable sales on an owned plus licensed basis decreased 2.9%0.7%.
Operating income for 2016 was $1.892 billion or 7.3% of sales, excluding impairments,Asset sale gains decreased $227 million to $162 million compared to 2018.
Restructuring, impairment, store closing and other costs increased $218 million to $354 million compared to 2018 driven by the restructuring activities, store closures and settlement charges,campus consolidation plans related to the Polaris strategy.
Net income attributable to Macy's, Inc. shareholders for 2019 was $564 million, a decrease of 18.7% and 130 basis points as a percent of sales$544 million from 2015 on a comparable basis.$1,108 million in 2018.
Diluted earnings per share attributable to Macy's, Inc. shareholders decreased to $1.81 in 2019 compared to $3.56 in 2018. Excluding restructuring, impairment, store closing and other costs, settlement charges, and losses on early retirement of debt, adjusted diluted earnings per share attributable to Macy's, Inc. shareholders decreased to $2.91 in 2019 from $4.18 in 2018. In addition, excluding certain items, declined 17.5%asset sales gains, adjusted diluted earnings per share attributable to $3.11Macy's, Inc. shareholders decreased to $2.53 in 20162019 from $3.77$3.26 in 2015.2018.
Adjusted EBITDA (earningsEarnings before interest, taxes, depreciation and amortization impairments,excluding restructuring, impairment, store closing and other costs and settlement charges) as a percent to net salescharges ("Adjusted EBITDA") was 11.4%$2,336 million in 2016,2019, as compared to 12.5%$2,877 million in 2015.2018.
Return on invested capital ("ROIC"), a key measure of operating productivity, was 18.5%, a decrease from 20.1% in 2015.17.1% for 2019 and 19.9% for 2018.
Net cash provided by operating activities, net of cash used by investing activities increased significantly in 2016 as compared to 2015.
TheIn 2019, the Company repurchased 7.9$525 million shares of its common stock for $316debt in a tender offer. In 2018, the Company repurchased $1,094 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, consisting of $344 million of debt repurchased in the dividendopen market and $750 million of debt repurchased in the past five years.a tender offer.
See pages 2030 to 2334 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.


Strategic Initiative Update

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


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

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

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

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


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

Presentation of Information

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





Results of Operations
  2019  2018  2017 
  Amount % to Sales  Amount % to Sales  Amount % to Sales 
  (dollars in millions, except per share figures) 
Net sales $24,560
    $24,971
    $24,939
   
Increase (decrease) in comparable sales (0.8)%  1.7
%  (2.2)% 
Credit card revenues, net 771
 3.1
%768
 3.1
%702
 2.8
%
               
Cost of sales (15,171) (61.8)%(15,215) (60.9)%(15,181) (60.9)%
Selling, general and administrative expenses (8,998) (36.6)%(9,039) (36.2)%(8,954) (35.9)%
Gains on sale of real estate 162
 0.6
%389
 1.5
%544
 2.2
%
Restructuring, impairment, store closing and other costs (354) (1.4)%(136) (0.5)%(186) (0.7)%
Operating income 970
 3.9
%1,738
 7.0
%1,864
 7.5
%
Benefit plan income, net 31
   39
   57
   
Settlement charges (58)   (88)   (105)   
Interest expense - net (185)    (236)    (310)   
Gains (losses) on early retirement of debt (30)    (33)    10
   
Income before income taxes 728
    1,420
    1,516
   
Federal, state and local income tax benefit (expense) (164)    (322)    39
   
Net income 564
    1,098
    1,555
   
Net loss attributable to noncontrolling interest —
    10
    11
   
Net income attributable to Macy's, Inc. shareholders $564
 2.3
%$1,108
 4.4
%$1,566
 6.3
%
                
Diluted earnings per share attributable to
Macy's, Inc. shareholders
 $1.81
    $3.56
    $5.10
   
                
Supplemental Financial Measure               
Gross margin $9,389
 38.2
%$9,756
 39.1
%$9,758
 39.1
%
Digital sales as a percent of comparable sales on an owned basis 26.0
%  23.0
%  22.0
% 
                
Supplemental Non-GAAP Financial Measures               
Increase (decrease) in comparable sales on
an owned plus licensed basis
 (0.7)%  2.0
%  (1.9)% 
Adjusted diluted earnings per share attributable to
Macy's, Inc. shareholders
 $2.91
    $4.18
    $3.79
  
Adjusted EBITDA $2,336
   $2,877
   $3,109
  
ROIC 17.1
%  19.9
%  20.8
% 
                
See pages 30 to 34 for a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measure and for other important information.
                



Comparison of 2019 and 2018
Net Sales and Comparable Sales
Net sales for 2019 were $24,560 million, a decrease of $411 million, or 1.6%, from 2018. The decrease in comparable sales on an owned basis for 2019 was 0.8% compared to 2018. The decrease in comparable sales on an owned plus licensed basis for 2019 was 0.7% compared to 2018. Digital sales continued to be strong in 2019, with digital sales as a percent of net sales increasing to 26.0% from 23.0% in 2018. By family of business, destination businesses including dresses, fine jewelry, fragrances, men's tailored clothing, women's shoes and mattresses performed well during 2019. Sales in 2019 were also strong in active apparel and kids. Sales in 2019 were weak in women's sportswear, handbags, color cosmetics and fashion watches. Sales of Macy's-branded private label brands represented nearly 20% of net sales in the Macy's-branded operations in both 2019 and 2018.
Comparable sales on an owned basis within the Company's three brands, which include store-within-store locations, are as follows:
 2019 2018 
Macy's    
Stores (a) 
65.0% 68.0% 
Digital23.0% 21.0% 
Bloomingdale's    
Stores (a)
8.0% 8.0% 
Digital3.0% 2.0% 
bluemercury1.0% 1.0% 
Total100.0% 100.0% 
(a) Includes Macy's Backstage free-standing locations and Bloomingdale's the Outlets, respectively.
Credit Card Revenues, Net
Net credit card revenues were $771 million for 2019, an increase of $3 million compared to $768 million recognized in 2018. Credit card penetration for 2019 was flat to 2018 at 46.9%. Net credit card revenues for 2019 were primarily driven by strong co-brand sales growth from transactions on the card outside of the Macy's family of brands offset by the decline in net sales and improved profit share associated with the underlying credit card portfolio performance.
Cost of Sales
Cost of sales for 2019 decreased $44 million from 2018. The cost of sales rate as a percent to net sales of 61.8% in 2019 increased 90 basis points in 2018, primarily due to higher promotional markdowns and higher delivery expenses associated with the Company's omnichannel activities, free shipping promotions and loyalty programs.
SG&A Expenses
SG&A expenses for 2019 decreased $41 million from 2018 and the SG&A rate as a percent to net sales increased 40 basis points to 36.6% as compared to 2018. The SG&A dollar reduction reflects lower variable expenses due to lower net sales. In addition, advertising expense, net of cooperative advertising allowances, decreased to $1,142 million in 2019 from $1,162 million in 2018.
Gains on Sale of Real Estate
The Company recognized gains of $162 million in 2019 associated with real estate sales, as compared to $389 million in 2018. 2019 included a gain of $52 million associated with the sale of the Macy's Downtown Seattle location. 2018 included gains of $178 million related to the I. Magnin building in Union Square San Francisco and $58 million related to the continued recognition of the deferred gain from the Macy's Brooklyn transaction which closed in 2015.
Restructuring, Impairment, Store Closing and Other Costs
Restructuring, impairment, store closing and other costs for 2019 and 2018 of $354 million and $136 million, respectively, included severance and other human resource-related costs, asset impairment charges and other costs associated with organizational changes and store closings. 2019 included costs primarily associated with the Polaris strategy, including $161 million of non-cash impairment charges associated with store closures and campus consolidations


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

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








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

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

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

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

During 2018, the Company repurchased $344 million face value of senior notes and debentures. The debt repurchases were made in the open market for a total cost of $354 million, including expenses and other fees related to the transactions. Such repurchases resulted in the recognition of expense of $5 million during 2018 presented as losses on early retirement of debt on the Consolidated Statements of Income.



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

Liquidity

On May 9, 2019, the Company entered into a new credit agreement with certain financial institutions that replaced the previous credit agreement which was set to expire on May 6, 2021. Similar to the previous agreement, the new credit agreement provides for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing). The new credit agreement is scheduled to expire on May 9, 2024, subject to up to two one-year extensions that may be requested by the Company and agreed to by the lenders.

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

The Company is party to a $1,500 million unsecured commercial paper program. The Company may issue and sell commercial paper in an aggregate amount outstanding at any particular time not to exceed its then-current combined borrowing availability under the bank credit agreement with certain financial institutions. There were no borrowings under the program during 2019 and 2018. As of February 1, 2020 and February 2, 2019, there were no remaining borrowings outstanding under the commercial paper program. As a result of the COVID-19 pandemic, the Company's ability to draw on commercial paper is limited.
The credit agreement requires the Company to maintain a specified interest coverage ratio for the latest four quarters of no less than 3.25 and a specified leverage ratio as of and for the latest four quarters of no more than 3.75. The Company's interest coverage ratio for 2019 was 12.68 and its leverage ratio at February 1, 2020 was 1.78, in each case as calculated in accordance with the credit agreement. The interest coverage ratio is defined as EBITDA divided by net interest expense and the leverage ratio is defined as debt divided by EBITDA. For purposes of these calculations EBITDA is calculated as net income plus interest expense, taxes, depreciation, amortization, non-cash impairment of goodwill, intangibles and real estate, settlement charges, non-recurring cash charges not to exceed in the aggregate $200 million and extraordinary losses less interest income and non-recurring or extraordinary gains. Net interest is adjusted to exclude the premium on early retirement of debt.
A breach of a restrictive covenant in the Company's credit agreement or the inability of the Company to maintain the financial ratios described above could result in an event of default under the credit agreement. In addition, an event of default would occur under the credit agreement if any indebtedness of the Company in excess of an aggregate principal amount of $150 million becomes due prior to its stated maturity or the holders of such indebtedness become able to cause it to become due prior to its stated maturity. Upon the occurrence of an event of default, the lenders could, subject to the terms and conditions of the credit agreement, elect to declare the outstanding principal, together with accrued interest, to be immediately due and payable. Moreover, most of the Company's senior notes and debentures contain cross-default provisions based on the non-payment at maturity, or other default after an applicable grace period, of any other debt, the unpaid principal amount of which is not less than $100 million that could be triggered by an event of default under the credit agreement. In such an event, the Company's senior notes and debentures that contain cross-default provisions would also be subject to acceleration.
At February 1, 2020, no notes or debentures contained provisions requiring acceleration of payment upon a debt rating downgrade. However, the terms of approximately $3,359 million in aggregate principal amount of the Company's senior notes outstanding at that date require the Company to offer to purchase such notes at a price equal to 101% of their principal amount plus accrued and unpaid interest if there is both a change of control (as defined in the applicable indenture) of the Company and the notes are rated by specified rating agencies at a level below investment grade.
As of February 1, 2020, the Company's credit rating and outlook were as described in the table below.


Moody'sStandard & Poor'sFitch
Long-term debtBaa3BBB-BBB
OutlookStableStableStable
In February 2020, Standard and Poor's and Fitch downgraded Macy's long-term debt ratings to BB+ and BBB-, respectively. Outlook by Standard and Poor's and Fitch remained at stable. In March 2020, Moody's downgraded the Company's long-term debt rating from Baa3 to Ba1 and changed the outlook to negative.
Dividends
On February 28, 2020, the Company's board of directors declared a quarterly dividend of 37.75 cents per share on its common stock, payable April 1, 2020, to shareholders of record at the close of business on March 13, 2020.
Share repurchases
As of February 1, 2020, the Company had $1,716 million of authorization remaining under its share repurchase program.
Contractual Obligations and Commitments
At February 1, 2020, the Company had contractual obligations (within the scope of Item 303(a)(5) of Regulation S-K) as follows:

 Obligations Due, by Period
Total 
Less than
1 Year
 
1 – 3
Years
 
3 – 5
Years
 
More than
5 Years
(millions)
Short-term debt$539
 $539
 $—
 $—
 $—
Long-term debt3,607
 —
 453
 1,472
 1,682
Interest on debt1,723
 188
 316
 248
 971
Finance lease obligations34
 3
 6
 6
 19
Operating leases (a and b)
6,911
 362
 667
 617
 5,265
Letters of credit34
 34
 —
 —
 —
Other obligations4,274
 2,778
 525
 233
 738
 $17,122
 $3,904
 $1,967
 $2,576
 $8,675
(a) Operating lease payments include $3,240 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $706 million of legally binding minimum lease payments for leases signed but not yet commenced.
(b) Operating lease payments include $1,203 million related to non-lease component payments, with $876 million related to options to extend lease terms that are reasonably certain of being exercised.

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


of tax examinations, and given the status of examinations, the Company cannot reliably estimate the period of any cash settlement with the respective taxing authorities.
Important Information Regarding Non-GAAP Financial MeasuresSettlement Charges
The Company reports its financial results in accordance with U.S. generally accepted accounting principles ("GAAP"). However, management believes that certain non-GAAP financial measures provide users$58 million and $88 million 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, and in evaluating the impact of changes in the manner in which certain departments are operated. Management believes that excluding certain items that may vary substantially in frequency and magnitude period-to-period from diluted earnings per share attributable to Macy's, Inc. shareholders and from operating income 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 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. 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 because the timing and amount of excluded items (e.g., asset impairment charges, retirementnon-cash settlement charges were recognized in 2019 and other store closing related costs)2018, respectively. These charges relate to the pro-rata recognition of net actuarial losses associated with the Company’s defined benefit retirement plans and are unreasonably difficult to fullythe result of lump sum distributions associated with retiree distribution elections and accurately estimate.restructuring activity.
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 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 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.Net Interest Expense


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,interest expense, 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.
  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 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.
  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 of the non-GAAP financial measure earnings before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted to exclude premiumlosses on early retirement of debt, impairments, store closingfor 2019 decreased $51 million from 2018. This decrease was primarily driven by the reduction in the Company's debt resulting from the tender offer and other costs and settlement charges ("Adjusted EBITDA"), as a percent to net sales to GAAP net income as a percent to net sales, whichopen market repurchases in 2018.
Losses on Early Retirement of Debt
In 2019, the Company believes to becompleted a tender offer debt repurchase of $525 million face value of senior notes and debentures. As a result of these transactions, the most directly comparable GAAP financial measure.
Company recognized $30 million in expenses and fees.
  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
TheIn 2018, the Company defines ROIC as adjusted operating income asrepurchased $344 million face value of senior notes and debentures and completed a percent to average invested capital. Average invested capital is comprisedtender offer debt repurchase of an annual two-point (i.e., end$750 million face value of senior notes and debentures. As a result of these transactions, the Company recognized $33 million in expenses and fees net of the year presentedwrite-off of unamortized debt premiums.
Effective Tax Rate
The Company's effective tax rate was expense of 22.5% for 2019 and 22.7% for 2018 compared to the immediately preceding year) averagefederal income tax statutory rate of gross property21%. The federal income tax statutory rate of 21% reflects U.S. federal tax reform enacted in 2017. The effective tax rates in 2019 and equipment, a capitalized value2018 were impacted by the settlement of non-capitalized leases equal to periodic annual reported net rent expense multiplied by a factor of eightcertain state 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.local tax matters.
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%





Results 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 of 2016 and 2015
Net Income Attributable to Macy's, Inc. Shareholders
Net income attributable to Macy's, Inc. shareholders for 20162019 decreased $544 million compared to 2015, reflecting2018, driven by lower salesearnings before interest and gross margin and higher selling, general and administrative expenses, impairments, store closing costs and other costs, settlement charges and net interest expense,taxes ("EBIT") partially offset by lower net interest expense and lower federal, state, and local income taxestax expense.








Cash Flow, Liquidity and Capital Resources
The Company's principal sources of liquidity are cash from operations, cash on hand and the credit facility described below.
Because of the COVID-19 outbreak, there is significant uncertainty surrounding the potential impact on the Company's results of operations and cash flows. The Company is proactively taking steps to increase available cash on hand including, but not limited to, targeted reductions in 2016 asdiscretionary operating expenses and capital expenditures, and utilizing funds available under the Company's credit agreement. The Company may pursue additional sources of financing to improve its liquidity. However the disruption of the capital markets caused by the COVID-19 outbreak could make any financing more challenging and there can be no assurance that the Company will be able to obtain such additional financing on commercially reasonable terms or at all.

Operating Activities
Net cash provided by operating activities was $1,608 million in 2019 compared to 2015.
Net Sales
Net sales for 2016 decreased $1,3011,735 million or 4.8% compared to 2015. in 2018. The decline was driven by lower EBITDA and a 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 pages 20 and 21 for information regarding the Company's calculation of comparable sales, a reconciliation of the non-GAAP measurenon-merchandise accounts payable, 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
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. 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 2016 increased $9 million from 2015 and the SG&A rate as a percent to net sales of 32.0% 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, SERPtax payments and defined contribution plan expenses)a net improvement in merchandise inventory and payables.
Investing Activities
Net cash used by investing activities for 2019 was $1,002 million, lower advertisingcompared to net cash used by investing activities of $456 million for 2018. Investing activities for 2019 included purchases of property and equipment totaling $902 million and capitalized software of $255 million, compared to purchases of property and equipment totaling $657 million and capitalized software of $275 million for 2018. The increase in capital expenditures was largely driven by the Company's Growth store investments, which expanded to another 100 stores in 2019, and Backstage strategic initiatives.
In 2019, the Company continued to execute on its real estate strategy that includes creating value through monetization and, in some cases, redevelopment of real estate assets. Overall, property and equipment sales, primarily related to real estate, generated cash proceeds of $185 million in 2019 compared to $474 million in 2018.
Financing Activities
Net cash used by the Company for financing activities was $1,123 million for 2019, including the repayment of $597 million of debt, the payment of $466 million of cash dividends and a $62 million decrease in outstanding checks. 2019 debt repayments included the repayment at maturity of $36 million of 8.5% senior debentures.

During December 2019, the Company completed a tender offer and purchased $525 million in aggregate principal amount of certain senior unsecured notes and debentures. The purchased senior unsecured notes and debentures included $190 million of 4.375% senior notes due 2023, $113 million of 6.9% senior debentures due 2029, $110 million of 2.875% senior notes due 2023, $100 million of 3.875% senior notes due 2022, and $12 million of 7.0% senior debentures due 2028. The total cash cost for the tender offer was $553 million. The Company recognized $30 million of expense net of cooperative advertising allowances andrelated to the impactrecognition 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. 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. 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.
Impairments, Store Closing and Other Costs
Impairments, store closingtender premium and other costs for 2016 includes costsincluding deferred debt discount amortization. This expense is presented as losses on early retirement of debt on the Consolidated Statements of Income during 2019.

During December 2018, the Company completed a tender offer and expenses primarily associated with the organizational changespurchased $750 million in aggregate principal amount of certain senior unsecured notes and store closings announced in January 2017. During 2016, these costsdebentures. The purchased senior unsecured notes and expensesdebentures included asset impairment charges of $265 million, $168$164 million of severance and other human resource-related costs and $466.65% senior debentures due 2024, $155 million of other7.0% senior debentures due 2028, $114 million of 6.9% senior debentures due 2029, $103 million of 4.5% senior notes due 2034, $94 million of 6.79% senior debentures due 2027, $35 million of 6.7% senior debentures due 2034, $34 million of 6.375% senior notes due 2037, $34 million of 6.7% senior debentures due 2028, $10 million of 6.9% senior debentures due 2032, $5 million of 8.75% senior debentures due 2029, and $2 million of 7.875% senior debentures due 2030. The total cash cost for the tender offer was $789 million. The Company recognized $28 million of expense related costs and expenses. Impairments, store closingto the recognition of the tender premium and other costs for 2015 included costs and expenses primarilypartially offset by the unamortized debt premium associated with organization changesthis debt. This expense is presented as losses on early retirement of debt on the Consolidated Statements of Income during 2018.

During 2018, the Company repurchased $344 million face value of senior notes and store closings announceddebentures. The debt repurchases were made in January 2016. During 2015, these coststhe open market for a total cost of $354 million, including expenses and expenses included asset impairment chargesother fees related to the transactions. Such repurchases resulted in the recognition of $148expense of $5 million $123during 2018 presented as losses on early retirement of debt on the Consolidated Statements of Income.



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

Liquidity

On May 9, 2019, the Company entered into a new credit agreement with certain financial institutions that replaced the previous credit agreement which was set to expire on May 6, 2021. Similar to the previous agreement, the new credit agreement provides for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing). The new credit agreement is scheduled to expire on May 9, 2024, subject to up to two one-year extensions that may be requested by the Company and agreed to by the lenders.

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

The Company is party to a $1,500 million unsecured commercial paper program. The Company may issue and sell commercial paper in an aggregate amount outstanding at any particular time not to exceed its then-current combined borrowing availability under the bank credit agreement with certain financial institutions. There were no borrowings under the program during 2019 and 2018. As of February 1, 2020 and February 2, 2019, there were no remaining borrowings outstanding under the commercial paper program. As a result of the COVID-19 pandemic, the Company's ability to draw on commercial paper is limited.
The credit agreement requires the Company to maintain a specified interest coverage ratio for the latest four quarters of no less than 3.25 and a specified leverage ratio as of and for the latest four quarters of no more than 3.75. The Company's interest coverage ratio for 2019 was 12.68 and its leverage ratio at February 1, 2020 was 1.78, in each case as calculated in accordance with the credit agreement. The interest coverage ratio is defined as EBITDA divided by net interest expense and the leverage ratio is defined as debt divided by EBITDA. For purposes of these calculations EBITDA is calculated as net income plus interest expense, taxes, depreciation, amortization, non-cash impairment of goodwill, intangibles and real estate, settlement charges, non-recurring cash charges not to exceed in the aggregate $200 million and extraordinary losses less interest income and non-recurring or extraordinary gains. Net interest is adjusted to exclude the premium on early retirement of debt.
A breach of a restrictive covenant in the Company's credit agreement or the inability of the Company to maintain the financial ratios described above could result in an event of default under the credit agreement. In addition, an event of default would occur under the credit agreement if any indebtedness of the Company in excess of an aggregate principal amount of $150 million becomes due prior to its stated maturity or the holders of such indebtedness become able to cause it to become due prior to its stated maturity. Upon the occurrence of an event of default, the lenders could, subject to the terms and conditions of the credit agreement, elect to declare the outstanding principal, together with accrued interest, to be immediately due and payable. Moreover, most of the Company's senior notes and debentures contain cross-default provisions based on the non-payment at maturity, or other default after an applicable grace period, of any other debt, the unpaid principal amount of which is not less than $100 million that could be triggered by an event of default under the credit agreement. In such an event, the Company's senior notes and debentures that contain cross-default provisions would also be subject to acceleration.
At February 1, 2020, no notes or debentures contained provisions requiring acceleration of payment upon a debt rating downgrade. However, the terms of approximately $3,359 million in aggregate principal amount of the Company's senior notes outstanding at that date require the Company to offer to purchase such notes at a price equal to 101% of their principal amount plus accrued and unpaid interest if there is both a change of control (as defined in the applicable indenture) of the Company and the notes are rated by specified rating agencies at a level below investment grade.
As of February 1, 2020, the Company's credit rating and outlook were as described in the table below.


Moody'sStandard & Poor'sFitch
Long-term debtBaa3BBB-BBB
OutlookStableStableStable
In February 2020, Standard and Poor's and Fitch downgraded Macy's long-term debt ratings to BB+ and BBB-, respectively. Outlook by Standard and Poor's and Fitch remained at stable. In March 2020, Moody's downgraded the Company's long-term debt rating from Baa3 to Ba1 and changed the outlook to negative.
Dividends
On February 28, 2020, the Company's board of directors declared a quarterly dividend of 37.75 cents per share on its common stock, payable April 1, 2020, to shareholders of record at the close of business on March 13, 2020.
Share repurchases
As of February 1, 2020, the Company had $1,716 million of authorization remaining under its share repurchase program.
Contractual Obligations and Commitments
At February 1, 2020, the Company had contractual obligations (within the scope of Item 303(a)(5) of Regulation S-K) as follows:

 Obligations Due, by Period
Total 
Less than
1 Year
 
1 – 3
Years
 
3 – 5
Years
 
More than
5 Years
(millions)
Short-term debt$539
 $539
 $—
 $—
 $—
Long-term debt3,607
 —
 453
 1,472
 1,682
Interest on debt1,723
 188
 316
 248
 971
Finance lease obligations34
 3
 6
 6
 19
Operating leases (a and b)
6,911
 362
 667
 617
 5,265
Letters of credit34
 34
 —
 —
 —
Other obligations4,274
 2,778
 525
 233
 738
 $17,122
 $3,904
 $1,967
 $2,576
 $8,675
(a) Operating lease payments include $3,240 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $706 million of legally binding minimum lease payments for leases signed but not yet commenced.
(b) Operating lease payments include $1,203 million related to non-lease component payments, with $876 million related to options to extend lease terms that are reasonably certain of being exercised.

“Other obligations” in the foregoing table includes post employment and postretirement benefits, self-insurance reserves, group medical/dental/life insurance programs, merchandise purchase obligations and obligations under outsourcing arrangements, construction contracts, energy and other human resource-related costssupply agreements identified by the Company and $17liabilities for unrecognized tax benefits that the Company expects to settle in cash in the next year excluding interest and penalties. The Company's merchandise purchase obligations fluctuate on a seasonal basis, typically being higher in the summer and early fall and being lower in the late winter and early spring. The Company purchases a substantial portion of its merchandise inventories and other goods and services otherwise than through binding contracts. Consequently, the amounts shown as “Other obligations” in the foregoing table do not reflect the total amounts that the Company would need to spend on goods and services in order to operate its businesses in the ordinary course.
Of the Company's $133 million of otherunrecognized tax benefits at February 1, 2020, within "other obligations" in the foregoing table, the Company has excluded $4 million of deferred tax assets and $117 million of long-term liabilities for unrecognized tax benefits for various tax positions taken. The table also excludes federal, state and local interest and penalties related coststo unrecognized tax benefits of $60 million. These liabilities may increase or decrease over time as a result


of tax examinations, and expenses.given the status of examinations, the Company cannot reliably estimate the period of any cash settlement with the respective taxing authorities.
Settlement Charges
$9858 million and $88 million of non-cash settlement charges were recognized in 2016.2019 and 2018, respectively. These charges relate to the pro-rata recognition of net actuarial losses associated with the Company’s defined benefit retirement plans and are the result of an increase in lump sum distributions associated with store closings, a voluntary separation program, organizationalretiree distribution elections and restructuring and periodic distribution activity.



Net Interest Expense
Net interest expense, excluding losses on early retirement of debt, for 2016 increased $22019 decreased $51 million from 2015. Net interest expense for 20162018. This decrease was impactedprimarily driven by lower capitalized interest associated withthe reduction in the Company's construction projects, offset slightly by lower ratesdebt resulting from the tender offer and open market repurchases in 2018.
Losses on outstanding borrowings as compared to 2015.Early Retirement of Debt
In 2019, the Company completed a tender offer debt repurchase of $525 million face value of senior notes and debentures. As a result of these transactions, the Company recognized $30 million in expenses and fees.
In 2018, the Company repurchased $344 million face value of senior notes and debentures and completed a tender offer debt repurchase of $750 million face value of senior notes and debentures. As a result of these transactions, the Company recognized $33 million in expenses and fees net of the write-off of unamortized debt premiums.
 
Effective Tax Rate
The Company's effective tax rate was expense of 35.8%22.5% for 20162019 and 36.2%22.7% for 2015 differ from2018 compared to the federal income tax statutory rate of 35%,21%. The federal income tax statutory rate of 21% reflects U.S. federal tax reform enacted in 2017. The effective tax rates in 2019 and on a comparative basis, principally because2018 were impacted by the settlement of the effect ofcertain state and local income taxes, including the settlement of various tax issues and tax examinations.matters.
Comparison of 2015 and 2014
Net Income Attributable to Macy's, Inc. Shareholders
Net income attributable to Macy's, Inc. shareholders for 20152019 decreased $544 million compared to 2014, reflecting2018, driven by lower salesearnings before interest and gross margin and higher impairments, store closing costs and other costs,taxes ("EBIT") partially offset by lower selling, general and administrative expenses,net 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 based 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, 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. The additional interest expense resulting from this transaction is presented as premium on early retirement of debt on the Consolidated Statements of Income.
Effective Tax Rate
The Company's effective tax rate of 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, income tax expense for 2015 and 2014 benefited from historic rehabilitation tax credits.expense.






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, the Company's 2017 assumptions include the following:
Total sales decline of approximately 3.2% - 4.3% from 2016 levels. Total sales in 2017 reflect a 53rd week of sales, whereas comparable sales below are on a 52-week basis.
Comparable sales decrease on an owned basis of approximately 2.2% - 3.3%, with comparable sales on an owned plus licensed basis to decline approximately 2% - 3%.
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 gain from the sale of the Brooklyn real estate.
Selling, general and administrative expense savings of 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 savings of approximately $300 million).
Credit income of approximately $740 million - $760 million.
Adjusted 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 2017 is expected to be used to repurchase debt.
The Company's budgeted capital expenditures are primarily related to new stores, store remodels, development costs associated with the Brookfield Strategic Alliance joint venture, technology and omnichannel investments, distribution network improvements and new growth initiatives. 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, 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.



Cash Flow, Liquidity and Capital Resources
The Company's principal sources of liquidity are cash from operations, cash on hand and the credit facility described below.

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

Operating Activities
Net cash provided by operating activities was $1,8011,608 million in 20162019 compared to $1,9841,735 million in 2015, reflecting2018. The decline was driven by lower EBITDA and a decrease in non-merchandise accounts payable, which were partially offset by lower tax payments and a net income.improvement in merchandise inventory and payables.
Investing Activities
Net cash used by investing activities for 20162019 was $1871,002 million, compared to net cash used by investing activities of $1,092456 million for 20152018. Investing activities for 20162019 included purchases of property and equipment totaling $596902 million and capitalized software of $316255 million, compared to purchases of property and equipment totaling $777657 million and capitalized software of $336275 million for 20152018. Investing activities for 2015 includesThe increase in capital expenditures was largely driven by the acquisition of Bluemercury, Inc., net of cash acquired, for $212 million.Company's Growth store investments, which expanded to another 100 stores in 2019, and Backstage strategic initiatives.
In 2016,2019, 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 $673$185 million in 2016,2019 compared to $204$474 million in 2015.
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. During 2015, the Company opened one new 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, the Company has opened 39 freestanding Bluemercury stores and 19 locations within an existing Macy's.2018.
Financing Activities
Net cash used by the Company for financing activities was $1,426$1,123 million for 2016,2019, including the acquisition of the Company's common stock under its share repurchase program at an approximate cost of $316 million, the repayment of $751$597 million of debt, the payment of $466 million of cash dividends and a $62 million decrease in outstanding checks. 2019 debt repayments included the repayment at maturity of $36 million of 8.5% senior debentures.

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

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

During 2018, the Company repurchased $344 million face value of senior notes and debentures. The debt repurchases were made in the open market for a total cost of $354 million, including expenses and other fees related to the transactions. Such repurchases resulted in the recognition of expense of $5 million during 2018 presented as losses on early retirement of debt on the Consolidated Statements of Income.



Net cash used by the Company for financing activities was $1,544 million for 2018, including the repayment of $1,149 million of debt and the payment of $459$463 million of cash dividends, partially offset by the issuance of $36$45 million of common stock, primarily related to the exercise of stock options, and an increase in outstanding checksproceeds of $61 million.$7 million received from Macy's China Limited's noncontrolling interest shareholder.


Liquidity

On August 15, 2016,May 9, 2019, 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. On October 14, 2016, the Company repaid $59 million of 7.45% senior debentures at maturity. On 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 that replaced the previous credit agreement which was set to expire on May 6, 2016 providing2021. Similar to the previous agreement, the new credit agreement provides for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing) outstanding at any particular time. This. The new credit agreement is setscheduled to expire on May 6, 20219, 2024, subject to up to two one-year extensions that may be requested by the Company and replacedagreed to by the prior agreement which was set to expire May 10, 2018.lenders.


As of January 28, 2017,February 1, 2020 and January 30, 2016,February 2, 2019, there were no revolving credit loans outstanding under thisthe credit agreement,agreements, and there were no borrowings under the agreement throughout all of 2016during 2019 and 2015.2018. In addition, there were no standby letters of credit outstanding at January 28, 2017February 1, 2020 and there were less than $1 million of standby letters of credit outstanding at January 30, 2016.February 2, 2019. Revolving loans under the credit agreement bear interest based on various published rates.


The Company is party to a $1,500 million unsecured commercial paper program. The Company may issue and sell commercial paper in an aggregate amount outstanding at any particular time not to exceed its then-current combined borrowing availability under the bank credit agreement with certain financial institutions. The amount ofThere were no borrowings under the commercial paper program increased to its highest level for 2016 of approximately $388 million during the fourth quarter.2019 and 2018. As of January 28, 2017,February 1, 2020 and February 2, 2019, 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 As a result of the COVID-19 pandemic, 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 relatedability to the exercise of stock options.draw on commercial paper is limited.
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 20162019 was 7.3612.68 and its leverage ratio at January 28, 2017February 1, 2020 was 2.38,1.78, in each case as calculated in accordance with the credit agreement. The interest coverage ratio is defined as EBITDA divided by net interest expense and the leverage ratio is defined as debt divided by EBITDA. For purposes of these calculations EBITDA is calculated as net income plus interest expense, taxes, depreciation, amortization, non-cash impairment of goodwill, intangibles and real estate, settlement charges, non-recurring cash charges not to exceed in the aggregate $300$200 million and extraordinary losses less interest income and non-recurring or extraordinary gains. DebtNet interest 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 1, 2020, no notes or debentures containcontained provisions requiring acceleration of payment upon a debt rating downgrade. However, the terms of approximately $4,250$3,359 million in aggregate principal amount of the Company's senior notes outstanding at that date require the Company to offer to purchase such notes at a price equal to 101% of their principal amount plus accrued and unpaid interest in specified circumstances involvingif there is both a change of control (as defined in the applicable indenture) of the Company and the rating of the notes are rated by specified rating agencies at a level below investment grade.
OnAs of February 26, 2016,1, 2020, the Company's board of directors approved an additional $1,500 millioncredit rating and outlook were as described in authorizationthe table below.


Moody'sStandard & Poor'sFitch
Long-term debtBaa3BBB-BBB
OutlookStableStableStable
In February 2020, Standard and Poor's and Fitch downgraded Macy's long-term debt ratings to purchase Common Stock. During 2016,BB+ and BBB-, respectively. Outlook by Standard and Poor's and Fitch remained at stable. In March 2020, Moody's downgraded the Company repurchased approximately 7.9 million shares of its common stock for a total of approximately $316 million. As of January 28, 2017,Company's long-term debt rating from Baa3 to Ba1 and changed the Company had $1,716 million of authorization remaining under its share repurchase program. The Company may continue or, from timeoutlook to time, suspend repurchases of shares under its share repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors.negative.
Dividends
On February 24, 2017,28, 2020, the Company's board of directors declared a quarterly dividend of 37.75 cents per share on its common stock, payable April 3, 20171, 2020, to Macy's shareholders of record at the close of business on March 15, 2017.13, 2020.

Share repurchases

As of February 1, 2020, the Company had $1,716 million of authorization remaining under its share repurchase program.
Contractual Obligations and Commitments
At January 28, 2017,February 1, 2020, the Company had contractual obligations (within the scope of Item 303(a)(5) of Regulation S-K) as follows:

Obligations Due, by PeriodObligations 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
 $—
 $—
 $—
$539
 $539
 $—
 $—
 $—
Long-term debt6,459
 —
 48
 1,092
 5,319
3,607
 —
 453
 1,472
 1,682
Interest on debt4,162
 342
 658
 631
 2,531
1,723
 188
 316
 248
 971
Capital lease obligations52
 3
 6
 6
 37
Operating leases3,683
 321
 587
 486
 2,289
Finance lease obligations34
 3
 6
 6
 19
Operating leases (a and b)
6,911
 362
 667
 617
 5,265
Letters of credit30
 30
 —
 —
 —
34
 34
 —
 —
 —
Other obligations4,325
 2,744
 470
 279
 832
4,274
 2,778
 525
 233
 738
$19,019
 $3,748
 $1,769
 $2,494
 $11,008
$17,122
 $3,904
 $1,967
 $2,576
 $8,675
(a) Operating lease payments include $3,240 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $706 million of legally binding minimum lease payments for leases signed but not yet commenced.
(b) Operating lease payments include $1,203 million related to non-lease component payments, with $876 million related to options to extend lease terms that are reasonably certain of being exercised.

“Other obligations” in the foregoing table includes post employment and postretirement benefits, self-insurance reserves, group medical/dental/life insurance programs, merchandise purchase obligations and obligations under outsourcing arrangements, construction contracts, energy and other supply agreements identified by the Company and liabilities for unrecognized tax benefits that the Company expects to settle in cash in the next year.year excluding interest and penalties. The Company's merchandise purchase obligations fluctuate on a seasonal basis, typically being higher in the summer and early fall and being lower in the late winter and early spring. The Company purchases a substantial portion of its merchandise inventories and other goods and services otherwise than through binding contracts. Consequently, the amounts shown as “Other obligations” in the foregoing table do not reflect the total amounts that the Company would need to spend on goods and services in order to operate its businesses in the ordinary course.
TheOf the Company's $133 million of unrecognized tax benefits at February 1, 2020, within "other obligations" in the foregoing table, the Company has not included in the contractual obligations table $157excluded $4 million of deferred tax assets and $117 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 $60 million. 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.
Important Information Regarding Non-GAAP Financial Measures
The Company has includedreports its financial results in accordance with GAAP. However, management believes that certain non-GAAP financial measures provide users of the contractual obligations table $6 million of liabilities for unrecognized tax benefits that the Company expects to settleCompany's financial information with additional useful information in cash in the next year.
Liquidity and Capital Resources Outlook
evaluating operating performance. Management believes that with respectproviding supplemental changes in comparable sales on an owned plus licensed basis, which includes the impact of growth in comparable sales of departments licensed 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 requirementsthird parties, assists in bothevaluating the near term and over the longer term. The Company's ability to generate fundssales 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 operationsdiluted earnings per share attributable to Macy's, Inc. shareholders, EBIT and EBITDA, including as a percent to sales, provide useful supplemental measures that assist in evaluating the Company's ability to generate earnings and leverage sales, respectively, and to more readily compare these metrics between past and future periods. Management also believes that EBIT, EBITDA, Adjusted EBIT and Adjusted EBITDA are frequently used by investors and securities analysts in their evaluations of companies, and that such supplemental measures facilitate comparisons between companies that have different capital and financing structures and/or tax rates. In addition, management believes that ROIC is a useful supplemental measure in evaluating how efficiently the Company employs its capital. The Company uses some of these non-GAAP financial measures as performance measures for components of executive compensation.
Non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, the Company's financial results prepared in accordance with GAAP. Certain of the items that may be affectedexcluded 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 numerous factors, including general economic conditions and levels of consumer confidence and demand; however, the Company expectson account of sales of departments licensed to third parties are limited to commissions received on such sales. The methods used by the Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies.
Changes in Comparable Sales
The following is a tabular reconciliation of the non-GAAP financial measure of changes in comparable sales on an owned plus licensed basis, to GAAP comparable sales (i.e., on an owned basis), which the Company believes to be ablethe most directly comparable GAAP financial measure.
  2019 2018 2017
Increase (decrease) in comparable sales on an owned basis (note 1) (0.8)% 1.7% (2.2)%
Impact of growth in comparable sales of departments licensed to third parties (note 2) 0.1 % 0.3% 0.3 %
Increase (decrease) in comparable sales on an owned plus licensed basis (0.7)% 2.0% (1.9)%
Notes:
(1)Represents the period-to-period percentage change in net sales from stores in operation throughout the year presented and the immediately preceding year and all online sales, adjusting for the 53rd week in 2017, excluding commissions from departments licensed to third parties. Stores impacted by a natural disaster or undergoing significant expansion or shrinkage remain in the comparable sales calculation unless the store, or a material portion of the store, is closed for a significant period of time. Definitions and calculations of comparable sales differ among companies in the retail industry.

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


with GAAP (i.e., on an owned basis). The amounts of commissions earned on sales of departments licensed to managethird parties are not material to its workingnet sales for the periods presented.
Adjusted Diluted Earnings Per Share Attributable to Macy's, Inc. Shareholders
The following is a tabular reconciliation of the non-GAAP financial measure diluted earnings per share attributable to Macy's, Inc. shareholders, excluding certain items, to GAAP diluted earnings per share attributable to Macy's, Inc. shareholders, which the Company believes to be the most directly comparable GAAP measure.
  2019 2018 2017
As reported $1.81
 $3.56
 $5.10
Restructuring, impairment, store closing and other costs (a)
 1.13
 0.41
 0.61
Settlement charges 0.19
 0.28
 0.34
Losses (gains) on early retirement of debt 0.10
 0.11
 (0.03)
Income tax impact of certain items identified above (0.32) (0.18) (0.33)
Deferred tax effects of federal tax reform —
 —
 (1.90)
As adjusted $2.91
 $4.18
 $3.79
Gains on sale of real estate (0.52) (1.25) (1.77)
Income tax impact of gains on sale of real estate 0.14
 0.33
 0.67
As adjusted excluding gains on sale of real estate $2.53
 $3.26
 $2.69
(a) 2018 excludes impairment, restructuring, and other costs attributable to the noncontrollling interest shareholder of $8 million.






Adjusted EBIT and EBITDA as a Percent to Net Sales
The following is a tabular reconciliation of the non-GAAP financial measures EBIT and EBITDA, as adjusted to exclude certain items ("Adjusted EBIT and Adjusted EBITDA"), as a percent to net sales to GAAP net income attributable to Macy's, Inc. shareholders as a percent to net sales, which the Company believes to be the most directly comparable GAAP financial measure.
  2019 2018 2017
  (millions, except percentages)
Net sales $24,560
 $24,971
 $24,939
       
Net income attributable to Macy's, Inc. shareholders $564
 $1,108
 $1,566
       
Net income attributable to Macy's, Inc. shareholders
    as a percent to net sales
 2.3% 4.4% 6.3%
       
Net income attributable to Macy's, Inc. shareholders $564
 $1,108
 $1,566
Restructuring, impairment, store closing and other costs (a)
 354
 128
 186
Settlement charges 58
 88
 105
Interest expense - net 185
 236
 310
Losses (gains) on early retirement of debt 30
 33
 (10)
Federal, state and local income tax expense (benefit) 164
 322
 (39)
Adjusted EBIT $1,355
 $1,915
 $2,118
Adjusted EBIT as a percent to net sales 5.5% 7.7% 8.5%
       
Add back depreciation and amortization 981
 962
 991
Adjusted EBITDA $2,336
 $2,877
 $3,109
Adjusted EBITDA as a percent to net sales 9.5% 11.5% 12.5%
(a) 2018 excludes impairment, restructuring, and other costs attributable to the noncontrollling interest shareholder of $8 million.


ROIC
Historically, the Company defined ROIC as adjusted EBITDA, excluding net lease expense, as a percent to average invested capital. Average invested capital levelsis comprised of an annual two-point (i.e., end of the year presented and capital expenditure amounts so asthe immediately preceding year) average of gross property and equipment, a capitalized value of non-capitalized leases equal to maintain sufficient levelsperiodic annual reported net rent expense multiplied by a factor of liquidity. Toeight and a four-point (i.e., end of each quarter within the extent thatperiod 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.
In conjunction with the Company's cash balances from time to time exceed amounts that are needed to fund its immediate liquidity requirements,adoption of ASU No. 2016-02 on February 3, 2019, the Company will consider alternative usesrecognized lease liabilities and related right of some or alluse ("ROU") assets on the balance sheet for its operating leases. In the calculation of such excess cash. Such alternative uses may include, among others, the redemption or repurchaseCompany's ROIC as of debt, equity orFebruary 1, 2020, the Company utilized the total lease ROU assets in lieu of the capitalized value of non-capitalized leases, excluding variable rent which is still multiplied by a factor of eight, as a result of the adoption of ASU 2016-02. In the Company's ROIC calculation as of February 2, 2019 and February 3, 2018, a capitalized value of non-capitalized leases equal to periodic annual reported net rent expense multiplied by a factor of eight was utilized. Rent expense in 2019 reflects lease expense related to the Company's operating leases in accordance with ASU 2016-02 and excludes non-lease component expenses. See Note 4, Properties and Leases, to the Consolidated Financial Statements for information on leases, including non-lease components.
In 2019, the calculation of ROIC reflected certain refinements to better reflect the company's adjusted EBITDA, excluding lease expense, and invested capital which are summarized below (4-point average of balance, as applicable):
Exclude non-lease components of $83 million from lease expense.
Exclude benefit plan income, net of $31 million from Adjusted EBITDA, excluding lease expense.
Exclude rabbi trust investments related to company's deferred compensation plan from prepaid expenses and other securities through open market purchases, privately negotiated transactions or otherwise,current assets ($32 million).
Exclude deferred financing costs ($4 million) and net pension asset ($46 million) from other assets.
Exclude dividend payable ($29 million), current liabilities for other postretirement health care and life insurance benefits and the fundingsupplementary retirement plan ($15 million and $61 million, respectively), and the current lease liability ($306 million) from accounts payable and accrued liabilities.
Include long-term workers' compensation and general liability ($371 million).
The following is a tabular reconciliation of pension related obligations. Depending upon its actualthe non-GAAP financial measure of ROIC to net income as a percent to property and anticipated sources and uses of liquidity, conditions in the capital markets and other factors,equipment - net, which the Company will from timebelieves to time considerbe 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.most directly comparable GAAP financial measure.



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.

  2019 2018 2017
  (millions, except percentages)
Net income $564
 $1,098
 $1,555
       
Property and equipment - net $6,633
 $6,637
 $6,672
       
Net income as a percent to property and
equipment - net		 8.5% 16.5% 23.3%
       
Net income $564
 $1,098
 $1,555
Add back interest expense, net 185
 236
 310
Add back (deduct) losses (gains) on early retirement of debt 30
 33
 (10)
Add back (deduct) federal, state and local tax expense (benefit) 164
 322
 (39)
Add back restructuring, impairment, store closing and
other costs		 354
 136
 186
Add back settlement charges 58
 88
 105
Add back depreciation and amortization 981
 962
 991
Deduct benefit plan income, net (31) —
 —
Add back rent expense      
Real estate 335
 327
 310
Personal property 8
 9
 10
Deferred rent amortization —
 14
 14
Adjusted EBITDA, excluding benefit plan income, net and lease expense $2,648
 $3,225
 $3,432
       
Property and equipment - net $6,628
 $6,655
 $6,845
Add back accumulated depreciation and amortization 4,438
 4,553
 4,733
Add capitalized value of non-capitalized leases —
 2,800
 2,672
Add back capitalized value of variable rent 114
 —
 —
Add back lease right of use assets 2,241
 —
 —
Add (deduct) other selected assets and liabilities:      
Receivables 265
 273
 327
Merchandise inventories 5,743
 5,664
 5,712
Prepaid expenses and other current assets 551
 608
 616
Other assets 675
 803
 830
Merchandise accounts payable (2,183) (2,219) (2,115)
Accounts payable and accrued liabilities (2,609) (2,917) (3,127)
Other long-term liabilities (371) —
 —
Total average invested capital $15,492
 $16,220
 $16,493
       
ROIC 17.1% 19.9% 20.8%



Critical Accounting Policies
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the last-in, first-out (LIFO)("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 profitmargin reduction is recognized in the period the markdown is recorded.
Long-Lived Asset Impairment and Restructuring Charges
The carrying values of long-lived assets, inclusive of ROU 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.

Goodwill and Intangible Assets
The Company reviews the carrying value of its goodwill and other intangible assets with indefinite lives at least annually, as of the end of fiscal May, or more frequently if an event occurs or circumstances change, for possible impairment in accordance with ASC Topic 350, Intangibles - Goodwill and Other. For impairment testing, goodwill has been assigned to reporting units which consist of the Company's retail operating divisions. Macy's and bluemercury are the only reporting units with goodwill as of February 1, 2020, and 97% of the Company's goodwill is allocated to the Macy's reporting unit.
The Company may elect to evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit or fair value of indefinite lived intangible assets is less than its carrying value. If the qualitative evaluation indicates that it is more likely than not that the fair value of a reporting unit or indefinite lived intangible asset is less than its carrying amount, a quantitative impairment test is required. Alternatively, the Company may bypass the qualitative assessment for a reporting unit or indefinite lived intangible asset and directly perform the quantitative assessment. This determination can be made on an individual reporting unit or asset basis, and performance of the qualitative assessment may resume in a subsequent period.
The quantitative impairment test involves estimating the fair value of each reporting unit and indefinite lived intangible asset and comparing these estimated fair values with the respective reporting unit or indefinite lived intangible asset carrying value. If the carrying value of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to such excess, limited to the total amount of goodwill allocated to the reporting unit. If the carrying value of an individual indefinite lived intangible asset exceeds its fair value, such individual indefinite lived intangible asset is written down by an amount equal to such excess.



Estimating the fair values of reporting units and indefinite lived intangible assets involves the use of significant assumptions, estimates and judgments with respect to a variety of factors, including sales, gross margin and SG&A rates, capital expenditures, cash flows and the selection and use of an appropriate discount rate and market values and multiples of earnings and revenues of similar public companies. Projected sales, gross margin and SG&A expense rate assumptions and capital expenditures are based on the Company's annual business plan or other forecasted results. Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting unit or indefinite lived intangible asset.
The use of different assumptions, estimates or judgments in the goodwill impairment testing process, including with respect to the estimated future cash flows of the Company's reporting units, the discount rate used to discount such estimated cash flows to their net present value, and the reasonableness of the resultant implied control premium relative to the Company's market capitalization, could materially increase or decrease the fair value of the reporting unit and/or its net assets and, accordingly, could materially increase or decrease any related impairment charge.
For its annual goodwill impairment test as of the end of fiscal May 2019, the Company performed a quantitative impairment assessment for all of its reporting units. The Company determined the fair value of each of its reporting units using a market approach, an income approach, or a combination of both, where appropriate. In the most recent annual impairment test performed as of the end of fiscal May 2019, the fair value of the Macy's reporting unit exceeded its related carrying value by approximately 29%.
As of the end of fiscal May 2019, the Company elected to perform a qualitative impairment test on its intangible assets with indefinite lives and concluded that it is more likely than not that the fair values exceeded the carrying values and the intangible assets with indefinite lives were not impaired.
During 2019, as a result of a number of business factors, including the Company's market capitalization being below its carrying value, qualitative interim impairment assessments of the Macy's goodwill balance were performed as of November 2, 2019 and February 1, 2020. As a result of these tests, the Company concluded that it is more likely than not that the fair values of the reporting unit exceeded the carrying value and goodwill was not impaired. 
During the first quarter of 2020, the Company observed a significant decline in the market valuation of the Company’s common shares as a result of events occurring after the end of 2019, including but not limited to the COVID-19 pandemic. As a result, the Company determined a triggering event had occurred that will require an interim quantitative impairment assessment for the Company's reporting units. If the market valuation of the Company's common shares remains at current levels, the Company expects to incur a goodwill impairment charge. Any impairment charge will be recognized in the first quarter of 2020.
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 2016.2019 and 2018. As of the date of this report, the Company does not anticipate making funding contributions to the Pension Plan in 2017. 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.2020.
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 6.50% for 2019, 6.75% for 2018 and 7.00% for 2017 based on expected future returns on the portfolio of assets. For 2020, the Company is lowering the assumed annual long-term rate of return to 6.25% 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 20172020 pension expense by approximately $8$7 million.
The Company discounted its future pension obligations using a weighted-average rate of 4.00%2.83% at January 28, 2017February 1, 2020 and 4.17%4.03% at January 30, 2016February 2, 2019 for the Pension Plan and 4.07%2.89% at January 28, 2017February 1, 2020 and 4.23%4.10% at January 30, 2016February 2, 2019 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 1, 2020 by approximately $105$93 million and would decrease estimated 20172020 pension expense by approximately $3$4 million. Increasing the discount rates by 0.25% would decrease the projected benefit obligations at January 28, 2017February 1, 2020 by approximately $99$88 million and would increase estimated 20172020 pension expense by approximately $3$4 million.
In 2016, theThe Company changed the method used to estimateestimates the service and interest cost components of net periodic benefit costs for the Pension Plan and SERP. The newThis 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
In May 2014, the FinancialSee Note 1, Organization and Summary of Significant Accounting Standards Board ("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 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 . The new standard and its related updates are 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 when the new 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), the Company currently estimates the material impacts to its consolidated financial statements to include changes in the presentation of estimates for future sales returns and related recoverable assets, presentation of earnings from credit operations, timing of certain real estate gains (particularly those with leaseback components) and the presentation of certain consignment and license arrangements.
The Company does not expect the new guidance to materially impact the revenue recognition associated with gift card breakage as well as the accounting 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 impact of the new guidance may differ from these initial estimates.
In February 2016, the FASB issued ASU No. 2016-02, Leases (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) 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. 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. The Company has not yet decided whether it will early adopt the new standard but the Company currently plans to elect all 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 relatePolicies, to the recognition ofConsolidated Financial Statements for discussion on 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. 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.accounting pronouncements.
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.



In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (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. The new standard is effective for the Company beginning in the first quarter of 2018, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial position, results of operations, cash flows and related disclosures. The Company plans to adopt this standard on February 4, 2018.

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.




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, Financing, to the 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 1, 2020, 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 1, 2020, 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.
 
Item 8.Consolidated Financial Statements and Supplementary Data.
Information called for by this item is set forth in the Company’s Consolidated Financial Statements and supplementary data contained in this report and is incorporated herein by this reference. Specific financial statements and supplementary data can be found at the pages listed in the following index:


INDEX
 
 Page
Report of Management
F-2
Report of Independent Registered Public Accounting Firm
F-3
Consolidated Statements of Income for the fiscal years ended
January 28, 2017, January 30, 2016 February 1, 2020, February 2, 2019 and January 31, 2015
February 3, 2018
F-4F-6
Consolidated Statements of Comprehensive Income for the fiscal years ended

January 28, 2017, January 30, 2016February 1, 2020, February 2, 2019 and January 31, 2015February 3, 2018
F-5F-7
Consolidated Balance Sheets as of February 1, 2020 and February 2, 2019
F-8
Consolidated Balance Sheets at January 28, 2017 and January 30, 2016
F-6
Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended

January 28, 2017, January 30, 2016February 1, 2020, February 2, 2019 and January 31, 2015February 3, 2018
F-7F-9
Consolidated Statements of Cash Flows for the fiscal years ended

January 28, 2017, January 30, 2016February 1, 2020, February 2, 2019 and January 31, 2015February 3, 2018
F-8F-10
Notes to Consolidated Financial Statements
F-9F-11






Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
 
Item 9A.Controls and Procedures.
a. Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have carried out, as of January 28, 2017February 1, 2020, with the participation of the Company’s management, an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of February 1, 2020 the Company’s disclosure controls and procedures arewere 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 1, 2020, the Company’s internal control over financial reporting iswas 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 1, 2020 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 adoption of new accounting pronouncements, major organizational restructuring and realignment occurs for which the Company reviews its internal control over financial reporting. As a result of this review, there were no changes in the Company’s internal 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.




Item 9B.Other Information.
None.



PART III
 
Item 10.Directors, Executive Officers and Corporate Governance.


The information required by this item for executive officers is set forth under “Item 1. Business - Information about our Executive Officers of the Registrant”Officers” 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 20172020 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,controller, or persons performing similar functions.  A copy of the Code of Conduct is available, free of charge, through the Company’s website athttp:
https://www.macysinc.com. We intend to satisfy any disclosure requirement under Item 55.05 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, 2017.19, 2020.
Name Age Director Since Principal Occupation Age Director Since Principal Occupation
David P. Abney 64 2018 Chairman and Chief Executive Officer of UPS, Inc., a multinational package delivery and supply chain management company, since 2016 and 2014, respectively. Chief Operating Officer of UPS, Inc. since 2007.
Francis S. Blake 67 2015 Former Chairman and Chief Executive Officer of The Home Depot, Inc. 70 2015 Former Chairman and Chief Executive Officer of The Home Depot, Inc., a multinational home improvement retailer.
Torrence N. Boone 50 2019 Vice President, Global Client Partnerships, Alphabet Inc. since 2010.
John A. Bryant 51 2015 Chairman of the Board of Kellogg Company since July 2014 and President and Chief Executive Officer since January 2011. 54 2015 Former Chairman, President and Chief Executive Officer of Kellogg Company, a multinational cereal and snack food producer.
Deirdre P. Connelly 56 2008 Former President, North American Pharmaceuticals of GlaxoSmithKline, a global pharmaceutical company. 59 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. 47 2015 President and Chief Executive Officer of RLJ Lodging Trust, a publicly-traded lodging real estate investment trust, since 2018.
William H. Lenehan 40 2016 President and Chief Executive Officer of Four Corners Property Trust, Inc., a real estate investment trust, since August 2015. 43 2016 President and Chief Executive Officer of Four Corners Property Trust, Inc., a real estate investment trust, since 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. 69 1997 Co-Founder and Director of Katapult, a digital entertainment company making products for today's creative generation, since 2013.
Joyce M. Roché 70 2006 Former President and Chief Executive Officer of Girls Incorporated, a national non-profit research, education and advocacy organization. 73 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. 56 2012 Former Chairman and Chief Executive Officer of Brown-Forman Corporation, a spirits and wine company.
Marna C. Whittington 69 1993 Former Chief Executive Officer of Allianz Global Investors Capital, a diversified global investment firm. 72 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.




Item 11.Executive Compensation.
Information called for by this item is set forth under “Compensation Discussion & Analysis,” “Compensation of the Named Executives for 20162019,” “Compensation Committee Report”,Report,” “Compensation Committee Interlocks and Insider Participation” and "Further Information Concerning the Board of Directors-RiskDirectors – Risk Oversight" in the Proxy Statement and incorporated herein by reference.


Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information called for by this item is set forth under “Stock Ownership – Certain Beneficial Owners”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.


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.


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
 
Item 15.Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
1.Financial Statements:
The list of financial statements required by this item is set forth in Item 8 “Consolidated Financial Statements and Supplementary Data” and is incorporated herein by reference.
2.Financial Statement Schedules:
All schedules are omitted because they are inapplicable, not required, or the information is included elsewhere in the Consolidated Financial Statements or the notes thereto.
3.Exhibits:


Exhibit
Number
 Description Document if Incorporated by Reference
3.1 Amended and Restated Certificate of Incorporation 
Exhibit 3.1 to the Company's Current Report on Form 8-K filed on May 18, 2010
     
3.1.1 Certificate of Designations of Series A Junior Participating Preferred Stock 
Exhibit 3.1.1 to the Company's Annual Report on
Form 10-K (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 
Exhibit 3.1 to the Company's Current Report on Form 8-K filed on May 24, 2011
     
3.2 Amended and Restated By-Laws 
Exhibit 3.1 to the Company's Current Report on Form 8-K filed on September 30, 2016
     
4.1Amended and Restated Certificate of IncorporationSee Exhibits 3.1, 3.1.1 and 3.1.2
4.2Amended and Restated By-LawsSee Exhibit 3.2
4.3 Indenture, dated as of January 15, 1991, among the Company (as successor to The May Department Stores Company (“May Delaware”)), Macy's Retail Holdings, Inc. (“Macy's Retail”) (f/k/a The May Department Stores Company (NY) or “May New York”) and The Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”, successor to J.P. Morgan Trust Company and as successor to The First National Bank of Chicago), as Trustee (the “1991(“1991 Indenture”) Exhibit 4(2) to May New York’s Current Report on Form 8-K filed on January 15, 1991
     
4.3.14.1.1 Guarantee of Securities, dated as of August 30, 2005, by the Company relating to the 1991 Indenture 
Exhibit 10.13 to the Company's Current Report on
Form 8-K filed on August 30, 2005 (the “August(“August 30, 2005 Form 8-K”)
     
4.44.2 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(“1994 Indenture”) Exhibit 4.1 to the Company's Registration Statement on Form S-3 (Registration No. 33-88328) filed on January 9, 1995
     
4.4.14.2.1 EighthNinth 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 23 to the Company's Current Report on Form 8-K filed on July 15, 1997 (the “July 15, 1997 Form 8-K”)


Exhibit
Number
DescriptionDocument if Incorporated by Reference
4.4.2Ninth 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 TrusteeExhibit 3 to the July 15, 1997 Form 8-K
     
4.4.34.2.2 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 
Exhibit 10.14 to the August 30, 2005 Form 8-K
     


4.4.4
Exhibit
Number
DescriptionDocument if Incorporated by Reference
4.2.3 Guarantee of Securities, dated as of August 30, 2005, by the Company relating to the 1994 Indenture 
Exhibit 10.16 to the August 30, 2005 Form 8-K
     
4.54.3 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(“1997 Indenture”) 
Exhibit 4.4 to the Company's Amendment No. 1 to Form S-3 (Registration No. 333-34321) filed on September 11, 1997
     
4.5.14.3.1 First Supplemental Indenture to the 1997 Indenture, dated as of February 6, 1998, between the Company and U.S. Bank National Association (successor to Citibank, N.A.), as Trustee 
Exhibit 2 to the Company's Current Report on Form 8-K filed on February 6, 1998
     
4.5.24.3.2 Third Supplemental Indenture to the 1997 Indenture, dated as of March 24, 1999, between the Company and U.S. Bank National Association (successor to Citibank, N.A.), as Trustee 
Exhibit 4.2 to the Company's Registration Statement on Form S-4 (Registration No. 333-76795) filed on April 22, 1999
     
4.5.34.3.3 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 
Exhibit 10.15 to the August 30, 2005 Form 8-K
     
4.5.44.3.4 Guarantee of Securities, dated as of August 30, 2005, by the Company relating to the 1997 Indenture 
Exhibit 10.17 to the August 30, 2005 Form 8-K
     
4.64.4 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(“1996 Indenture”) 
Exhibit 4.1 to the Registration Statement on Form S-3 (Registration No. 333-06171) filed on June 18, 1996 by May Delaware
     
4.6.14.4.1 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 (successor to J.P. Morgan Trust Company, National Association), as Trustee 
Exhibit 10.9 to the August 30, 2005 Form 8-K
     
4.74.5 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(“2004 Indenture”) 
Exhibit 4.1 to the Current Report on Form 8-K (File No. 001-00079) filed on July 21,22, 2004 by May Delaware
     
4.7.14.5.1 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 (successor to J.P. Morgan Trust Company, National Association), as Trustee 
Exhibit 10.10 to the August 30, 2005 Form 8-K
     
4.84.6 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(“2006 Indenture”) 
Exhibit 4.6 to the Company's Registration Statement on Form S-3ASR (Registration No. 333-138376) filed on November 2, 2006
     
4.6.1Third Supplemental Indenture to 2006 Indenture, dated March 12, 2007, among Macy's Retail, the Company and U.S. Bank National Association, as Trustee
Exhibit 4.2 to the Company's Current Report on Form 8-K filed March 12, 2007
4.6.2Sixth Supplemental Indenture to 2006 Indenture, dated December 10, 2015, among Macy's Retail, the Company and U.S. Bank National Association, as Trustee
Exhibit 4.2 to the Company's Current Report on Form 8-K filed December 10, 2015
4.7Indenture, dated as of January 13, 2012, among Macy's Retail, the Company and BNY Mellon, as Trustee ("2012 Indenture")
Exhibit 4.1 to the Company's Current Report on Form 8-K filed January 13, 2012 (“January 13, 2012 Form 8-K”)



Exhibit
Number
 Description Document if Incorporated by Reference
4.8.1First Supplemental Indenture to the 2006 Indenture, dated November 29, 2006, among Macy's Retail, the Company and U.S. Bank National Association, as TrusteeExhibit 4.1 to the Company's Current Report on Form 8-K filed on November 29, 2006
     
4.8.2Third Supplemental Indenture to the 2006 Indenture, dated March 12, 2007, among Macy's Retail, the Company and U.S. Bank National Association, as TrusteeExhibit 4.2 to the Company's Current Report on Form 8-K filed on March 12, 2007
4.8.3Sixth Supplemental Indenture to the 2006 Indenture, dated December 10, 2015, among Macy's Retail, the Company and U.S. Bank National Association, as TrusteeExhibit 4.2 to the Company's Current Report on Form 8-K filed on December 10, 2015
4.9Indenture, dated as of January 13, 2012, among Macy's Retail, the Company and BNY Mellon, as Trustee (the "2012 Indenture")Exhibit 4.1 to the Company's Current Report on Form 8-K filed on January 13, 2012 (the “January 13, 2012 Form 8-K”)
4.9.14.7.1 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 
Exhibit 4.2 to the January 13, 2012 Form 8-K
     
4.9.24.7.2 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 
Exhibit 4.3 to the January 13, 2012 Form 8-K
     
4.9.34.7.3 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 
Exhibit 4.2 to the Company's Current Report on Form 8-K filed on November 20, 2012 (the “November(“November 20, 2012 Form 8-K”)
     
4.9.44.7.4 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 
Exhibit 4.3 to the November 20, 2012 Form 8-K
     
4.9.54.7.5 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 
Exhibit 4.2 to the Company's Current Report on Form 8-K filed on September 6, 2013
     
4.9.64.7.6 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 
Exhibit 4.2 to the Company's Current Report on Form 8-K filed on May 23, 2014
     
4.9.74.7.7 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 
Exhibit 4.2 to the Company's Current Report on Form 8-K filed on November 18, 2014
4.8
Description of the Company's Securities Registered under Section 12 of the Securities Exchange Act of 1934
     
10.1 Credit Agreement, dated as of May 6, 2016,9, 2019, 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 
Exhibit 10.0110.1 to the Company's Current Report on Form 8-K filed on May 11, 2016 (the “May 11, 201615, 2019 (“May 15, 2019 Form 8-K”)
     
10.2 Guarantee Agreement, dated as of May 16, 2016,9, 2019, among the Company, Macy's Retail certain subsidiary guarantors and JPMorgan Chase Bank of America, N.A., as payingadministrative agent 
Exhibit 10.0210.2 to the May 11, 201615, 2019 Form 8-K
     
10.3 Tax Sharing Agreement, dated as of October 31, 2014, among Macy's, Inc. and members of the Affiliated Group 
Exhibit 10.7 to the Company's Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended January 31, 2015 (the “2014(“2014 Form 10-K”)
     


Exhibit
Number
DescriptionDocument 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. 
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on December 8, 2014
     
10.5 1995Senior Executive Equity Incentive Compensation Plan as amended and restated as of June 1, 2007 (the “1995 Plan”) * Exhibit 10.11
Appendix B to the Company's Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended JanuaryProxy Statement dated March 31, 2009 (the “2008 Form 10-K”)2017
     
10.6Senior Executive Incentive Compensation Plan *Appendix B to the Company's Proxy Statement dated March 28, 2012
10.71994 Stock Incentive Plan, as amended and restated as of June 1, 2007 *Exhibit 10.13 to the 2008 Form 10-K
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
     
10.9Executive Severance Plan, effective November 1, 2009, as revised and restated January 1, 2014 *Exhibit 10.14 to the Company’s Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended February 1, 2014 (the “2013 Form 10-K”)
10.10Form of Non-Qualified Stock Option Agreement for the 1995 Plan (for Executives and Key Employees) *Exhibit 10.2 to the Company's Current Report on Form 8-K filed on March 29, 2005
10.10.1Form of Non-Qualified Stock Option Agreement for the 1995 Plan (for Executives and Key Employees), as amended *Exhibit 10.33.1 to the Company's Annual Report Form 10-K (File No. 1-13536) for the fiscal year ended January 28, 2006
10.10.2Form of Non-Qualified Stock Option Agreement for the 1994 Stock Incentive Plan *Exhibit 10.7 to the Current Report on From 8-K (File No. 001-00079) filed on March 23, 2005 by May Delaware (the “March 23, 2005 Form 8-K”)
10.10.3Form of Nonqualified Stock Option Agreement under the 2009 Omnibus Incentive Compensation Plan (for Executives and Key Employees) *Exhibit 10.15.3 to the Company's Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended February 2, 2013 (the "2012 Form 10-K")
10.10.4Form of Nonqualified Stock Option Agreement under the Amended and Restated 2009 Omnibus Incentive Compensation Plan (for Executives and Key Employees) *Exhibit 10.14.4 to the 2014 Form 10-K
10.11Nonqualified Stock Option Agreement, dated as of October 26, 2007, by and between the Company and Terry Lundgren *Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 1, 2007
10.12Form of Restricted Stock Agreement for the 1994 Stock Incentive Plan *Exhibit 10.4 to the March 23, 2005 Form 8-K
10.12.1
Form of Time-Based Restricted Stock Agreement under the 2009 Omnibus Incentive Compensation
Plan *
Exhibit 10.3 to the Company's Current Report on Form 8-K filed on March 25, 2010
10.13Form 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
10.13.12016-2018 Performance-Based Restricted Stock Unit Terms and Conditions *Exhibit 10.13.2 to the 2015 Form 10-K
10.13.22017-2019 Performance-Based Restricted Stock Unit Terms and Conditions *



Exhibit
Number
 Description Document if Incorporated by Reference
10.7Executive Severance Plan, effective November 1, 2009, as revised and restated January 1, 2014 *
Exhibit 10.14 to the Company’s Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended February 1, 2014 (“2013 Form 10-K”)
10.7.1Senior Executive Severance Plan effective as of April 1, 2018 *
Exhibit 10.9.1 to the Company's Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended February 3, 2018 ("2017 Form 10-K")
10.8Form of Nonqualified Stock Option Agreement under the 2009 Omnibus Incentive Compensation Plan (for Executives and Key Employees) *
Exhibit 10.15.3 to the Company's Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended February 2, 2013 ("2012 Form 10-K")
10.8.1Form of Nonqualified Stock Option Agreement under the Amended and Restated 2009 Omnibus Incentive Compensation Plan (for Executives and Key Employees) *
Exhibit 10.14.4 to 2014 Form 10-K
10.8.2Form of Nonqualified Stock Option Agreement under the Amended and Restated 2009 Omnibus Incentive Compensation Plan (for Executives and Key Employees), as amended *
Exhibit 10.10.5 to 2017 Form 10-K
10.8.3
Form of Stock Option Terms and Conditions under the 2018 Equity and Incentive Compensation Plan *

Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q (File No. 1-13536) for the quarter ended May 4, 2019
10.9
Form of Time-Based Restricted Stock Agreement under the 2009 Omnibus Incentive Compensation
Plan *
Exhibit 10.3 to the Company's Current Report on Form 8-K filed March 25, 2010
10.102017-2019 Performance-Based Restricted Stock Unit Terms and Conditions under the Amended and Restated 2009 Omnibus Incentive Compensation Plan *
Exhibit 10.13.2 to the Company's Quarterly Report on Form 10-Q filed August 25, 2017
10.10.12018-2020 Performance-Based Restricted Stock Unit Terms and Conditions under the Amended and Restated 2009 Omnibus Incentive Compensation Plan *
Exhibit 10.12.2 to 2017 Form 10-K
10.10.2
2019-2021 Performance-Based Restricted Stock Unit Terms and Conditions under the 2018 Equity and Incentive Compensation Plan *

Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q (File No. 1-13536) for the quarter ended May 4, 2019
10.11 Form of Time-Based Restricted Stock Unit Agreement under the 2009 Omnibus Incentive Compensation Plan * 
Exhibit 10.19 to the 2012 Form 10-K
     
10.14.110.11.1 Form of Time-Based Restricted Stock Unit Agreement under the Amended and Restated 2009 Omnibus Incentive Compensation Plan * 
Exhibit 10.18.1 to the 2014 Form 10-K
     
10.1510.11.2 Supplementary Executive RetirementForm of Time-Based Restricted Stock Unit Agreement under the Amended and Restated 2009 Omnibus Incentive Compensation Plan (with dividend equivalents) * 
Exhibit 10.2910.13.2 to the 20082017 Form 10-K
     
10.15.110.11.3
Form of Time-Based Restricted Stock Unit Agreement under the Amended and Restated 2009 Omnibus Incentive Compensation Plan, as amended *


Exhibit 10.13.3 to 2017 Form 10-K
��
10.11.4
Form of Time-Based Restricted Stock Unit Terms and Conditions under the 2018 Equity and Incentive Compensation Plan *

Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q (File No. 1-13536) for the quarter ended May 4, 2019
10.12Supplementary Executive Retirement Plan *
Exhibit 10.29 to 2008 Form 10-K


Exhibit
Number
DescriptionDocument if Incorporated by Reference
10.12.1 First Amendment to the Supplementary Executive Retirement Plan effective January 1, 2012 * 
Exhibit 10.21.1 to the Company's Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended January 28, 2012
     
10.15.210.12.2 Second Amendment to Supplementary Executive Retirement Plan effective January 1, 2012 * 
Exhibit 10.20.2 to the 2012 Form 10-K
     
10.15.310.12.3 Third Amendment to Supplementary Executive Retirement Plan effective December 31, 2013 * 
Exhibit 10.20.3 to the 2013 Form 10-K
     
10.1610.13 Executive Deferred Compensation Plan * 
Exhibit 10.30 to the 2008 Form 10-K
     
10.16.110.13.1 First Amendment to Executive Deferred Compensation Plan effective December 19,31, 2013 * 
Exhibit 10.21.1 to the 2013 Form 10-K
     
10.1710.14 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 * 
Exhibit 10.22 to the 2013 Form 10-K
     
10.17.110.14.1 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 * 
Exhibit 10.21.1 to the 2014 Form 10-K
     
10.17.210.14.2 Second Amendment to the Plan regarding marriage status, effective January 1, 2014 * 
Exhibit 10.21.2 to the 2014 Form 10-K
     
10.17.310.14.3 Third Amendment to the Plan regarding matching contributions with respect to the Plan’s plan years beginning on and after January 1, 2014 * 
Exhibit 10.21.3 to the 2014 Form 10-K
     
10.17.410.14.4 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)* 
Exhibit 10.17.4 to the Company's Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended January 30, 2016 ("2015 Form 10-K10-K")
     
10.17.510.14.5 Fifth Amendment to the Plan regarding eligible associates to participate (pre-tax deferrals only, no match) immediately upon hire*hire effective as of January 1, 2014* 
Exhibit 10.17.5 to the 2015 Form 10-K
     
10.1810.15 Director Deferred Compensation Plan * 
Exhibit 10.33 to the 2008 Form 10-K
     
10.1910.16 Macy's, Inc. Amended and Restated 2009 Omnibus Incentive Compensation Plan * 
Appendix B to the Company's Proxy Statement dated April 2, 2014
10.17Macy's, Inc. 2018 Equity and Incentive Compensation Plan *
Appendix B to the Company's Proxy Statement dated April 4, 2018
10.18
Macy's, Inc. Deferred Compensation Plan (Amended and restated effective as of August 1, 2018) *

10.19Change in Control Plan, effective November 1, 2009, as revised and restated effective April 1, 2018 *
Exhibit 10.20 to 2017 Form 10-K
     
10.20 
Time Sharing Agreement between Macy's, Inc. Deferred Compensation Planand Jeff Gennette, dated June 14, 2017 *

 
Exhibit 4.510.21.1 to the Company's Registration Statement on2017 Form S-8 (Registration No. 333-192917) filed on December 18, 201310-K
     
10.20.121 First Amendment to Deferred Compensation Plan regarding special rules of eligibility for newly eligible participants, effective April 1, 2014 *
Subsidiaries
 Exhibit 10.24.1 to the 2014 Form 10-K
23
Consent of KPMG LLP
24
Powers of Attorney
     



Exhibit
Number
 Description Document if Incorporated by Reference
10.20.2Second Amendment to Deferred Compensation Plan regarding payment rules for plan years that begin on or after January 1, 2015, effective January 1, 2014 *Exhibit 10.24.2 to the 2014 Form 10-K
10.20.3Third 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*Exhibit 10.20.3 to the 2015 Form 10-K
10.21Change in Control Plan, effective November 1, 2009, as revised and restated January 1, 2014 *Exhibit 10.26 to the 2013 Form 10-K
10.22Amended and Restated Time Sharing Agreement between Macy's, Inc. and Terry J. Lundgren, dated August 21, 2014 *Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on September 8, 2014
10.23General Release with Addendum between Macy's, Inc. and Peter R. Sachse *
21Subsidiaries
23Consent of KPMG LLP
24Powers of Attorney
31.1 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
  
     
31.2 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
  
     
32.1 
Certification by Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act
  
     
32.2 
Certification by Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act
  
     
101 The following financial statements from Macy's, Inc.’s Annual Report on Form 10-K for the year ended January 28, 2017,February 1, 2020, filed on March 29, 2017,30, 2020, formatted in XBRL:iXBRL (Inline eXtensible Business Reporting Language): (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.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)  
___________________
+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.
 MACY’S, INC.
   
 By:
/s/    ELISA D. GARCIA
  
Elisa D. Garcia
Executive Vice President, Chief Legal Officer and Secretary
Date: March 29, 201730, 2020
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, 201730, 2020.
 
     
* * *
Jeff Gennette Karen M. HoguetPaula A. Price Felicia Williams
     
President, Chief Executive Officer (principal executive officer), Chairman of the Board and Director Executive Vice President and Chief Financial Officer (principal financial officer) ExecutiveSenior Vice President, Controller and Enterprise Risk Officer (principal accounting officer)
     
* * *
Terry J. LundgrenDavid P. Abney Francis S. Blake John A. Bryant
Executive Chairman, Chairman of the Board and DirectorDirectorDirector
***
Deirdre P. ConnellyLeslie D. HaleWilliam H. LenehanTorrence N. Boone
     
Director Director Director
     
* * *
John A. BryantDeirdre P. ConnellyLeslie D. Hale
DirectorDirectorDirector
***
William H. LenehanSara Levinson Joyce M. RochéPaul C. Varga
     
Director Director Director
     
* *  
Paul C. VargaMarna C. WhittingtonAnnie Young-Scrivner  
     
Director Director
  
 ___________________
*The undersigned, by signing hisher name hereto, does sign and execute this Annual Report on Form 10-K pursuant to the Powers of Attorney executed by the above-named officers and directors and filed herewith.


 By:
/s/    ELISA D. GARCIA
  
Elisa D. Garcia
Attorney-in-Fact




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Page
Report of Management
F-2
Report of Independent Registered Public Accounting Firm
F-3
Consolidated Statements of Income for the fiscal years ended
January 28, 2017, January 30, 2016 February 1, 2020, February 2, 2019 and January 31, 2015February 3, 2018
F-4F-6
Consolidated Statements of Comprehensive Income for the fiscal years ended
January 28, 2017, January 30, 2016
February 1, 2020, February 2, 2019 and January 31, 2015February 3, 2018
F-5F-7
Consolidated Balance Sheets at January 28, 2017as of February 1, 2020 and January 30, 2016February 2, 2019
F-6F-8
Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended
January 28, 2017, January 30, 2016
February 1, 2020, February 2, 2019 and January 31, 2015February 3, 2018
F-7F-9
Consolidated Statements of Cash Flows for the fiscal years ended
January 28, 2017, January 30, 2016
February 1, 2020, February 2, 2019 and January 31, 2015February 3, 2018
F-8F-10
Notes to Consolidated Financial Statements
F-9F-11






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
President and Chief Executive Officer, Chairman of the Board and Director
Karen M. HoguetPaula A. Price
Executive Vice President and Chief Financial Officer
Felicia Williams
ExecutiveSenior Vice President, Controller and Enterprise Risk Officer




Report of Independent Registered Public Accounting Firm
TheTo 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 January 28, 2017February 1, 2020 and January 30, 2016, andFebruary 2, 2019, 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 1, 2020, 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 1, 2020, based on criteria established in Internal Control - Integrated Framework 2013 (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)Commission.
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 1, 2020 and February 2, 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended February 1, 2020, 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 1, 2020 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases as of February 3, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases. Macy’s, Inc.’s
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,Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements referredthat were communicated or required to above present fairly,be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in all material respects,any way our opinion on the consolidated financial positionstatements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment of Macy’s, Inc.the liability for unrecognized tax benefits
As discussed in Note 8 to the consolidated financial statements, the Company has recorded gross unrecognized tax benefits, including interest and subsidiariespenalties, of $193 million as of January 28, 2017February 1, 2020. The Company recognizes tax positions when it is more likely than not that the tax position will be sustained on examination based on the technical merits of the position. Uncertain tax positions meeting the recognition threshold are then measured at the largest amount of benefit that is more likely than not to be realized upon ultimate settlement.
We identified the assessment of the liability for unrecognized tax benefits as a critical audit matter. Complex auditor judgment was required in evaluating the Company’s interpretation of tax law and January 30, 2016,its estimate of the ultimate resolution of the tax positions.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s unrecognized tax benefits process, including controls related to the interpretation of tax law and the results of their operations and their cash flows for eachestimate of the yearsultimate resolution. Since tax law is complex and often subject to interpretation, we involved tax professionals with specialized skills and knowledge. They assisted us in evaluating the tax positions taken by the Company and the impact on unrecognized tax benefits by assessing tax examination activity and evaluating the tax positions based on tax law, regulations, and other authoritative guidance with respect to statute expirations and reserve additions.
Assessment of the carrying value of certain property and equipment
As discussed in Note 1 to the consolidated financial statements, the Company evaluates the carrying value of property and equipment whenever events or changes in circumstances indicate that a potential impairment has occurred. As of February 1, 2020, net property and equipment was $6,633 million. The Company primarily used a market approach in determining the fair value of potentially impaired property and equipment in order to evaluate the recoverability of its carrying value. As discussed in Note 3 to the consolidated financial statements, the Company recognized asset impairments of $197 million in the three-year periodyear 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 reportingFebruary 1, 2020.
We identified the assessment of the carrying value of certain property and equipment as of January 28, 2017,a critical audit matter. Subjective and challenging auditor judgment was required to identify comparable sales transactions and market rent assumptions, as well as assessing adjustments to the comparable market data based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizationsspecific characteristics of the Treadway Commission.property.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s impairment assessment process for property and equipment. We involved valuation professionals with specialized skills and knowledge who assisted in developing an independent fair value estimate for certain properties by:


Selecting comparable sales transactions and market rent assumptions based on publicly available market data for comparable assets, considering the location, quality of the property and real estate market conditions
Comparing the independent fair value estimates to the Company’s fair value estimates which were ultimately used to identify and record, if applicable, impairment

/s/ KPMG LLP
We have served as the Company’s auditor since 1988.
Cincinnati, Ohio
March 29, 201730, 2020







MACY’S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(millions, except per share data)
 
          
2016 2015 20142019 2018 2017
Net sales$25,778
 $27,079
 $28,105
$24,560
 $24,971
 $24,939
Credit card revenues, net771
 768
 702
     
Cost of sales(15,621) (16,496) (16,863)(15,171) (15,215) (15,181)
Gross margin10,157
 10,583
 11,242
Selling, general and administrative expenses(8,265) (8,256) (8,355)(8,998) (9,039) (8,954)
Impairments, store closing and other costs(479) (288) (87)
Gains on sale of real estate162
 389
 544
Restructuring, impairment, store closing and other costs(354) (136) (186)
Operating income970
 1,738
 1,864
Benefit plan income, net31
 39
 57
Settlement charges(98) —
 —
(58) (88) (105)
Operating income1,315
 2,039
 2,800
Interest expense(367) (363) (395)(205) (261) (321)
Premium on early retirement of debt—
 —
 (17)
Gains (losses) on early retirement of debt(30) (33) 10
Interest income4
 2
 2
20
 25
 11
Income before income taxes952
 1,678
 2,390
728
 1,420
 1,516
Federal, state and local income tax expense(341) (608) (864)
Federal, state and local income tax benefit (expense)(164) (322) 39
Net income611
 1,070
 1,526
564
 1,098
 1,555
Net loss attributable to noncontrolling interest8
 2
 —
—
 10
 11
Net income attributable to Macy's, Inc. shareholders$619
 $1,072
 $1,526
$564
 $1,108
 $1,566
Basic earnings per share attributable to
Macy's, Inc. shareholders
$2.01
 $3.26
 $4.30
$1.82
 $3.60
 $5.13
Diluted earnings per share attributable to
Macy's, Inc. shareholders		$1.99
 $3.22
 $4.22
$1.81
 $3.56
 $5.10


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




MACY’S, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(millions)
 
          
2016 2015 20142019 2018 2017
Net income$611
 $1,070
 $1,526
$564
 $1,098
 $1,555
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)
Net actuarial gain (loss) and prior service credit on post employment and postretirement benefit plans, net of tax effect of $36 million, $52 million and $37 million(107) (151) 82
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 million60
 —
 —
Net actuarial loss and prior service cost on post employment and postretirement benefit plans, net of tax effect of $8 million, $7 million and $13 million23
 23
 22
Settlement charges, net of tax effect of $14 million, $23 million and $37 million44
 65
 68
Total other comprehensive income (loss)147
 29
 (407)(40) (63) 172
Comprehensive income758
 1,099
 1,119
524
 1,035
 1,727
Comprehensive loss attributable to noncontrolling interest8
 2
 —
—
 10
 11
Comprehensive income attributable to
Macy's, Inc. shareholders
$766
 $1,101
 $1,119
$524
 $1,045
 $1,738


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








MACY’S, INC.
CONSOLIDATED BALANCE SHEETS
(millions)
 
      
January 28, 2017 January 30, 2016February 1, 2020 February 2, 2019
ASSETS      
Current Assets:      
Cash and cash equivalents$1,297
 $1,109
$685
 $1,162
Receivables522
 558
409
 400
Merchandise inventories5,399
 5,506
5,188
 5,263
Prepaid expenses and other current assets408
 479
528
 620
Total Current Assets7,626
 7,652
6,810
 7,445
Property and Equipment – net7,017
 7,616
6,633
 6,637
Right of Use Assets2,668
 —
Goodwill3,897
 3,897
3,908
 3,908
Other Intangible Assets – net498
 514
439
 478
Other Assets813
 897
714
 726
Total Assets$19,851
 $20,576
$21,172
 $19,194
LIABILITIES AND SHAREHOLDERS’ EQUITY      
Current Liabilities:      
Short-term debt$309
 $642
$539
 $43
Merchandise accounts payable1,423
 1,526
1,682
 1,655
Accounts payable and accrued liabilities3,563
 3,333
3,448
 3,366
Income taxes352
 227
81
 168
Total Current Liabilities5,647
 5,728
5,750
 5,232
Long-Term Debt6,562
 6,995
3,621
 4,708
Long-Term Lease Liabilities2,918
 —
Deferred Income Taxes1,443
 1,477
1,169
 1,238
Other Liabilities1,877
 2,123
1,337
 1,580
Shareholders’ Equity:      
Common stock (304.1 and 310.3 shares outstanding)3
 3
Common stock (309.0 and 307.5 shares outstanding)3
 3
Additional paid-in capital617
 621
621
 652
Accumulated equity6,088
 6,334
7,989
 8,050
Treasury stock(1,489) (1,665)(1,241) (1,318)
Accumulated other comprehensive loss(896) (1,043)(995) (951)
Total Macy's, Inc. Shareholders’ Equity4,323
 4,250
6,377
 6,436
Noncontrolling interest(1) 3
—
 —
Total Shareholders' Equity4,322
 4,253
6,377
 6,436
Total Liabilities and Shareholders’ Equity$19,851
 $20,576
$21,172
 $19,194


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
Balance at January 28, 2017$3
 $617
 $6,141
 $(1,489) $(896) $4,376
 $(1) $4,375
Net income (loss)    1,566
     1,566
 (11) 1,555
Other comprehensive income        (407) (407)   (407)        172
 172
   172
Common stock dividends
($1.1875 per share)
    (421)     (421)   (421)
Common stock dividends ($1.51 per share)    (461)     (461)   (461)
Stock repurchases      (1,901)   (1,901)   (1,901)      (1)   (1)   (1)
Stock-based compensation
expense
  72
       72
   72
  58
       58
   58
Stock issued under stock plans  (66)   324
   258
   258
  (24)   34
   10
   10
Retirement of common stock  (1,480)   1,480
   —
   —
Deferred compensation
plan distributions
      2
   2
   2
Balance at January 31, 20154
 1,048
 7,340
 (1,942) (1,072) 5,378
 —
 5,378
Other  25
   
   25
   25
Balance at February 3, 20183
 676
 7,246
 (1,456) (724) 5,745
 (12) 5,733
Net income (loss)    1,072
     1,072
 (2) 1,070
    1,108
     1,108
 (10) 1,098
Other comprehensive loss        29
 29
   29
        (63) (63)   (63)
Common stock dividends ($1.3925 per share)    (456)     (456)   (456)
Common stock dividends ($1.51 per share)    (468)     (468)   (468)
Stock-based compensation
expense		  63
       63
   63
Stock issued under stock plans  (87)   138
   51
   51
Stranded tax costs (a)
    164
   (164) —
   —
Macy's China Limited          —
 22
 22
Balance at February 2, 20193
 652
 8,050
 (1,318) (951) 6,436
 —
 6,436
Cumulative-effect adjustment (b)
    (158)     (158)   (158)
Net income    564
     564
   564
Other comprehensive loss        (40) (40)   (40)
Common stock dividends ($1.51 per share)    (470)     (470)   (470)
Stock repurchases      (2,001)   (2,001)   (2,001)      (1)   (1)   (1)
Stock-based compensation
expense		  64
       64
   64
  38
       38
   38
Stock issued under stock plans  (64)   226
   162
   162
  (69)   78
   9
   9
Retirement of common stock(1) (427) (1,622) 2,050
   —
   —
Deferred compensation
plan distributions
      2
   2
   2
Macy's China Limited          —
 5
 5
Balance at January 30, 20163
 621
 6,334
 (1,665) (1,043) 4,250
 3
 4,253
Net income (loss)    619
     619
 (8) 611
Other comprehensive income        147
 147
   147
Common stock dividends ($1.4925 per share)    (459)     (459)   (459)
Stock repurchases      (316)   (316)   (316)
Stock-based compensation
expense		  60
       60
   60
Stock issued under stock plans  (64)   81
   17
   17
Retirement of common stock
 

 (406) 406
   —
   —
Deferred compensation
plan distributions
      5
   5
   5
Macy's China Limited          —
 4
 4
Balance at January 28, 2017$3
 $617
 $6,088
 $(1,489) $(896) $4,323
 $(1) $4,322
Other    3
   (4) (1)   (1)
Balance at February 1, 2020$3
 $621
 $7,989
 $(1,241) $(995) $6,377
 $—
 $6,377
(a) Represents the reclassification of stranded tax effects to retained earnings as a result of U.S. federal tax reform.
(b) Represents the cumulative-effect adjustment to retained earnings for the adoption of Accounting Standards Update 2016-02 (ASU-2016-02), Leases (Topic 842), on February 3, 2019.

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




MACY’S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
          
2016 2015 20142019 2018 2017
Cash flows from operating activities:          
Net income$611
 $1,070
 $1,526
$564
 $1,098
 $1,555
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 costs479
 288
 87
Restructuring, impairment, store closing and other costs354
 136
 186
Settlement charges98
 —
 —
58
 88
 105
Depreciation and amortization1,058
 1,061
 1,036
981
 962
 991
Benefit plans31
 30
 35
Stock-based compensation expense61
 65
 73
38
 63
 58
Gains on sale of real estate(209) (212) (92)(162) (389) (544)
Deferred income taxes(6) 112
 (421)
Amortization of financing costs and premium on acquired debt(14) (14) (5)4
 (15) (45)
Changes in assets and liabilities:          
(Increase) decrease in receivables(1) (45) 22
(9) (61) 120
(Increase) decrease in merchandise inventories107
 (60) 44
75
 (87) 221
Increase in prepaid expenses and other current assets(8) —
 (3)
Increase in other assets not separately identified—
 (1) (61)
Decrease in merchandise accounts payable(132) (78) (21)
Increase (decrease) in accounts payable, accrued
liabilities and other items not separately identified		(162) 68
 129
Increase (decrease) in current income taxes125
 (69) (65)
Increase (decrease) in deferred income taxes(139) (1) 29
Increase (decrease) in other liabilities not separately identified(73) (88) 10
Decrease in prepaid expenses and other current assets89
 21
 17
Increase in merchandise accounts payable40
 55
 162
Increase (decrease) in accounts payable and accrued liabilities(257) 14
 (221)
Decrease in current income taxes(60) (136) (114)
Change in other assets and liabilities(132) (156) (129)
Net cash provided by operating activities1,801
 1,984
 2,709
1,608
 1,735
 1,976
Cash flows from investing activities:          
Purchase of property and equipment(596) (777) (770)(902) (657) (487)
Capitalized software(316) (336) (298)(255) (275) (273)
Acquisition of Bluemercury, Inc., net of cash acquired—
 (212) —
Disposition of property and equipment673
 204
 172
185
 474
 411
Other, net52
 29
 (74)(30) 2
 (2)
Net cash used by investing activities(187) (1,092) (970)(1,002) (456) (351)
Cash flows from financing activities:          
Debt issued2
 499
 1,044
Financing costs(3) (4) (9)
Debt issuance costs(3) —
 —
Debt repaid(751) (152) (870)(597) (1,149) (988)
Dividends paid(459) (456) (421)(466) (463) (461)
Increase (decrease) in outstanding checks61
 (83) 133
(62) 16
 (15)
Acquisition of treasury stock(316) (2,001) (1,901)(1) —
 (1)
Issuance of common stock36
 163
 258
6
 45
 6
Proceeds from noncontrolling interest4
 5
 —
—
 7
 13
Net cash used by financing activities(1,426) (2,029) (1,766)(1,123) (1,544) (1,446)
Net increase (decrease) in cash and cash equivalents188
 (1,137) (27)
Cash and cash equivalents beginning of period1,109
 2,246
 2,273
Cash and cash equivalents end of period$1,297
 $1,109
 $2,246
Net increase (decrease) in cash, cash equivalents and restricted cash(517) (265) 179
Cash, cash equivalents and restricted cash beginning of period1,248
 1,513
 1,334
Cash, cash equivalents and restricted cash end of period$731
 $1,248
 $1,513
Supplemental cash flow information:          
Interest paid$396
 $383
 $413
$242
 $328
 $361
Interest received4
 2
 2
20
 25
 12
Income taxes paid (net of refunds received)352
 635
 834
229
 345
 496
Restricted cash, end of period46
 86
 58
The accompanying notes are an integral part of these Consolidated Financial Statements.




MACY’S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 


1.Organization and Summary of Significant Accounting Policies
Nature of Operations
Macy’s, Inc. and, together with its 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)kids'), cosmetics, home furnishings and other consumer goods. The Company has stores in 4543 states, the District of Columbia, GuamPuerto Rico and Puerto Rico.Guam. As of January 28, 2017February 1, 2020, the Company’s operations and reportableoperating segments were conducted through Macy’s, Bloomingdale’s, Bloomingdale’s The Outlet, Macy's Backstage, Bluemercury and Macy's China Limited,bluemercury, 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 2016, 2015 and 2014, the following merchandise constituted the following percentages of sales:
 2016 2015 2014
Women’s Accessories, Intimate Apparel, Shoes, Cosmetics and Fragrances38% 38% 38%
Women’s Apparel23
 23
 23
Men’s and Children’s23
 23
 23
Home/Miscellaneous16
 16
 16
 100% 100% 100%


Fiscal Year
The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years 20162019, 20152018 and 20142017 ended on January 28, 2017February 1, 2020, January 30, 2016February 2, 2019 and January 31, 2015February 3, 2018, respectively,respectively. Fiscal years 2019 and each2018 included 52 weeks and fiscal year 2017 included 53 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 holdsheld a sixty-five percent ownership interest and Hong Kong-based Fung Retailing Limited holdsheld the remaining thirty-five percent ownership interest. Macy's China Limited sellssold merchandise in China through an e-commerce presence on Alibaba Group's Tmall Global. TheIn January 2019, the Company ended the joint venture with Fung Retailing Limited after winding down the operations of Macy's China Limited earlier in 2018. In conjunction with the termination of the joint venture, the Company acquired the noncontrolling interest in Macy's China Limited from Fung Retailing Limited, resulting in one hundred percent ownership. For the period of time prior to the acquisition of the noncontrolling interest, Fung Retailing Limited's thirty-five percent proportionate share of the results of Macy's China Limited was reported as noncontrolling interest in the Consolidated Financial Statements. All significant intercompany transactions were eliminated.
For 2019 and 2018, the Consolidated Financial Statements include the accounts of Macy's, Inc. and its 100%-owned subsidiaries and, for the newly establishedapplicable periods, the 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’years' 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.

Net Sales
Revenue is recognized when customers obtain control of goods and services promised by the Company. The amount of revenue recognized is based on the amount that reflects the consideration that is expected to be received in exchange for those respective goods and services. See Note 2, Revenue, for further discussion of the Company's accounting policies for revenue from contracts with customers.
F-9


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 $119118 million at January 28, 2017February 1, 2020 and $128114 million at January 30, 2016February 2, 2019.
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 andSecurities, while all marketable securities held by the Company are accounted for under ASC Topic 321, Investments – Equity Securities.” Unrealized holding gains and losses on trading securities and equity securities with a readily determinable fair value are recognized in the Consolidated Statements of IncomeIncome. Equity securities without a readily determinable fair value are generally recorded at cost and unrealized holding gains and losses on available-for-sale securities are included as a separate componentsubsequently adjusted, in net income, for observable price changes (i.e., prices in orderly transactions for the identical investment or similar investment of accumulated other comprehensive income, net of income tax effect, until realized. At January 28, 2017, the Company did not hold any held-to-maturity or available-for-sale securities.same issuer).
Receivables
In connection withReceivables were $409 million at February 1, 2020, compared to $400 million at February 2, 2019.
The Company and Citibank, the saleowner of most of the Company’sCompany's credit assets, are party 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") expensescredit card revenues, net 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 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. Under the Bloomingdale’s brand, the Company offers a tender neutral points-based program. Benefits also include free delivery and gift wrap services. The Company recognizes the estimated net amount of the rewards that will be earned and redeemed as a reduction to net sales.

F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


customers.
Merchandise Inventories
Merchandise inventories are valued at lower of cost or market using the last-in, first-out (LIFO)("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 1, 2020 and January 30, 2016February 2, 2019, 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)("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 20162019, 20152018 or 20142017. 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.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




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, “Customer Payments and Incentives.”earned. The Company also receives advertising allowances from approximately 1,000780 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.incurred. 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 one1 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.

F-11

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:
 2019 2018 2017
 (millions)
Gross advertising and promotional costs$1,330
 $1,358
 $1,397
Cooperative advertising allowances188
 196
 289
Advertising and promotional costs, net of
cooperative advertising allowances		$1,142
 $1,162
 $1,108
Net sales$24,560
 $24,971
 $24,939
Advertising and promotional costs, net of cooperative
advertising allowances, as a percent to net sales		4.6% 4.7% 4.4%
 2016 2015 2014
 (millions)
Gross advertising and promotional costs$1,547
 $1,587
 $1,602
Cooperative advertising allowances394
 414
 425
Advertising and promotional costs, net of
cooperative advertising allowances		$1,153
 $1,173
 $1,177
Net sales$25,778
 $27,079
 $28,105
Advertising and promotional costs, net of cooperative
advertising allowances, as a percent to net sales		4.5% 4.3% 4.2%

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, inclusive of ROU 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




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.

Leases
F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Operating lease liabilities are recognized at the lease commencement date based on the present value of the fixed lease payments using the Company's incremental borrowing rates for its population of leases. Related operating ROU assets are recognized based on the initial present value of the fixed lease payments, reduced by contributions from landlords, plus any prepaid rent and direct costs from executing the leases. ROU assets are tested for impairment in the same manner as long-lived assets. 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. Lease terms include the noncancellable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods, termination options and purchase options.  Lease agreements with lease and non-lease components are combined as a single lease component for all classes of underlying assets.
Leases
The with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes operating lease minimum rentalsexpense for these leases 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 salesVariable lease payments 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.as they are incurred. 
Prior to February 3, 2019, leases were accounted for under ASC Subtopic 840, Leases.
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. 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 or other intangible assets with indefinite lives is less than its carrying value and whether it is necessary to perform the two-step goodwillquantitative impairment process.test. If required, the first stepCompany performs a quantitative impairment test which involves a comparison of each reporting unit’sunit's or other intangible assets with indefinite lives’ fair valuevalues to its carrying valuevalue. Estimating the fair values of the reporting units or other intangible assets with indefinite lives involves the use of significant assumptions, estimates and the Company estimates fair value based on discounted cash flows. The reporting unit’s discounted cash flows require significant management judgmentjudgments with respect to a variety of factors, including sales, gross margin and SG&A rates, capital expenditures, cash flows and the selection and use of an appropriate discount rate.rate and market values and multiples of earnings and revenues of similar public companies. 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 fromof the use of those assets in operations. reporting unit or indefinite lived intangible asset.
The estimates of fair value of reporting units or other intangible assets with indefinite lives 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 twofour to five years. 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 or issued, no revenue is recognized; rather, the Company records an accrued liability to customers. The liability is relieved and revenue is recognized equal to the amount redeemed at the time gift cards are redeemed for merchandise. The Company records incomerevenue from unredeemed gift cards

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




(breakage) asin net sales on a reduction of SG&A expenses, and income is recorded in proportion andpro-rata basis over the time period gift cards are actually redeemed. At least three3 years of historical data, updated annually, is used to determine actual redemption patterns. The Company records breakage income within net sales on the Consolidated Statements of Income.
Loyalty Programs
The Company maintains customer loyalty programs in which customers earn points based on their purchases. Under the Macy’s Star Rewards loyalty program, points are earned based on customers’ spending on Macy’s private label and co-branded credit cards as well as non-proprietary cards during certain tender-neutral promotional events. Under the Macy’s brand, the Company previously participated in a coalition program ("Plenti") whereby customers could earn points based on spending levels with bonus opportunities through various targeted offers and promotions at Macy's and other partners. The Company's participation in Plenti ended on May 3, 2018. Under the Bloomingdale’s Loyallist program, the Company offers a tender neutral points-based program. The Company recognizes the estimated net amount of the rewards that will be earned and redeemed as a reduction to net sales at the time of the initial transaction and as tender when the points are subsequently redeemed by a customer.
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.

F-13

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, mortality rates, 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 “Derivatives and Hedging,” which establishes accounting and reporting standards for derivative instruments and hedging activities and requires recognition of all derivatives as either assets or liabilities and measurement of those instruments at fair value. The Company makes limited use of derivative financial instruments. The Company does not use financial instruments for trading or other speculative purposes and is not a party to any leveraged financial instruments. On the date that the Company enters into a derivative contract, the Company designates the derivative instrument as either a fair value hedge, a cash flow hedge or as a free-standing derivative instrument, each of which would receive different accounting treatment. Prior to entering into a hedge transaction, the 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, 2017, 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.

Comprehensive Income





Total comprehensive income represents the change in equity during a period from sources other than transactions with shareholders and, as such, includes net income. For the Company, the only other components of total comprehensive income for 2019, 2018 and 2017 relate to post employment and postretirement plan items. Settlement charges incurred are included as a separate component of income before income taxes in the Consolidated Statements of Income. Amortization
F-14


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




2.Impairments, Store Closing and Other Costs
Impairments, store closingreclassifications out of accumulated other comprehensive loss are included in the computation of net periodic benefit cost (income) and otherare included in benefit plan income, net on the Consolidated Statements of Income.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), as amended, which requires lessees to recognize substantially all leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a 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 are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard was adopted by the Company on February 3, 2019 utilizing a modified retrospective approach that allowed for transition in the period of adoption. The Company adopted the package of practical expedients available at transition that retained the lease classification and initial direct costs consistfor any leases that existed prior to adoption of the following:
 2016 2015 2014
 (millions)
Asset Impairments$265
 $148
 $33
Severance168
 123
 46
Other46
 17
 8
 $479
 $288
 $87

During January 2017,standard. Contracts entered into prior to adoption were not reassessed for leases or embedded leases. Upon adoption, the Company announcedused hindsight in determining lease term and impairment. For lease and non-lease components, the Company has elected to account for both as 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 include the announced closure of sixty-eight Macy's stores and the reorganizationsingle lease component.
Adoption of the field structure that supportsnew standard resulted in the remaining storesrecording of additional net lease assets and a significant restructuringlease liabilities of $2,519 million to $2,728 million, respectively, as of February 3, 2019. The difference of $209 million between the additional net lease assets and lease liabilities, net of the Company's operationsdeferred tax impact of $54 million, was recorded as an adjustment to focus resources on strategic priorities, improve organizational agilityretained earnings. Prepaid rent, intangible lease assets, finance lease assets, and reduce expense.
During January 2016, the Company announced a seriesaccrued and deferred rent as of cost-efficiency and process improvement measures, including organization changes that combine 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,February 3, 2019 were recorded 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 closureROU asset. Finance lease obligations as 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 resultFebruary 3, 2019 were recorded as part of the Company’s projected undiscounted futurelease liabilities. The standard did not materially impact the Company's consolidated net income and had no impact on 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.flows.
The Company expects to pay out the majority of the 2016 accrued severance costs, which are included in accounts payable and accrued liabilities on the Consolidated Balance Sheets, prior to July 29, 2017. The 2015 and 2014 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.




F-15


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




3.2.ReceivablesRevenue
Receivables were $522 million at January 28, 2017, comparedNet sales
Revenue is recognized when customers obtain control of goods and services promised by the Company. The amount of revenue recognized is based on the amount that reflects the consideration that is expected to $558 million at January 30, 2016.
In January 2016, the Company completed a $270 million real estate transaction that will enable a re-creation of Macy’s Brooklyn store. The Company will continue to ownbe received in exchange for those respective goods and operate the first four floors and lower level of its existing nine-story retail store, which will be reconfigured and remodeled. The remaining portionservices. Macy's accounted for approximately 88% of the storeCompany's net sales for 2019 and its nearby parking facility89% of the Company's net sales for both 2018 and 2017. Disaggregation of the Company's net sales by family of business for 2019, 2018 and 2017 were as follows:
 2019 2018 2017
Women’s Accessories, Intimate Apparel, Shoes, Cosmetics and Fragrances$9,454
 $9,457
 $9,444
Women’s Apparel5,411
 5,642
 5,765
Men’s and Kids’5,628
 5,699
 5,610
Home/Other (a)
4,067
 4,173
 4,120
Total$24,560
 $24,971
 $24,939
(a) Other primarily includes restaurant sales, allowance for merchandise returns adjustments, certain loyalty program income and breakage income from unredeemed gift cards.

The Company's revenue generating activities include the following:
Retail Sales
Retail sales include merchandise sales, inclusive of delivery income, licensed department income, sales of private brand goods directly to third party retailers and sales of excess inventory to third parties. Sales of merchandise are recorded at the time of shipment to the customer and are reported net of estimated merchandise returns and certain customer incentives. Commissions earned on sales generated by licensed departments are included as a component of total net sales and are recognized as revenue at the time merchandise is sold to Tishman Speyer in a single sales transaction.customers. Service revenues (e.g., alteration and cosmetic services) are recorded at the time the customer receives the benefit of the service. The Company has receivedelected to present sales taxes on a net basis and, as such, sales taxes are included in accounts payable and accrued liabilities until remitted to the taxing authorities.
Merchandise Returns
The Company estimates merchandise returns using historical data and recognizes an allowance that reduces net sales and cost of sales. The liability for merchandise returns is included in accounts payable and accrued liabilities on the Company's Consolidated Balance Sheets and was $213 million as of February 1, 2020 and $269 million as of February 2, 2019. Included in prepaid expenses and other current assets is an asset totaling $147 million as of February 1, 2020 and $188 million as of February 2, 2019 for the recoverable cost of merchandise estimated to be returned by customers.
Gift Cards and Customer Loyalty Programs
The liability for unredeemed gift cards and customer loyalty programs is included in accounts payable and accrued liabilities on the Company's Consolidated Balance Sheets and was $839 million as of February 1, 2020 and $856 million as of February 2, 2019. During 2018, the Company recognized approximately $209 million of cash ($68$40 million in 2015breakage income related to changes in breakage rate estimates. Changes in the liability for unredeemed gift cards and $141 million in 2016) from Tishman Speyer for these real estate assets and will receive $61 millioncustomer loyalty programs are as follows:
 2019 2018 2017
 (millions)
Balance, beginning of year$856
 $906
 $911
Liabilities issued but not redeemed (a)
554
 570
 551
Revenue recognized from beginning liability(571) (620) (556)
Balance, end of year$839
 $856
 $906
(a) Net of additional cash over the next two years,. This receivable is backed by a guarantee.estimated breakage income.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Credit Card Revenues, net
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”("Credit Card Program") with substantially similar financial terms as the prior credit card program agreement.. The Program Agreement is now set to expireexpires March 31, 2025, subject to an additional renewal term of three3 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.
As part of the Program Agreement, the Company receives payments for providing a combination of interrelated services and intellectual property to Citibank in support of the underlying Credit Card Program. Revenue based on the spending activity of the underlying accounts is recognized as the respective card purchases occur and the Company’s profit share is recognized based on the performance of the underlying portfolio. Revenue associated with the establishment of new credit accounts and assisting in the receipt of payments for existing accounts is recognized as such activities occur. Credit card revenues include finance charges, late fees and other revenue generated by the Company’s Credit Card Program, net of fraud losses and expenses associated with establishing new accounts.
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.
The Company’s credit card revenues, net were $771 million for 2019, $768 million for 2018, and $702 million for 2017. Amounts received under the Program Agreement were $912$985 million for 2016, $1,0262019, $966 million for 20152018 and $975$929 million for 2014,2017, and are treated as reductions of SG&A expensesincluded within credit card revenues, net on the Consolidated Statements of Income. The Company’s earnings from credit operations, net of servicing expenses, were $736 million for 2016, $831 million for 2015, and $776 million for 2014.

F-16


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




3.Restructuring, Impairment, Store Closing and Other Costs
Restructuring, impairment, store closing and other costs (income) consist of the following:
 2019 2018 2017
 (millions)
Restructuring$123
 $80
 $142
Asset Impairments197
 64
 53
Other34
 (8) (9)
 $354
 $136
 $186


During 2019, the Company closed or announced the closure of 30 Macy's stores. On February 4, 2020, the Company announced its Polaris strategy, a three-year plan designed to stabilize profitability and position the Company for sustainable, profitable growth. The strategy, developed in 2019, includes initiatives focused on strengthening customer relationships, curating quality fashion, accelerating digital growth, optimizing the Company's store portfolio and resetting its cost base. In conjunction with these initiatives, the Company announced plans to close approximately 125 of its least productive stores over the next three years, including the 30 announced in 2019. As part of the reset of its cost base, the Company developed a plan to streamline the organization through reductions in corporate and support functions, campus consolidations and the consolidation of the Company's sole headquarters to New York City, New York. In 2019, the Company recognized Polaris-related costs of approximately $318 million, of which approximately $161 million were non-cash impairment charges associated with store closures and campus consolidations and approximately $157 million were cash costs primarily related to severance and human resource-related activities and other costs.

A summary of the restructuring and other cash activity for 2019 related to the Polaris strategy, which are included within accounts payable and accrued liabilities, is as follows:

 Severance and other benefits Professional fees and other related charges Total
 (millions)
Balance at February 2, 2019$—
 $—
 $—
Additions charged to expense121
 36
 157
Cash payments(6) (27) (33)
Balance at February 1, 2020$115
 $9
 $124


As the Company continues to execute on the initiatives identified under the Polaris strategy, the Company expects to incur additional costs in 2020 of approximately $82 million to $102 million. The Company may incur significant additional charges in future periods as it more fully defines incremental Polaris strategy initiatives and moves into the execution phases of these projects. Since the scope of such efforts are not fully known at this time, the benefits of such initiatives, and any related charges or capital expenditures, are not currently quantifiable. Actions associated with the Polaris strategy are currently expected to continue through 2022.
During 2018, the Company closed or announced the closure of 10 Macy's stores. In addition, the Company introduced a plan in 2018 that reduced the complexity of the upper management structure to increase the speed of decision making, reduce costs and respond to changing customer expectations. Restructuring, impairment, store closing and other costs for 2018 included costs and expenses, including severance and other human-resource related costs, primarily associated with the organizational changes and store closings announced in January 2019. For 2018, the Company recorded expense of approximately $80 million of severance and other human resource-related costs associated with these restructuring activities.

During 2017, the Company closed or announced the closure of 16 Macy's stores, part of the approximately 100 planned closings announced in August 2016. During January 2018 and August 2017, the Company announced restructuring

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




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. Restructuring, impairment, store closing and other costs for 2017 included costs and expenses, including severance and other human-resource related costs, primarily associated with the organizational changes and store closings announced in January 2018 and August 2017.
The Company expects to pay out the majority of the 2019 accrued severance costs, which are included in accounts payable and accrued liabilities on the Consolidated Balance Sheets, prior to the end of the second quarter of 2020. The 2018 and 2017 accrued severance costs, which were included in accounts payable and accrued liabilities on the respective Consolidated Balance Sheets, were paid out in the year subsequent to incurring such severance costs.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




4.Properties and Leases
Property and Equipment, net
 January 28,
2017		 January 30,
2016
 (millions)
Land$1,541
 $1,629
Buildings on owned land4,212
 4,690
Buildings on leased land and leasehold improvements1,545
 1,672
Fixtures and equipment4,541
 4,910
Leased properties under capitalized leases34
 34
 11,873
 12,935
Less accumulated depreciation and amortization4,856
 5,319
 $7,017
 $7,616
The major classes of property and equipment, net as of February 1, 2020 and February 2, 2019 are as follows: 

 February 1,
2020		 February 2,
2019
 (millions)
Land$1,436
 $1,454
Buildings on owned land3,822
 4,019
Buildings on leased land and leasehold improvements1,365
 1,404
Fixtures and equipment4,402
 4,230
Leased properties under capitalized leases (a)
—
 25
 11,025
 11,132
Less accumulated depreciation and amortization (a)
4,392
 4,495
 $6,633
 $6,637

(a) As a result of the adoption of ASU 2016-02 on February 3, 2019, capital, or finance, lease assets were reclassed to the ROU assets on the Consolidated Balance Sheet. See Note 4 for information on leases.

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.fifteen years. Some of these agreements require that the stores be operated under a particular name.
Leases
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, insurance and other executorysimilar 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 theseCompany's 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, 2017, for noncancellable leases are:
ROU assets and lease liabilities consist of:
 
Capitalized
Leases
 
Operating
Leases
 Total
 (millions)
Fiscal year     
2017$3
 $321
 $324
20183
 304
 307
20193
 283
 286
20203
 249
 252
20213
 237
 240
After 202137
 2,289
 2,326
Total minimum lease payments52
 $3,683
 $3,735
Less amount representing interest24
    
Present value of net minimum capitalized lease payments$28
    
  February 1, 2020
 Classification(millions)
Assets  
Finance lease assets (a)
Right of Use Assets$13
Operating lease assets (b)
Right of Use Assets2,655
Total lease assets $2,668
   
Liabilities  
Current  
Finance (a)
Accounts payable and accrued liabilities$2
Operating (b)
Accounts payable and accrued liabilities331
   
Noncurrent  
Finance (a)
Long-Term Lease Liabilities21
Operating (b)
Long-Term Lease Liabilities2,897
Total lease liabilities $3,251

(a) Finance lease assets are recorded net of accumulated amortization of $12 million as of February 1, 2020. As of February 1, 2020, finance lease assets and noncurrent lease liabilities each included $2 million of non-lease components.
Capitalized leases are(b) As of February 1, 2020, operating lease assets included in the Consolidated Balance Sheets as property$403 million of non-lease components and equipment while the related obligation iscurrent and noncurrent lease liabilities included in short-term ($1$36 million) and long-term ($27$397 million,) debt. Amortization respectively, 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 $17 million on operating leases.

non-lease components.
F-17


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




The components of net lease expense, recognized primarily within selling, general and administrative expenses are disclosed below. For 2019, lease expense included $83 million related to non-lease components.
 2019 2018 2017
 (millions)
Real estate     
Operating leases (c) –
     
Minimum rents$364
 $317
 $317
Variable rents54
 11
 11
 418
 328
 328
Less income from subleases –     
Operating leases(2) (1) (3)
 $416
 $327
 $325
Personal property – Operating leases$8
 $9
 $10
(c) Certain supply chain operating lease expense amounts are included in cost of sales.

As of February 1, 2020, the maturity of lease liabilities is as follows:
 
Finance
Leases (d)
 
Operating
Leases (e and f)
 Total
 (millions)
Fiscal year     
2020$3
 $362
 $365
20213
 345
 348
20223
 322
 325
20233
 317
 320
20243
 300
 303
After 202419
 5,265
 5,284
Total undiscounted lease payments34
 6,911
 6,945
Less amount representing interest11
 3,683
 3,694
Total lease liabilities$23
 $3,228
 $3,251

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

Additional supplemental information regarding assumptions and cash flows for operating and finance leases is as follows:
February 1, 2020
Lease Term and Discount Rate(millions)
Weighted-average remaining lease term (years)
Finance leases12.7
Operating leases23.3
Weighted-average discount rate
Finance leases6.69%
Operating leases6.53%


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




 52 Weeks Ended
 February 1, 2020
Other Information 
Cash paid for amounts included in the measurement of lease liabilities: 
Operating cash flows used from operating leases$363
Financing cash flows used from financing leases2
Leased assets obtained in exchange for new operating lease liabilities216


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 $284$225 million and are offset by payments from existing tenants and subtenants. In addition, the Company is contingently liable for other expenses related to the above leases, such as property taxes and common area maintenance, which are also payable by existing tenants and subtenants. Potential liabilities related to these guarantees are subject to certain defenses by the Company. The Company believes that the risk of significant loss from the guarantees of these lease obligations is remote.
Rental expense consists of:
 2016 2015 2014
 (millions)
Real estate (excluding executory costs)     
Capitalized leases –     
Contingent rentals$—
 $—
 $—
Operating leases –     
Minimum rentals312
 288
 265
Contingent rentals12
 19
 22
 324
 307
 287
Less income from subleases –     
Operating leases(5) (6) (8)
 $319
 $301
 $279
Personal property – Operating leases$11
 $12
 $12

Included as a reduction to the expense above is deferred rent amortization of $9 million, $8 million and $7 million for 2016, 2015 and 2014, respectively, related to contributions received from landlords.


F-18


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




5.Goodwill and Other Intangible Assets
The following summarizes the Company’s goodwill and other intangible assets:
 
 February 1,
2020		 February 2,
2019
 (millions)
Non-amortizing intangible assets   
Goodwill$9,290
 $9,290
Accumulated impairment losses(5,382) (5,382)
 3,908
 3,908
Tradenames403
 403
 $4,311
 $4,311
Amortizing intangible assets   
Favorable leases and other contractual assets (a)
$5
 $136
Tradenames43
 43
 48
 179
Accumulated amortization   
Favorable leases and other contractual assets (a)
(1) (95)
Tradenames(11) (9)
 (12) (104)
 $36
 $75
    
Capitalized software   
Gross balance$1,262
 $1,316
Accumulated amortization(620) (646)
 $642
 $670

 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
Tradenames403
 414
 $4,300
 $4,311
Amortizing intangible assets   
Favorable leases and other contractual assets$141
 $149
Tradenames43
 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) As a result of the acquisitionadoption of Bluemercury,ASU 2016-02 on February 3, 2019, favorable leases were reclassed to the Company established intangibleright of use assets relating to definite lived tradenames and favorable leases.on the Consolidated Balance Sheet. See Note 4 for information on the right of use assets as of February 1, 2020.
DefiniteFinite 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 intangibleterms.
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$3 million for 20162019, $23while favorable leases, other contractual assets, and tradenames amortization expense amounted to $10 million for 20152018 and $312017. Capitalized software amortization expense amounted to $285 million for 2014.2019, $296 million for 2018 and $301 million for 2017.
Future estimated intangible amortization expense for assets, excluding in-process capitalized software of $66 million not yet placed in service as of February 1, 2020, is shown below:
 Amortizing intangible assets Capitalized Software
 (millions)
Fiscal year   
2020$2
 $253
20212
 185
20222
 103
20232
 34
20242
 1

 (millions)
Fiscal year 
2017$10
201810
20199
20208
20216



F-19


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




6.Financing
The Company’s debt is as follows:
 February 1,
2020		 February 2,
2019
 (millions)
Short-term debt:   
8.5% Senior debentures due 2019$—
 $36
3.45% Senior notes due 2021500
 —
10.25% Senior debentures due 202133
 —
Capital lease and current portion of other long-term obligations (a)6
 7
 $539
 $43
Long-term debt:   
2.875% Senior notes due 2023$640
 $750
3.875% Senior notes due 2022450
 550
4.5% Senior notes due 2034367
 367
3.45% Senior notes due 2021—
 500
3.625% Senior notes due 2024500
 500
4.375% Senior notes due 2023210
 400
5.125% Senior debentures due 2042250
 250
4.3% Senior notes due 2043250
 250
6.7% Senior debentures due 2034201
 201
6.9% Senior debentures due 202979
 192
6.375% Senior notes due 2037192
 192
6.65% Senior debentures due 2024122
 122
7.0% Senior debentures due 2028105
 117
6.7% Senior debentures due 2028103
 103
6.79% Senior debentures due 202771
 71
6.9% Senior debentures due 203217
 17
10.25% Senior debentures due 2021—
 33
7.6% Senior debentures due 202524
 24
8.75% Senior debentures due 202913
 13
7.875% Senior debentures due 203010
 10
9.5% amortizing debentures due 20212
 6
9.75% amortizing debentures due 20211
 3
Unamortized debt issue costs(13) (18)
Unamortized debt discount(7) (9)
Premium on acquired debt, using an effective
interest yield of 5.542% to 7.144%		34
 39
Capital lease and other long-term obligations (a)—
 25
 $3,621
 $4,708

 January 28,
2017		 January 30,
2016
 (millions)
Short-term debt:   
7.45% Senior debentures due 2017$300
 $—
5.9% Senior notes due 2016—
 577
7.45% Senior debentures due 2016—
 59
Capital lease and current portion of other long-term obligations9
 6
 $309
 $642
Long-term debt:   
2.875% Senior notes due 2023$750
 $750
3.875% Senior notes due 2022550
 550
4.5% Senior notes due 2034550
 550
3.45% Senior notes due 2021500
 500
3.625% Senior notes due 2024500
 500
6.375% Senior notes due 2037500
 500
4.375% Senior notes due 2023400
 400
6.9% Senior debentures due 2029400
 400
6.7% Senior debentures due 2034400
 400
7.45% Senior debentures due 2017—
 300
6.65% Senior debentures due 2024300
 300
7.0% Senior debentures due 2028300
 300
6.9% Senior debentures due 2032250
 250
5.125% Senior debentures due 2042250
 250
4.3% Senior notes due 2043250
 250
6.7% Senior debentures due 2028200
 200
6.79% Senior debentures due 2027165
 165
7.875% Senior debentures due 2036—
 108
8.75% Senior debentures due 202961
 61
8.5% Senior debentures due 201936
 36
10.25% Senior debentures due 202133
 33
7.6% Senior debentures due 202524
 24
7.875% Senior debentures due 203018
 18
9.5% amortizing debentures due 202114
 17
9.75% amortizing debentures due 20218
 9
Unamortized debt issue costs(29) (32)
Unamortized debt discount(16) (16)
Premium on acquired debt, using an effective
interest yield of 5.542% to 6.021%		121
 143
Capital lease and other long-term obligations27
 29
 $6,562
 $6,995
(a) As a result of the adoption of ASU 2016-02 on February 3, 2019, capital, or finance, leases were reclassed to lease liabilities within accounts payable and accrued liabilities and long-term lease liabilities on the Consolidated Balance Sheet. See Note 4 for information on leases.



F-20


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




Interest expense and premiumlosses (gains) on early retirement of debt isare as follows:
 
 2019 2018 2017
 (millions)
Interest on debt$211
 $269
 $332
Amortization of debt premium(5) (7) (9)
Amortization of financing costs and debt discount6
 7
 7
Interest on capitalized leases2
 2
 2
 214
 271
 332
Less interest capitalized on construction9
 10
 11
Interest expense$205
 $261
 $321
Losses (gains) on early retirement of debt$30
 $33
 $(10)

 2016 2015 2014
 (millions)
Interest on debt$392
 $393
 $411
Amortization of debt premium(22) (21) (12)
Amortization of financing costs and debt discount5
 6
 7
Interest on capitalized leases2
 2
 2
 377
 380
 408
Less interest capitalized on construction10
 17
 13
Interest expense$367
 $363
 $395
Premium on early retirement of debt$—
 $—
 $17


On August 15, 2016,During December 2019, the Company redeemed at par thecompleted a tender offer and purchased $525 million in aggregate principal amount of $108certain senior unsecured notes and debentures. The purchased senior unsecured notes and debentures included $190 million of 7.875%4.375% senior notes due 2023, $113 million of 6.9% senior debentures due 2036, pursuant2029, $110 million of 2.875% senior notes due 2023, $100 million of 3.875% senior notes due 2022, and $12 million of 7.0% senior debentures due 2028. The total cash cost for the tender offer was $553 million. The Company recognized $30 million of expense related to the terms of the debentures. Interest expense in 2016 benefited from the recognition of unamortizedthe tender premium and other costs including deferred debt premium associated with this debt.discount amortization. This expense is presented as losses on early retirement of debt on the Consolidated Statements of Income during 2019.


On August 17, 2015,During 2018, the Company redeemed at parrepurchased $344 million face value of senior notes and debentures. The debt repurchases were made in the principal amountopen market for a total cost of $76$354 million, of 8.125% senior debentures due 2035, pursuantincluding expenses and other fees related 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 andtransactions. Such repurchases resulted in the recognition of additional interest expense of $17$5 million during 2014. This additional interest expense is2018 presented as premiumlosses 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)
Fiscal year 
2018$6
201942
2020539
2021553
2022—
After 20225,319

During 2016, 2015 and 2014,December 2018, the Company repaid $636completed a tender offer and purchased $750 million, $69 million and $453 million, respectively, of indebtedness at maturity.
On December 7, 2015, the Company issued $500 million in aggregate principal amount of 3.45%certain senior unsecured notes and debentures. The purchased senior unsecured notes and debentures included $164 million of 6.65% senior debentures due 2021, the proceeds2024, $155 million of which were used for general corporate purposes.
On November 18, 2014, the Company issued $5507.0% senior debentures due 2028, $114 million aggregate principal amountof 6.9% senior debentures due 2029, $103 million of 4.5% senior notes due 2034. This debt was used to pay for the redemption2034, $94 million of the $4076.79% senior debentures due 2027, $35 million of 6.7% senior debentures due 2034, $34 million of 6.375% senior notes due 2037, $34 million of 6.7% senior debentures due 2028, $10 million of 6.9% senior debentures due 2032, $5 million of 8.75% senior debentures due 2029, and $2 million of 7.875% senior notesdebentures due 2015 described above.2030. The total cash cost for the tender offer was $789 million. The Company recognized $28 million of expense related to the recognition of the tender premium and other costs partially offset by the unamortized debt premium associated with this debt. This expense is presented as losses on early retirement of debt on the Consolidated Statements of Income during 2018.
On May 23, 2014,
During 2017, the Company issued $500completed a tender offer and purchased $400 million in aggregate principal amount of 3.625%certain senior unsecured notes and debentures. The purchased senior unsecured notes and debentures included $147 million of 6.9% senior debentures due 2024,2032, $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 proceedstender offer was $423 million. The Company recognized $11 million of whichincome related to the recognition of the unamortized debt premium partially offset by the tender premium and other costs associated with this debt as gains on early retirement of debt. This income is presented as gains on early retirement of debt on the Consolidated Statements of Income during 2017.

During 2017, the Company repurchased $247 million face value of senior notes and debentures. The debt repurchases were usedmade in the open market for general corporate purposes.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 losses on early retirement of debt on the Consolidated Statements of Income.



F-21


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




Future maturities of long-term debt are shown below:
 (millions)
Fiscal year 
2021$453
2022—
2023850
2024622
202524
After 20251,658


During 2019 and 2017, the Company repaid $36 million and $300 million, respectively, of indebtedness at maturity.
The following table shows the detail of debt repayments:
 2019 2018 2017
 (millions)
6.9% Senior debentures due 2029$113
 $204
 $3
4.5% Senior notes due 2034—
 183
 —
7.0% Senior debentures due 202812
 182
 2
4.375% Senior notes due 2023190
 —
 —
3.875% Senior notes due 2022100
 —
 —
2.875% Senior notes due 2023110
 —
 —
6.65% Senior debentures due 2024—
 175
 4
7.45% Senior debentures due 2017—
 —
 300
6.7% Senior debentures due 2028—
 94
 3
6.79% Senior debentures due 2027—
 94
 —
6.375% Senior notes due 2037—
 77
 231
6.7% Senior debentures due 2034—
 63
 136
6.9% Senior debentures due 2032—
 15
 219
8.75% Senior debentures due 2029—
 5
 43
7.875% Senior debentures due 2030—
 2
 6
8.5% Senior debentures due 201936
 —
 —
9.5% amortizing debentures due 20214
 4
 4
9.75% amortizing debentures due 20212
 2
 2
Capital leases and other obligations (a)
—
 1
 1
 $567
 $1,101
 $954

 2016 2015 2014
 (millions)
5.9% Senior notes due 2016$577
 $—
 $—
7.875% Senior notes due 2036108
 —
 —
7.45% Senior debentures due 201659
 —
 —
7.5% Senior debentures due 2015—
 69
 —
8.125% Senior debentures due 2035—
 76
 —
5.75% Senior notes due 2014—
 —
 453
7.875% Senior debentures due 2015—
 —
 407
9.5% amortizing debentures due 20214
 4
 4
9.75% amortizing debentures due 20212
 3
 2
Capital leases and other obligations1
 —
 4
 $751
 $152
 $870
(a) As a result of the adoption of ASU 2016-02 on February 3, 2019, capital, or finance, leases were reclassed to lease liabilities within accounts payable and accrued liabilities and long-term lease liabilities on the Consolidated Balance Sheet. See Note 4 for information on leases.


The following summarizes certain components of the Company’s debt:
Bank Credit Agreement
The
On May 9, 2019, the Company entered into a new credit agreement with certain financial institutions that replaced the previous credit agreement which was set to expire on May 6, 2016 providing2021. Similar to the previous agreement, the new credit agreement provides for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing) outstanding at any particular time.. The new credit agreement is setscheduled to expire on May 6, 20219, 2024, subject to up to two one-year extensions that may be requested by the Company and replacedagreed to by the prior agreement which was set to expire May 10, 2018.lenders.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




As of January 28, 2017,February 1, 2020 and January 30, 2016,February 2, 2019, there were no0 revolving credit loans outstanding under thisthe credit agreement,agreements, and there were no borrowings under the agreement throughout all of 2016agreements during 2019 and 2015.2018. In addition, there were no0 standby letters of credit outstanding at January 28, 2017February 1, 2020 and there were less than $1 million of standby letters of credit outstanding at January 30, 2016.February 2, 2019. 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 3.75.3.75. The Company’s interest coverage ratio for 2019 was 12.68 and its leverage ratio at February 1, 2020 was 1.78, in each case as calculated in accordance with the credit agreement. The interest coverage ratio is defined as EBITDA (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, settlement charges, non-recurring cash charges not to exceed in the aggregate $300$200 million and extraordinary losses less interest income and non-recurring or extraordinary gains. DebtNet interest 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.

F-22

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. The amount ofThere were 0 borrowings under the commercial paper program increased to its highest level for 2016 of approximately $388 million during the fourth quarter.2019 and 2018. As of January 28, 2017,February 1, 2020 and February 2, 2019, there were no0 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, “CondensedCondensed Consolidating Financial Information”)Information).
Other Financing Arrangements
At January 28, 2017February 1, 2020 and January 30, 2016February 2, 2019, 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 $3034 million and $21$28 million, respectively, of other standby letters of credit outstanding at January 28, 2017February 1, 2020 and January 30, 2016, respectively.February 2, 2019.



F-23


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




7.Accounts Payable and Accrued Liabilities
 
 February 1,
2020		 February 2,
2019
 (millions)
Accounts payable$977
 $983
Gift cards and customer rewards839
 856
Lease related liabilities (a)
399
 180
Allowance for future sales returns213
 269
Accrued wages and vacation194
 268
Current portion of post employment and postretirement benefits180
 194
Taxes other than income taxes145
 134
Current portion of workers’ compensation and general liability reserves105
 112
Restructuring accruals, including severance113
 67
Accrued interest41
 51
Deferred real estate gains—
 23
Other242
 229
 $3,448
 $3,366

 January 28,
2017		 January 30,
2016
 (millions)
Accounts payable$754
 $814
Gift cards and customer rewards970
 920
Deferred real estate gains340
 104
Current portion of post employment and postretirement benefits208
 257
Taxes other than income taxes166
 184
Lease related liabilities174
 165
Accrued wages and vacation215
 153
Current portion of workers’ compensation and general liability reserves119
 127
Severance and relocation166
 123
Allowance for future sales returns96
 112
Accrued interest74
 88
Other281
 286
 $3,563
 $3,333
 (a) As of February 1, 2020, the balance includes the current portion of operating leases and finance leases accounted for under ASU 2016-02. As of February 2, 2019, lease related liabilities were accounted for under ASC Subtopic 840, Leases. See Note 4 for information on leases.

Adjustments to the allowance for future sales returns, which amounted to a credit of $16 million, and charges of $19 million and $8 million for 2016, 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:
 
 2019 2018 2017
 (millions)
Balance, beginning of year$487
 $497
 $503
Charged to costs and expenses120
 130
 144
Payments, net of recoveries(145) (140) (150)
Balance, end of year$462
 $487
 $497

 2016 2015 2014
 (millions)
Balance, beginning of year$508
 $505
 $497
Charged to costs and expenses145
 159
 160
Payments, net of recoveries(150) (156) (152)
Balance, end of year$503
 $508
 $505


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 1, 2020 and January 30, 2016,February 2, 2019, workers’ compensation and general liability reserves included $112$110 million of liabilities and $112 million, respectively, which are covered by deposits and receivables included in current assets on the Consolidated Balance Sheets.



F-24


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




8.Taxes
Income tax expense (benefit) is as follows:
 
 2019 2018 2017
 Current Deferred Total Current Deferred Total Current Deferred Total
 (millions)
Federal$137
 $4
 $141
 $156
 $79
 $235
 $367
 $(462) $(95)
State and local33
 (10) 23
 54
 33
 87
 15
 41
 56
 $170
 $(6) $164
 $210
 $112
 $322
 $382
 $(421) $(39)

 2016 2015 2014
 Current Deferred Total Current Deferred Total Current Deferred Total
 (millions)
Federal$433
 $(125) $308
 $536
 $—
 $536
 $743
 $28
 $771
State and local37
 (4) 33
 72
 —
 72
 92
 1
 93
 $470
 $(129) $341
 $608
 $—
 $608
 $835
 $29
 $864
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 $584 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 2.6% in 2017.

The income tax expense (benefit) reported differs from the expected tax computed by applying the federal income tax statutory rate of 35%21% for 2016both 2019 and 2018, 2015and 201433.7% for 2017 to income before income taxes.taxes net of noncontrolling interest. The reasons for this difference and their tax effects are as follows:
 
 2019 2018 2017
 (millions)
Expected tax$153
 $300
 $515
State and local income taxes, net of federal income tax benefit (a)
13
 59
 19
Federal tax reform deferred tax remeasurement—
 (17) (584)
Tax impact of equity awards (a)
1
 —
 14
Federal tax credits(3) (16) (16)
Change in valuation allowance5
 10
 18
Other(5) (14) (5)
 $164
 $322
 $(39)

 2016 2015 2014
 (millions)
Expected tax$333
 $587
 $836
State and local income taxes, net of federal income tax benefit12
 43
 59
Historic rehabilitation tax credit(1) (12) (20)
Change in valuation allowance9
 3
 1
Other(12) (13) (12)
 $341
 $608
 $864
(a) 2017 included the recognition of approximately $15 million of net tax shortfalls 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.

F-25


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:
 
 February 1,
2020		 February 2,
2019
 (millions)
Deferred tax assets   
Post employment and postretirement benefits$210
 $208
Accrued liabilities accounted for on a cash basis for tax purposes165
 222
Lease liabilities864
 —
Unrecognized state tax benefits and accrued interest40
 39
State operating loss and credit carryforwards102
 103
Other110
 172
Valuation allowance(80) (75)
Total deferred tax assets1,411
 669
Deferred tax liabilities   
Excess of book basis over tax basis of property and equipment(988) (987)
Right of use assets(707) —
Merchandise inventories(365) (398)
Intangible assets(309) (308)
Other(211) (214)
Total deferred tax liabilities(2,580) (1,907)
Net deferred tax liability$(1,169) $(1,238)

 January 28,
2017		 January 30,
2016
 (millions)
Deferred tax assets   
Post employment and postretirement benefits$405
 $536
Accrued liabilities accounted for on a cash basis for tax purposes379
 340
Long-term debt63
 73
Unrecognized state tax benefits and accrued interest76
 79
State operating loss and credit carryforwards79
 82
Other347
 206
Valuation allowance(36) (27)
Total deferred tax assets1,313
 1,289
Deferred tax liabilities   
Excess of book basis over tax basis of property and equipment(1,381) (1,485)
Merchandise inventories(604) (606)
Intangible assets(380) (345)
Other(391) (330)
Total deferred tax liabilities(2,756) (2,766)
Net deferred tax liability$(1,443) $(1,477)


The valuation allowance at January 28, 2017February 1, 2020 and January 30, 2016February 2, 2019 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$5 million for 2016 and2019. In 2018, the net change in the valuation allowance amounted to an increase of $310 million for 2015.
As of January 28, 2017February 1, 2020, the Company had no0 federal net operating loss carryforwards, state net operating loss carryforwards, net of $374valuation allowances, of $218 million, and state credit carryforwards, net of valuation allowances, of $319 million, which will expire between 20172020 and 2036.2039.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
 February 1,
2020		 February 2,
2019		 February 3,
2018
 (millions)
Balance, beginning of year$149
 $140
 $167
Additions based on tax positions related to the current year18
 17
 7
Additions for tax positions of prior years11
 13
 —
Reductions for tax positions of prior years(20) (12) (23)
Settlements(16) —
 (2)
Statute expirations(9) (9) (9)
Balance, end of year$133
 $149
 $140
Amounts recognized in the Consolidated Balance Sheets     
Current income taxes$12
 $28
 $11
Deferred income taxes4
 4
 4
Other liabilities (a)
117
 117
 125
 $133
 $149
 $140

 January 28,
2017		 January 30,
2016		 January 31,
2015
 (millions)
Balance, beginning of year$178
 $172
 $189
Additions based on tax positions related to the current year16
 30
 33
Additions for tax positions of prior years—
 —
 —
Reductions for tax positions of prior years(12) (7) (15)
Settlements(4) (3) (23)
Statute expirations(11) (14) (12)
Balance, end of year$167
 $178
 $172
Amounts recognized in the Consolidated Balance Sheets at
   January 28, 2017, January 30, 2016 and January 31, 2015
     
Current income taxes$6
 $12
 $11
Long-term deferred income taxes4
 5
 6
Other liabilities157
 161
 155
 $167
 $178
 $172
(a) Unrecognized tax benefits not expected to be settled within one year are included within other liabilities on the Consolidated Balance Sheets.



F-26


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




As of January 28, 2017Additional information regarding unrecognized benefits and January 30, 2016, the amount of unrecognized tax benefits, net of deferred tax assets, that, if recognized would affect the effective income tax rate, was $109 millionrelated interest and $115 million, respectively.penalties is as follow:
The Company classifies unrecognized tax benefits not expected to be settled within one year as other liabilities on the Consolidated Balance Sheets.
 February 1,
2020		 February 2,
2019		 
 (millions)
Amount of unrecognized tax benefits, net of deferred tax assets, that if recognized would affect the effective tax rate$106
 $120
 
Accrued federal, state and local interest and penalties60
 56
 
Amounts recognized in the Consolidated Balance Sheets    
Current income taxes4
 28
 
Other liabilities56
 28
 

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 an expense of $2 million for 2016, an expense of $1 million for 2015, and a credit of $3 million for 2014, are reflected in income tax expense.
The Company had $55 million and $53 million accrued for the payment of federal, state and local interest and penalties at January 28, 2017 and January 30, 2016, respectively. The accrued federal, state and local interest and penalties primarily relatesrelate to state tax issues and the amount of penalties paid in prior periods, and the amountamounts of penalties accrued at January 28, 2017February 1, 2020 and January 30, 2016February 2, 2019, are insignificant. At January 28, 2017, $54 million of federal,Federal, state and local interest and penalties is included in other liabilitiesamounted to an expense of $6 million for 2019, an expense of $5 million for 2018, and a credit of $13 million is included in current income taxes on the Consolidated Balance Sheets. for 2017.
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 2013.2016. 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 2007.2010. 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.

As of February 1, 2020, the Company believes it is reasonably possible that certain unrecognized tax benefits ranging from 0 to $56 million may be recognized by the end of 2020. It is reasonably possible that there could be other material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues or the reassessment of existing uncertain tax positions; however, the Company is not able to estimate the impact of these items at this time.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




9.Retirement Plans
The Company has defined contribution plans which cover substantially all employees who work 1,000 hours or more in a year. In addition, the Company has a funded defined benefit plan (“Pension Plan”) and an unfunded defined benefit supplementary retirement plan (“SERP”), which provides benefits, for certain employees, in excess of qualified plan limitations. Effective January 1, 2012, the Pension Plan was closed to new participants, with limited exceptions, and effective January 2, 2012, the SERP was closed to new participants.
In February 2013, the Company announced changes to the Pension Plan and SERP whereby eligible employees no longer earn future pension service credits after December 31, 2013, with limited exceptions. All retirement benefits attributable to service in subsequent periods are provided through defined contribution plans.
Retirement expenses, excluding settlement charges, included the following components:
 2019 2018 2017
 (millions)
401(k) Qualified Defined Contribution Plan$96
 $96
 $93
Non-Qualified Defined Contribution Plan2
 1
 1
Pension Plan(54) (64) (82)
Supplementary Retirement Plan30
 31
 31
 $74
 $64
 $43

 2016 2015 2014
 (millions)
401(k) Qualified Defined Contribution Plan$94
 $88
 $89
Non-Qualified Defined Contribution Plan2
 2
 2
Pension Plan(83) (54) (64)
Supplementary Retirement Plan31
 41
 38
 $44
 $77
 $65
In 2016, theThe Company changed the method used to estimateestimates the service and interest cost components of net periodic benefit costs for the Pension Plan and SERP. The newThis 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 obligationsobligation 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 $102$104 million at January 28, 2017February 1, 2020 and $97$103 million January 30, 2016.at February 2, 2019. Expense related to matching contributions for the qualified plan amounted to $94$96 million for 2016, $882019 and 2018, and $93 million for 2015 and $89 million for 2014.2017.
At January 28, 2017February 1, 2020 and January 30, 2016,February 2, 2019, the liability under the non-qualified plan, which is reflected in other liabilities on the Consolidated Balance Sheets, was $20$34 million and $13$27 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 $2 million at January 28, 2017February 1, 2020 and January 30, 2016.February 2, 2019. Expense related to matching contributions for the non-qualified plan amounted to $2 million for 20162019 and 2015.$1 million for both 2018 and 2017. In connection with the non-qualified plan, the Company

F-27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


had mutual fund investments at January 28, 2017February 1, 2020 and January 30, 2016February 2, 2019 of $20$34 million and $13$27 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.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Pension Plan
The following provides a reconciliation of benefit obligations, plan assets, and funded status of the Pension Plan as of January 28, 2017February 1, 2020 and January 30, 2016February 2, 2019:
 
 2019 2018
 (millions)
Change in projected benefit obligation   
Projected benefit obligation, beginning of year$3,011
 $3,271
Service cost5
 5
Interest cost103
 109
Actuarial (gain) loss463
 (27)
Benefits paid(261) (347)
Projected benefit obligation, end of year3,321
 3,011
Changes in plan assets   
Fair value of plan assets, beginning of year3,018
 3,409
Actual return on plan assets602
 (44)
Company contributions—
 —
Benefits paid(261) (347)
Fair value of plan assets, end of year3,359
 3,018
Funded status at end of year$38
 $7
Amounts recognized in the Consolidated Balance Sheets at
February 1, 2020 and February 2, 2019		   
Other assets$38
 $7
 
 
Amounts recognized in accumulated other comprehensive loss at
February 1, 2020 and February 2, 2019		   
Net actuarial loss$1,086
 $1,109

 2016 2015
 (millions)
Change in projected benefit obligation   
Projected benefit obligation, beginning of year$3,585
 $3,966
Service cost5
 6
Interest cost108
 137
Actuarial (gain) loss55
 (282)
Benefits paid(284) (242)
Projected benefit obligation, end of year3,469
 3,585
Changes in plan assets   
Fair value of plan assets, beginning of year3,256
 3,636
Actual return on plan assets402
 (138)
Company contributions—
 —
Benefits paid(284) (242)
Fair value of plan assets, end of year3,374
 3,256
Funded status at end of year$(95) $(329)
Amounts recognized in the Consolidated Balance Sheets at
January 28, 2017 and January 30, 2016		   
Other liabilities$(95) $(329)
 
 
Amounts recognized in accumulated other comprehensive loss at
January 28, 2017 and January 30, 2016		   
Net actuarial loss$1,232
 $1,451


The accumulated benefit obligation for the Pension Plan was $3,4643,320 million as of January 28, 2017February 1, 2020 and $3,5743,010 million as of January 30, 2016February 2, 2019.

F-28


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:
 
 2019 2018 2017
 (millions)
Net Periodic Pension Cost     
Service cost$5
 $5
 $6
Interest cost103
 109
 104
Expected return on assets(191) (206) (223)
Amortization of net actuarial loss29
 28
 31
Amortization of prior service credit—
 —
 —
 (54) (64) (82)
      
Settlement charges45
 78
 89
      
Other Changes in Plan Assets and Projected Benefit Obligation
Recognized in Other Comprehensive Loss		     
Net actuarial (gain) loss51
 223
 (120)
Amortization of net actuarial loss(29) (28) (31)
Settlement charges(45) (78) (89)
 (23) 117
 (240)
Total recognized$(32) $131
 $(233)

 2016 2015 2014
 (millions)
Net Periodic Pension Cost     
Service cost$5
 $6
 $6
Interest cost108
 137
 151
Expected return on assets(227) (235) (246)
Amortization of net actuarial loss31
 38
 25
Amortization of prior service credit—
 —
 —
 (83) (54) (64)
      
Settlement charges68
 —
 —
      
Other Changes in Plan Assets and Projected Benefit Obligation
Recognized in Other Comprehensive Loss		     
Net actuarial (gain) loss(120) 92
 491
Amortization of net actuarial loss(31) (38) (25)
Amortization of prior service credit—
 —
 —
Settlement charges(68) —
 —
 (219) 54
 466
Total recognized$(234) $—
 $402


The estimated net actuarial loss for the Pension Plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 20172020 is $3342 million.
The following weighted average assumptions were used to determine the projected benefit obligations for the Pension Plan at January 28, 2017February 1, 2020 and January 30, 2016February 2, 2019:
 
 2019 2018
Discount rate2.83% 4.03%
Rate of compensation increases3.25% 4.00%

 2016 2015
Discount rate4.00% 4.17%
Rate of compensation increases4.10% 4.10%


The following weighted average assumptions were used to determine the net periodic pension cost for the Pension Plan:
 2019 2018 2017
Discount rate used to measure service cost4.09% 3.77% - 4.46%
 3.75% - 4.06%
Discount rate used to measure interest cost3.67% 3.39% - 4.06%
 3.12% - 3.31%
Expected long-term return on plan assets6.50% 6.75% 7.00%
Rate of compensation increases4.00% 4.00% 4.10%

 2016 2015 2014
Discount rate used to measure service cost3.79% - 4.26%
 3.55% 4.50%
Discount rate used to measure interest cost2.96% - 3.30%
 3.55% 4.50%
Expected long-term return on plan assets7.00% 7.00% 7.50%
Rate of compensation increases4.10% 4.10% 4.10%


The Pension Plan’s assumptions are evaluated annually, and at interim re-measurements if required, and updated as necessary. Due to settlement accounting and re-measurements during 2018 and 2017, the discount rate used to measure service cost and 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 Pension Plan.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




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.

F-29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Due to settlement accounting and re-measurements during 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 1, 2020, the Company lowered the assumed annual long-term rate of return for the Pension Plan's assets from 7.50%6.50% to 7.00%6.25% 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%63% debt securities, 5%2% 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.

F-30


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




The fair values of the Pension Plan assets as of January 28, 2017February 1, 2020, excluding interest and dividend receivables and pending investment purchases and sales, by asset category are as follows:
 
Fair Value MeasurementsFair 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)(millions)
Short term investments$14
 $—
 $14
 $—
Money market funds74
 74
 —
 —
$37
 $37
 $—
 $—
Equity securities:              
U.S. stocks309
 309
 —
 —
122
 122
 —
 —
U.S. pooled funds (a)654
 446
 —
 —
U.S. pooled funds474
 474
 —
 —
International pooled funds (a)649
 131
 —
 —
357
 82
 —
 —
Fixed income securities:              
U. S. Treasury bonds194
 —
 194
 —
U.S. Treasury bonds58
 —
 58
 —
Other Government bonds40
 —
 40
 —
61
 —
 61
 —
Agency backed bonds24
 —
 24
 —
13
 —
 13
 —
Corporate bonds453
 —
 453
 —
615
 —
 615
 —
Mortgage-backed securities85
 —
 85
 —
23
 —
 23
 —
Asset-backed securities17
 —
 17
 —
10
 —
 10
 —
Pooled funds461
 461
 —
 —
1,442
 1,442
 —
 —
Other types of investments:              
Real estate (a)223
 —
 —
 —
37
 —
 —
 —
Private equity (a)186
 —
 —
 —
167
 —
 —
 —
Derivatives in a positive position13
 —
 13
 —
4
 —
 4
 —
Derivatives in a negative position(19) —
 (19) —
(6) —
 (6) —
Total$3,377
 $1,421
 $821
 $—
$3,414
 $2,157
 $778
 $—
(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.



F-31


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




The fair values of the Pension Plan assets as of January 30, 2016February 2, 2019, excluding interest and dividend receivables and pending investment purchases and sales, by asset category are as follows:
 
Fair Value MeasurementsFair 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)(millions)
Cash and cash equivalents$15
 $15
 $—
 $—
Short term investments36
 —
 36
 —
$1
 $—
 $1
 $—
Money market funds46
 46
 —
 —
33
 33
 —
 —
Equity securities:       

      
U.S. stocks280
 280
 —
 —
117
 117
 —
 —
U.S. pooled funds (a)391
 207
 —
 —
U.S. pooled funds398
 398
 —
 —
International pooled funds (a)575
 336
 —
 —
347
 78
 —
 —
Fixed income securities:       

      
U. S. Treasury bonds233
 —
 233
 —
U.S. Treasury bonds52
 —
 52
 —
Other Government bonds41
 —
 41
 —
53
 —
 53
 —
Agency backed bonds31
 —
 31
 —
11
 —
 11
 —
Corporate bonds433
 —
 433
 —
513
 —
 513
 —
Mortgage-backed securities112
 —
 112
 —
15
 —
 15
 —
Asset-backed securities28
 —
 28
 —
11
 —
 11
 —
Pooled funds427
 427
 —
 —
1,270
 1,270
 —
 —
Other types of investments:       

      
Real estate (a)238
 —
 —
 —
56
 —
 —
 —
Hedge funds (a)179
 —
 —
 —
Private equity (a)188
 —
 —
 —
185
 —
 —
 —
Derivatives in a positive position15
 —
 15
 —
6
 —
 6
 —
Derivatives in a negative position(22) —
 (22) —
(2) —
 (2) —
Total$3,246
 $1,311
 $907
 $—
$3,066
 $1,896
 $660
 $—
(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.

F-32


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 1, 2020 and January 30, 2016February 2, 2019, certain of these investments are generally subject to lock-up periods, ranging from two1 to fourteen9 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 1, 2020 and January 30, 2016February 2, 2019, the Pension Plan had unfunded commitments related to certain of these investments totaling $72$43 million and $9649 million, respectively.


The Company does not anticipate making funding contributions to the Pension Plan in 2017.2020.
The following benefit payments are estimated to be paid from the Pension Plan:
 
 (millions)
Fiscal year 
2020$325
2021274
2022259
2023250
2024234
2025-20291,010

 (millions)
Fiscal year 
2017$383
2018309
2019299
2020286
2021246
2022-20261,113



F-33


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 1, 2020 and January 30, 2016February 2, 2019:
 
 2019 2018
 (millions)
Change in projected benefit obligation   
Projected benefit obligation, beginning of year$644
 $703
Service cost—
 —
Interest cost21
 23
Actuarial (gain) loss87
 (9)
Benefits paid(71) (73)
Projected benefit obligation, end of year681
 644
Change in plan assets   
Fair value of plan assets, beginning of year—
 —
Company contributions71
 73
Benefits paid(71) (73)
Fair value of plan assets, end of year—
 —
Funded status at end of year$(681) $(644)
Amounts recognized in the Consolidated Balance Sheets at
February 1, 2020 and February 2, 2019		   
Accounts payable and accrued liabilities$(55) $(68)
Other liabilities(626) (576)
 $(681) $(644)
Amounts recognized in accumulated other comprehensive loss at
February 1, 2020 and February 2, 2019		   
Net actuarial loss$283
 $218
Prior service cost6
 6
 $289
 $224

 2016 2015
 (millions)
Change in projected benefit obligation   
Projected benefit obligation, beginning of year$823
 $920
Service cost—
 —
Interest cost22
 31
Actuarial (gain) loss26
 (70)
Benefits paid(124) (58)
Projected benefit obligation, end of year747
 823
Change in plan assets   
Fair value of plan assets, beginning of year—
 —
Company contributions124
 58
Benefits paid(124) (58)
Fair value of plan assets, end of year—
 —
Funded status at end of year$(747) $(823)
Amounts recognized in the Consolidated Balance Sheets at
January 28, 2017 and January 30, 2016		   
Accounts payable and accrued liabilities$(86) $(138)
Other liabilities(661) (685)
 $(747) $(823)
Amounts recognized in accumulated other comprehensive loss at
January 28, 2017 and January 30, 2016		   
Net actuarial loss$248
 $261
Prior service cost8
 8
 $256
 $269


The accumulated benefit obligation for the supplementary retirement plan was $747681 million as of January 28, 2017February 1, 2020 and $823644 million as of January 30, 2016February 2, 2019.

F-34


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:
 
 2019 2018 2017
 (millions)
Net Periodic Pension Cost     
Service cost$—
 $—
 $—
Interest cost21
 23
 22
Amortization of net actuarial loss9
 7
 8
Amortization of prior service cost—
 1
 1
 30
 31
 31
      
Settlement charges13
 10
 16
      
Other Changes in Plan Assets and Projected Benefit Obligation
Recognized in Other Comprehensive Loss		     
Net actuarial loss (gain)87
 (9) 20
Amortization of net actuarial loss(9) (7) (8)
Amortization of prior service cost—
 (1) (1)
Settlement charges(13) (10) (16)
 65
 (27) (5)
Total recognized$108
 $14
 $42

 2016 2015 2014
 (millions)
Net Periodic Pension Cost     
Service cost$—
 $—
 $—
Interest cost22
 31
 33
Amortization of net actuarial loss9
 10
 5
Amortization of prior service credit—
 —
 —
 31
 41
 38
      
Settlement charges30
 —
 —
      
Other Changes in Plan Assets and Projected Benefit Obligation
Recognized in Other Comprehensive Loss		     
Net actuarial (gain) loss26
 (70) 170
Prior service cost—
 —
 —
Amortization of net actuarial loss(9) (10) (5)
Amortization of prior service credit—
 —
 —
Settlement charges(30) —
 —
 (13) (80) 165
Total recognized$48
 $(39) $203


The estimated net actuarial loss and prior service cost for the supplementary retirement plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 20172020 is $812 million.
The following weighted average assumption was used to determine the projected benefit obligations for the supplementary retirement plan at January 28, 2017February 1, 2020 and January 30, 2016February 2, 2019:
 
 2019 2018
Discount rate2.89% 4.10%

 2016 2015
Discount rate4.07% 4.23%


The following weighted average assumption was used to determine net pension costs for the supplementary retirement plan:
 
 2019 2018 2017
Discount rate used to measure interest cost2.65% - 3.69% 3.39% - 4.09% 3.10% - 3.26%

 2016 2015 2014
Discount rate used to measure interest cost2.65% - 3.16% 3.55% 4.50%


The supplementary retirement plan’s assumptions are evaluated annually, and at interim re-measurements if required, and updated as necessary. Due to settlement accounting and re-measurements during 2019, 2018 and 2017, 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.
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 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.



F-35


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)
Fiscal year 
2020$55
202150
202247
202346
202445
2025-2029203

 (millions)
Fiscal year 
2017$86
201878
201946
202048
202148
2022-2026228



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




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.

F-36

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 1, 2020 and January 30, 2016:February 2, 2019:
 
 2019 2018
 (millions)
Change in accumulated postretirement benefit obligation   
Accumulated postretirement benefit obligation, beginning of year$137
 $156
Service cost—
 —
Interest cost5
 5
Actuarial loss (gain)5
 (11)
Medicare Part D subsidy—
 —
Benefits paid(14) (13)
Accumulated postretirement benefit obligation, end of year133
 137
Change in plan assets   
Fair value of plan assets, beginning of year—
 —
Company contributions14
 13
Benefits paid(14) (13)
Fair value of plan assets, end of year—
 —
Funded status at end of year$(133) $(137)
Amounts recognized in the Consolidated Balance Sheets at
February 1, 2020 and February 2, 2019		   
Accounts payable and accrued liabilities$(14) $(15)
Other liabilities(119) (122)
 $(133) $(137)
Amounts recognized in accumulated other comprehensive loss at
February 1, 2020 and February 2, 2019		   
Net actuarial gain$(30) $(41)
Prior service credit(8) (9)
 $(38) $(50)

 2016 2015
 (millions)
Change in accumulated postretirement benefit obligation   
Accumulated postretirement benefit obligation, beginning of year$212
 $243
Service cost—
 —
Interest cost6
 8
Actuarial gain(13) (22)
Medicare Part D subsidy1
 1
Benefits paid(20) (18)
Accumulated postretirement benefit obligation, end of year186
 212
Change in plan assets   
Fair value of plan assets, beginning of year—
 —
Company contributions20
 18
Benefits paid(20) (18)
Fair value of plan assets, end of year—
 —
Funded status at end of year$(186) $(212)
Amounts recognized in the Consolidated Balance Sheets at
January 28, 2017 and January 30, 2016		   
Accounts payable and accrued liabilities$(18) $(20)
Other liabilities(168) (192)
 $(186) $(212)
Amounts recognized in accumulated other comprehensive loss at
January 28, 2017 and January 30, 2016		   
Net actuarial gain$(31) $(22)



F-37


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




Net postretirement benefit costs and other amounts recognized in other comprehensive loss included the following actuarially determined components:
 2019 2018 2017
 (millions)
Net Periodic Postretirement Benefit Cost     
Service cost$—
 $—
 $—
Interest cost5
 5
 5
Amortization of net actuarial gain(6) (5) (5)
Amortization of prior service credit(1) (1) —
 (2) (1) —
Other Changes in Plan Assets and Projected Benefit Obligation
Recognized in Other Comprehensive Loss		     
Net actuarial loss (gain)5
 (11) (9)
Amortization of net actuarial gain6
 5
 5
Amortization of prior service credit1
 1
 —
Prior service credit—
 —
 (10)
 12
 (5) (14)
Total recognized$10
 $(6) $(14)

 2016 2015 2014
 (millions)
Net Periodic Postretirement Benefit Cost     
Service cost$—
 $—
 $—
Interest cost6
 8
 10
Amortization of net actuarial gain(4) —
 (5)
Amortization of prior service cost—
 —
 —
 2
 8
 5
Other Changes in Plan Assets and Projected Benefit Obligation
Recognized in Other Comprehensive Loss		     
Net actuarial (gain) loss(13) (22) 30
Amortization of net actuarial gain4
 —
 5
Amortization of prior service cost—
 —
 —
 (9) (22) 35
Total recognized$(7) $(14) $40


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 20172020 is $4$5 million.
The following weighted average assumption was used to determine the accumulated postretirement benefit obligations at January 28, 2017February 1, 2020 and January 30, 2016:February 2, 2019:
 
 2019 2018
Discount rate2.81% 4.02%

 2016 2015
Discount rate3.99% 4.15%


The following weighted average assumption was used to determine the net postretirement benefit costs for the postretirement obligations:
 
 2019 2018 2017
Discount rate used to measure interest cost3.57% 3.28% 3.17%

 2016 2015 2014
Discount rate used to measure interest cost3.14% 3.55% 4.50%


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 Company estimates the interest cost component of net periodic benefit costs using 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.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




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.

F-38

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 1, 2020 and January 30, 2016February 2, 2019:
 
 2019 2018
Health care cost trend rates assumed for next year5.25% - 8.63% 5.38% - 9.31%
Rates to which the cost trend rate is assumed to decline (the ultimate trend rate)4.5% 4.5%
Year that the rate reaches the ultimate trend rate2027 2027

 2016 2015
Health care cost trend rates assumed for next year6.15% - 9.75% 6.25% - 10.0%
Rates to which the cost trend rate is assumed to decline (the ultimate trend rate)5.0% 5.0%
Year that the rate reaches the ultimate trend rate2027 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
 (millions)
Effect on total of service and interest cost$—
 $—
Effect on accumulated postretirement benefit obligations$7
 $(6)

 
1 – Percentage
Point Increase
 
1 – Percentage
Point Decrease
 (millions)
Effect on total of service and interest cost$—
 $—
Effect on accumulated postretirement benefit obligations$11
 $(10)


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
 (millions)
Fiscal Year   
2020$14
 $—
202113
 —
202212
 —
202311
 —
202410
 —
2025-202941
 1
 
Expected
Benefit
Payments
 
Expected
Federal
Subsidy
 (millions)
Fiscal Year   
2017$17
 $1
201817
 1
201916
 1
202016
 —
202115
 —
2022-202663
 1

 

F-39


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




11.Stock BasedStock-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 stock on the date of grant, have ten-yearten-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 1, 2020, 16approximately 17 million shares of common 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:
 
 2019 2018 2017
 (millions)
Stock options$15
 $24
 $34
Restricted stock units23
 39
 24
 $38
 $63
 $58

 2016 2015 2014
 (millions)
Stock options$43
 $52
 $47
Restricted stock units18
 13
 26
 $61
 $65
 $73


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.

F-40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Stock Options
The fair value of stock options granted during 20162019, 20152018 and 20142017 and the weighted average assumptions used to estimate the fair value are as follows:
 
 2019 2018 2017
Weighted average grant date fair value of stock options
granted during the period		$5.11
 $7.43
 $5.84
Dividend yield6.3% 5.2% 6.2%
Expected volatility40.6% 41.1% 41.8%
Risk-free interest rate2.4% 2.7% 1.9%
Expected life5.5 years
 5.6 years
 5.7 years

 2016 2015 2014
Weighted average grant date fair value of stock options
granted during the period		$12.14
 $20.78
 $19.07
Dividend yield3.8% 2.7% 2.5%
Expected volatility42.7% 43.3% 42.7%
Risk-free interest rate1.4% 1.7% 1.5%
Expected life5.7 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 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.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Activity related to stock options for 20162019 is as follows:
 Shares 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 (thousands)   (years) (millions)
Outstanding, beginning of period18,893
 $39.73
    
Granted1,994
 23.94
    
Canceled or forfeited(1,731) 32.73
    
Exercised(657) 9.08
    
Outstanding, end of period18,499
 $39.77
    
Exercisable, end of period14,258
 $42.97
 4.2 $—
Options expected to vest3,133
 $29.20
 7.9 $—

 Shares 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 (thousands)   (years) (millions)
Outstanding, beginning of period18,829.8
 $41.92
    
Granted3,886.8
 $42.97
    
Canceled or forfeited(1,116.6) $51.33
    
Exercised(1,122.1) $31.30
    
Outstanding, end of period20,477.9
 $42.18
    
Exercisable, end of period12,541.5
 $36.48
 4.1 $46
Options expected to vest6,657.5
 $51.07
 8.3 $—


Additional information relating to stock options is as follows:
 
 2019 2018 2017
 (millions)
Intrinsic value of options exercised$10
 $27
 $3
Cash received from stock options exercised6
 45
 6

 2016 2015 2014
 (millions)
Intrinsic value of options exercised$12
 $127
 $189
Cash received from stock options exercised35
 125
 200


As of February 1, 2020, the Company had $15 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.






F-41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



Restricted Stock Units
The weighted average grant date fair values of performance-based and time-based restricted stock units granted during 20162019, 20152018 and 20142017 are as follows:
 
 2019 2018 2017
Restricted stock units (performance-based)$24.28
 $30.64
 $27.16
Restricted stock units (time-based)17.81
 25.57
 20.75

 2016 2015 2014
Restricted stock units$40.02
 $62.61
 $59.41


During 2019, 2018 and 2017, 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 3-year performance periods ending January 29, 2022, January 30, 2021 and February 1, 2020, 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 an EBITDA as a percent to sales ratio, owned plus licensed comparable sales growth 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 an executive compensation peer group over the performance period, assuming the reinvestment of dividends. Depending on the results achieved during the 3-year performance periods, the actual number of shares that a grant recipient receives at the end of the period may range from 0% to 200% of the Target Shares granted.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




among a twelve-companyan executive compensation peer group over the remaining performance periods. The expected volatility of the Company’s common stock at the date of grant was estimated based on a historical average volatility rate for the approximate three3-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 1, 2020, the Company had $43 million of unrecognized compensation costs related to nonvested restricted stock units, which is expected to be recognized over a weighted average period of approximately 2.0 years.
 
Activity related to restricted stock units for 20162019 is as follows:
 
 Shares 
Weighted
Average
Grant Date
Fair Value
 (thousands)  
Nonvested, beginning of period4,143
 $26.33
Granted – performance-based861
 24.28
Performance adjustment(26) 28.17
Granted – time-based1,443
 17.81
Forfeited(909) 23.88
Vested(765) 29.19
Nonvested, end of period4,747
 $23.37

 Shares 
Weighted
Average
Grant Date
Fair Value
 (thousands)  
Nonvested, beginning of period1,497.0
 $57.06
Granted – performance-based575.1
 43.72
Performance adjustment(237.6) 59.82
Granted – time-based482.8
 35.61
Forfeited(250.0) 32.99
Vested(249.0) 33.70
Nonvested, end of period1,818.3
 $53.29










F-42


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




12.Shareholders’ Equity
The authorized shares of the Company consist of 125 million shares of preferred stock (“Preferred Stock”), par value of $.010.01 per share, with no0 shares issued, and 1,000 million shares of Common Stock,common stock, par value of $.01$0.01 per share, with 333.6 million shares of Common Stockcommon stock issued and 304.1309.0 million shares of Common Stockcommon stock outstanding at January 28, 2017February 1, 2020, and with 341.6333.6 million shares of Common Stockcommon stock issued and 310.3307.5 million shares of Common Stockcommon stock outstanding at January 30, 2016February 2, 2019 (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 31.0 millionNo shares of Common Stockcommon stock were retired during 2016, 20152019, 2018 and 2014, respectively.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 commencingBeginning in January 2000, the Company’s boardBoard of directors has from time to timeDirectors approved various authorizations to purchase, in the aggregate, up to $18,000 million of Common Stock. All authorizations are cumulative and do not havecommon stock, which includes the Company's Board of Directors approval of an expiration date. During 2016, the Company purchased approximately 7.9additional authorization to purchase common stock of $1,500 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. on February 26, 2016. As of January 28, 2017February 1, 2020, $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 Stockcommon 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 Stockcommon 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.

F-43


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




Changes in the Company’s Common Stockcommon stock issued and outstanding, including shares held by the Company’s treasury, are as follows:
   Treasury Stock  
 
Common
Stock
Issued
 
Deferred
Compensation
Plans
 Other Total 
Common
Stock
Outstanding
     (thousands)    
Balance at January 28, 2017333,606
 (1,096) (28,447) (29,543) 304,063
Stock issued under stock plans  (119) 590
 471
 471
Stock repurchases    (38) (38) (38)
Deferred compensation plan distributions  269
   269
 269
Balance at February 3, 2018333,606
 (946) (27,895) (28,841) 304,765
Stock issued under stock plans  (106) 2,756
 2,650
 2,650
Stock repurchases    (6) (6) (6)
Deferred compensation plan distributions  111
   111
 111
Balance at February 2, 2019333,606
 (941) (25,145) (26,086) 307,520
Stock issued under stock plans  (130) 1,510
 1,380
 1,380
Stock repurchases    (38) (38) (38)
Deferred compensation plan distributions  169
   169
 169
Balance at February 1, 2020333,606
 (902) (23,673) (24,575) 309,031
   Treasury Stock  
 
Common
Stock
Issued
 
Deferred
Compensation
Plans
 Other Total 
Common
Stock
Outstanding
     (thousands)    
Balance at February 1, 2014410,605.8
 (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, 2015379,605.8
 (1,179.2) (37,852.9) (39,032.1) 340,573.7
Stock issued under stock plans  (60.4) 4,493.5
 4,433.1
 4,433.1
Stock repurchases         
Repurchase program    (34,806.8) (34,806.8) (34,806.8)
Other    (12.7) (12.7) (12.7)
Deferred compensation plan distributions  68.8
   68.8
 68.8
Retirement of common stock(38,000.0)   38,000.0
 38,000.0
 —
Balance at January 30, 2016341,605.8
 (1,170.8) (30,178.9) (31,349.7) 310,256.1
Stock issued under stock plans  (87.0) 1,611.7
 1,524.7
 1,524.7
Stock repurchases         
Repurchase program    (7,874.3) (7,874.3) (7,874.3)
Other    (4.6) (4.6) (4.6)
Deferred compensation plan distributions  160.9
   160.9
 160.9
Retirement of common stock(8,000.0)   8,000.0
 8,000.0
 —
Balance at January 28, 2017333,605.8
 (1,096.9) (28,446.1) (29,543.0) 304,062.8

Accumulated Other Comprehensive Loss
For the Company, the only component of accumulated other comprehensive loss for 20162019, 20152018 and 20142017 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 expensesbenefit plan income, net 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, "RetirementRetirement Plans," and Note 10, "PostretirementPostretirement Health Care and Life Insurance Benefits," for further information.



F-44


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:
 February 1, 2020 February 2, 2019
   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		$132
 $34
 $98
 $—
 $101
 $27
 $74
 $—

 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
 $—


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:
 
 February 1, 2020 February 2, 2019
 
Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
Notional
Amount
 
Carrying
Amount
 
Fair
Value
 (millions)
Long-term debt$3,607
 $3,621
 $3,702
 $4,671
 $4,683
 $4,407

 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


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 20162019 and 20152018:
 
 February 1, 2020 February 2, 2019
   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$129
 $—
 $—
 $129
 $24
 $—
 $—
 $24

 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
During 20162019, long-lived assets held and used with a carrying value of $405326 million were written down to their fair value of $147129 million, resulting in asset impairment charges of $258197 million. During 20152018, long-lived assets held and used with a carrying value of $20184 million were written down to their fair value of $5324 million, resulting in asset impairment charges of $14860 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.

F-45


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 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:
 
 2019 2018 2017
 
Net
Income
   Shares 
Net
Income
   Shares Net Income   Shares
 (millions, except per share data)
Net income attributable to Macy's, Inc. shareholders
    and average number of shares outstanding
$564
   308.8
 $1,108
   306.8
 $1,566
   304.5
Shares to be issued under deferred compensation
and other plans		—
   0.9
 —
   0.9
 —
   0.9
 $564
   309.7
 $1,108
   307.7
 $1,566
   305.4
Basic earnings per share attributable to Macy's, Inc. shareholders  $1.82
     $3.60
     $5.13
  
Effect of dilutive securities:                 
Stock options and restricted
stock units		—
   1.7
 —
   3.7
 —
   1.4
 $564
   311.4
 $1,108
   311.4
 $1,566
   306.8
Diluted earnings per share attributable to Macy's, Inc. shareholders  $1.81
     $3.56
     $5.10
  

 2016 2015 2014
 
Net
Income
   Shares 
Net
Income
   Shares Net Income   Shares
 (millions, except per share data)
Net income attributable to Macy's, Inc. shareholders
    and average number of shares outstanding
$619
   307.6
 $1,072
   327.6
 $1,526
   354.3
Shares to be issued under deferred compensation
and other plans		    0.9
     0.8
     0.9
 $619
   308.5
 $1,072
   328.4
 $1,526
   355.2
Basic earnings per share attributable to Macy's, Inc. shareholders  $2.01
     $3.26
     $4.30
  
Effect of dilutive securities:                 
Stock options, restricted stock and restricted
stock units		    2.3
     4.6
     6.5
 $619
   310.8
 $1,072
   333.0
 $1,526
   361.7
Diluted earnings per share attributable to Macy's, Inc. shareholders  $1.99
     $3.22
     $4.22
  


In addition to the stock options and restricted stock units reflected in the foregoing table, stock options to purchase 15.518.5 million shares of common stock and restricted stock units relating to 1.7 million shares of common stock were outstanding at February 1, 2020, stock options to purchase 15.3 million of shares of common stock and restricted stock units relating to 1.10.9 million shares of common stock were outstanding at January 28, 2017February 2, 2019, and stock options to purchase 12.616.6 million of shares of common stock and restricted stock units relating to 140,0000.9 million shares of common 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, 2015February 3, 2018, but were not included in the computation of diluted earnings per share attributable to Macy's, Inc. shareholders for 20162019, 20152018 and 20142017, respectively, because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.





F-46


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
 (millions, except per share data)
2019:       
Net sales$5,504
 $5,546
 $5,173
 $8,337
Credit card revenues, net172
 176
 183
 239
        
Cost of sales(3,403) (3,395) (3,106) (5,266)
Selling, general and administrative expenses(2,112) (2,177) (2,202) (2,509)
Gains on sale of real estate43
 7
 17
 95
Restructuring, impairment, store closing and other costs(1) (2) (13) (337)
Benefit plan income, net7
 8
 8
 8
Settlement charges—
 —
 (12) (46)
Net income attributable to Macy's, Inc. shareholders136
 86
 2
 340
Basic earnings per share attributable to  
    Macy's, Inc. shareholders
0.44
 0.28
 0.01
 1.10
Diluted earnings per share attributable to
    Macy's, Inc. shareholders
0.44
 0.28
 0.01
 1.09
        
2018:       
Net sales$5,541
 $5,572
 $5,404
 $8,455
Credit card revenues, net157
 186
 185
 240
        
Cost of sales(3,382) (3,320) (3,226) (5,288)
Selling, general and administrative expenses(2,083) (2,164) (2,255) (2,538)
Gains on sale of real estate24
 46
 42
 278
Restructuring, impairment, store closing and other costs(19) (17) (3) (97)
Benefit plan income, net11
 11
 9
 8
Settlement charges—
 (50) (23) (15)
Net income attributable to Macy's, Inc. shareholders139
 166
 62
 740
Basic earnings per share attributable to  
    Macy's, Inc. shareholders		0.45
 0.54
 0.20
 2.40
Diluted earnings per share attributable to
    Macy's, Inc. shareholders		0.45
 0.53
 0.20
 2.37

 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 (millions, except per share data)
2016:       
Net sales$5,771
 $5,866
 $5,626
 $8,515
Cost of sales(3,516) (3,468) (3,386) (5,251)
Gross margin2,255
 2,398
 2,240
 3,264
Selling, general and administrative expenses(1,966) (2,026) (2,071) (2,202)
Impairments, store closing and other costs—
 (249) —
 (230)
Settlement charges(13) (6) (62) (17)
Net income attributable to Macy's, Inc. shareholders116
 11
 17
 475
Basic earnings per share attributable to  
    Macy's, Inc. shareholders
.37
 .03
 .05
 1.56
Diluted earnings per share attributable to
    Macy's, Inc. shareholders
.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 margin2,432
 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. shareholders193
 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.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




16.Condensed Consolidating Financial Information
Certain debt obligations of the Company described in Note 6, "Financing,"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.”
Condensed Consolidating Statements of Comprehensive Income for 2016, 20152019, 2018 and 2014,2017, Consolidating Balance Sheets as of January 28, 2017February 1, 2020 and January 30, 2016February 2, 2019, and the related Condensed Consolidating Statements of Cash Flows for 20162019, 20152018, and 20142017 are presented on the following pages.

F-47


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




MACY’S, INC.
Condensed Consolidating Statement of Comprehensive Income
For 20162019
(millions)
 
Parent 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 ConsolidatedParent 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 Consolidated
Net sales$—
 $10,677
 $23,436
 $(8,335) $25,778
$—
 $9,477
 $20,831
 $(5,748) $24,560
Credit card revenues (expense), net—
 (7) 778
 —
 771
         
Cost of sales—
 (6,787) (17,169) 8,335
 (15,621)—
 (5,834) (15,085) 5,748
 (15,171)
Gross margin—
 3,890
 6,267
 —
 10,157
Selling, general and administrative expenses(2) (3,739) (4,524) —
 (8,265)2
 (3,490) (5,510) —
 (8,998)
Impairments, store closing and other costs—
 (295) (184) —
 (479)
Gains on sale of real estate—
 37
 125
 —
 162
Restructuring, impairment, store closing and other costs—
 (108) (246) —
 (354)
Operating income2
 75
 893
 —
 970
Benefit plan income, net—
 12
 19
 —
 31
Settlement charges—
 (34) (64) —
 (98)—
 (22) (36) —
 (58)
Operating income (loss)(2) (178) 1,495
 —
 1,315
Interest (expense) income, net:                  
External2
 (366) 1
 —
 (363)15
 (204) 4
 —
 (185)
Intercompany—
 (200) 200
 —
 —
—
 (72) 72
 —
 —
Equity in earnings of subsidiaries619
 255
 —
 (874) —
Losses on early retirement of debt—
 (30) —
 —
 (30)
Equity in earnings (loss) of subsidiaries547
 (266) —
 (281) —
Income (loss) before income taxes619
 (489) 1,696
 (874) 952
564
 (507) 952
 (281) 728
Federal, state and local income
tax benefit (expense)		—
 281
 (622) —
 (341)—
 33
 (197) —
 (164)
Net income (loss)619
 (208) 1,074
 (874) 611
564
 (474) 755
 (281) 564
Net loss attributable to noncontrolling interest—
 —
 8
 —
 8
—
 —
 —
 —
 —
Net income (loss) attributable to
Macy's, Inc. shareholders
$619
 $(208) $1,082
 $(874) $619
Net income attributable to
Macy's, Inc. shareholders
$564
 $(474) $755
 $(281) $564
Comprehensive income (loss)$766
 $(61) $1,153
 $(1,100) $758
$524
 $(512) $731
 $(219) $524
Comprehensive loss attributable to
noncontrolling interest
—
 —
 8
 —
 8
—
 —
 —
 —
 —
Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$766
 $(61) $1,161
 $(1,100) $766
$524
 $(512) $731
 $(219) $524



F-48


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




MACY’S, INC.
Condensed Consolidating Statement of Comprehensive Income
For 20152018
(millions)
 
Parent 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 ConsolidatedParent 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 Consolidated
Net sales$—
 $11,959
 $24,037
 $(8,917) $27,079
$—
 $9,051
 $23,720
 $(7,800) $24,971
Credit card revenues (expense), net—
 (3) 771
 —
 768
         
Cost of sales—
 (7,670) (17,743) 8,917
 (16,496)—
 (5,786) (17,229) 7,800
 (15,215)
Gross margin—
 4,289
 6,294
 —
 10,583
Selling, general and administrative expenses(2) (3,980) (4,274) —
 (8,256)—
 (3,509) (5,530) —
 (9,039)
Impairments, store closing and other costs—
 (170) (118) —
 (288)
Gains on sale of real estate—
 141
 248
 —
 389
Restructuring, impairment, store closing and other costs—
 (33) (103) —
 (136)
Operating income (loss)(2) 139
 1,902
 —
 2,039
—
 (139) 1,877
 —
 1,738
Benefit plan income, net—
 15
 24
 —
 39
Settlement charges(5) (30) (53) —
 (88)
Interest (expense) income, net:                  
External1
 (361) (1) —
 (361)20
 (260) 4
 —
 (236)
Intercompany—
 (230) 230
 —
 —
—
 (72) 72
 —
 —
Losses on early retirement of debt—
 (33) —
 —
 (33)
Equity in earnings of subsidiaries1,072
 421
 —
 (1,493) —
1,104
 345
 —
 (1,449) —
Income (loss) before income taxes1,071
 (31) 2,131
 (1,493) 1,678
1,119
 (174) 1,924
 (1,449) 1,420
Federal, state and local income
tax benefit (expense)		1
 120
 (729) —
 (608)(11) 219
 (530) —
 (322)
Net income1,072
 89
 1,402
 (1,493) 1,070
1,108
 45
 1,394
 (1,449) 1,098
Net loss attributable to noncontrolling interest—
 —
 2
 —
 2
—
 —
 10
 —
 10
Net income attributable to
Macy's, Inc. shareholders		$1,072
 $89
 $1,404
 $(1,493) $1,072
$1,108
 $45
 $1,404
 $(1,449) $1,108
Comprehensive income$1,101
 $118
 $1,415
 $(1,535) $1,099
Comprehensive income (loss)$1,045
 $(15) $1,353
 $(1,348) $1,035
Comprehensive loss attributable to
noncontrolling interest		—
 —
 2
 —
 2
—
 —
 10
 —
 10
Comprehensive income attributable to
Macy's, Inc. shareholders		$1,101
 $118
 $1,417
 $(1,535) $1,101
Comprehensive income (loss) attributable to
Macy's, Inc. shareholders		$1,045
 $(15) $1,363
 $(1,348) $1,045



F-49


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




MACY’S, INC.
Condensed Consolidating Statement of Comprehensive Income
For 20142017
(millions)
 
 Parent 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 Consolidated
Net sales$—
 $9,490
 $23,317
 $(7,868) $24,939
Credit card revenues (expense), net—
 (2) 704
 —
 702
          
Cost of sales—
 (6,122) (16,927) 7,868
 (15,181)
Selling, general and administrative expenses—
 (3,426) (5,528) —
 (8,954)
Gains on sale of real estate—
 201
 343
 —
 544
Restructuring, impairment, store closing and other costs—
 (40) (146) —
 (186)
Operating income—
 101
 1,763
 —
 1,864
Benefit plan income, net—
 22
 35
 —
 57
Settlement charges—
 (35) (70) —
 (105)
Interest (expense) income, net:         
External—
 (313) 3
 —
 (310)
Intercompany—
 (139) 139
 —
 —
Gains on early retirement of debt—
 10
 —
 —
 10
Equity in earnings of subsidiaries1,574
 773
 —
 (2,347) —
Income before income taxes1,574
 419
 1,870
 (2,347) 1,516
Federal, state and local income
tax benefit (expense)		(8) 356
 (309) —
 39
Net income1,566
 775
 1,561
 (2,347) 1,555
Net loss attributable to noncontrolling interest—
 —
 11
 —
 11
Net income attributable to
Macy's, Inc. shareholders		$1,566
 $775
 $1,572
 $(2,347) $1,566
Comprehensive income$1,738
 $935
 $1,673
 $(2,619) $1,727
Comprehensive loss attributable to
noncontrolling interest		—
 —
 11
 —
 11
Comprehensive income attributable to
Macy's, Inc. shareholders		$1,738
 $935
 $1,684
 $(2,619) $1,738

 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:         
External1
 (394) —
 —
 (393)
Intercompany—
 (230) 230
 —
 —
Premium on early retirement of debt—
 (17) —
 —
 (17)
Equity in earnings of subsidiaries1,528
 624
 —
 (2,152) —
Income before income taxes1,526
 538
 2,478
 (2,152) 2,390
Federal, state and local income
tax benefit (expense)		—
 25
 (889) —
 (864)
Net income1,526
 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



F-50


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




MACY’S, INC.
Condensed Consolidating Balance Sheet
As of January 28, 2017February 1, 2020
(millions)
 
 Parent 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 Consolidated
ASSETS:         
Current Assets:         
Cash and cash equivalents$413
 $59
 $213
 $—
 $685
Receivables—
 83
 326
 —
 409
Merchandise inventories—
 2,239
 2,949
 —
 5,188
Prepaid expenses and other current assets—
 118
 410
 —
 528
Total Current Assets413
 2,499
 3,898
 —
 6,810
Property and Equipment – net—
 3,103
 3,530
 —
 6,633
Right of Use Assets—
 611
 2,057
 —
 2,668
Goodwill—
 3,326
 582
 —
 3,908
Other Intangible Assets – net—
 4
 435
 —
 439
Other Assets—
 37
 677
 —
 714
Deferred Income Taxes12
 —
 —
 (12) —
Intercompany Receivable2,675
 —
 1,128
 (3,803) —
Investment in Subsidiaries3,433
 2,796
 —
 (6,229) —
Total Assets$6,533
 $12,376
 $12,307
 $(10,044) $21,172
LIABILITIES AND SHAREHOLDERS’ EQUITY:         
Current Liabilities:         
Short-term debt$—
 $539
 $—
 $—
 $539
Merchandise accounts payable—
 702
 980
 —
 1,682
Accounts payable and accrued liabilities126
 909
 2,413
 —
 3,448
Income taxes5
 11
 65
 —
 81
Total Current Liabilities131
 2,161
 3,458
 —
 5,750
Long-Term Debt—
 3,621
 —
 —
 3,621
Long-Term Lease Liabilities—
 543
 2,375
 —
 2,918
Intercompany Payable—
 3,803
 —
 (3,803) —
Deferred Income Taxes—
 595
 586
 (12) 1,169
Other Liabilities25
 414
 898
 —
 1,337
Shareholders’ Equity:        

Macy's, Inc.6,377
 1,239
 4,990
 (6,229) 6,377
Noncontrolling Interest—
 —
 —
 —
 —
Total Shareholders’ Equity6,377
 1,239
 4,990
 (6,229) 6,377
Total Liabilities and Shareholders’ Equity$6,533
 $12,376
 $12,307
 $(10,044) $21,172

 Parent 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 Consolidated
ASSETS:         
Current Assets:         
Cash and cash equivalents$938
 $81
 $278
 $—
 $1,297
Receivables—
 169
 353
 —
 522
Merchandise inventories—
 2,565
 2,834
 —
 5,399
Prepaid expenses and other current assets—
 84
 324
 —
 408
Total Current Assets938
 2,899
 3,789
 —
 7,626
Property and Equipment – net—
 3,397
 3,620
 —
 7,017
Goodwill—
 3,315
 582
 —
 3,897
Other Intangible Assets – net—
 51
 447
 —
 498
Other Assets—
 47
 766
 —
 813
Deferred Income Taxes26
 —
 —
 (26) —
Intercompany Receivable375
 —
 2,428
 (2,803) —
Investment in Subsidiaries3,137
 3,540
 —
 (6,677) —
Total Assets$4,476
 $13,249
 $11,632
 $(9,506) $19,851
LIABILITIES AND SHAREHOLDERS’ EQUITY:         
Current Liabilities:         
Short-term debt$—
 $306
 $3
 $—
 $309
Merchandise accounts payable—
 590
 833
 —
 1,423
Accounts payable and accrued liabilities15
 1,064
 2,484
 —
 3,563
Income taxes71
 16
 265
 —
 352
Total Current Liabilities86
 1,976
 3,585
 —
 5,647
Long-Term Debt—
 6,544
 18
 —
 6,562
Intercompany Payable—
 2,803
 —
 (2,803) —
Deferred Income Taxes—
 688
 781
 (26) 1,443
Other Liabilities66
 500
 1,311
 —
 1,877
Shareholders’ Equity:        

Macy's, Inc.4,323
 738
 5,939
 (6,677) 4,323
Noncontrolling Interest—
 —
 (1) —
 (1)
Total Shareholders’ Equity4,323
 738
 5,938
 (6,677) 4,322
Total Liabilities and Shareholders’ Equity$4,475
 $13,249
 $11,633
 $(9,506) $19,851



F-51


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




MACY’S, INC.
Condensed Consolidating Balance Sheet
As of January 30, 2016February 2, 2019
(millions)
 
 Parent 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 Consolidated
ASSETS:         
Current Assets:         
Cash and cash equivalents$889
 $59
 $214
 $—
 $1,162
Receivables—
 68
 332
 —
 400
Merchandise inventories—
 2,342
 2,921
 —
 5,263
Prepaid expenses and other current assets—
 143
 477
 —
 620
Total Current Assets889
 2,612
 3,944
 —
 7,445
Property and Equipment – net—
 3,287
 3,350
 —
 6,637
Goodwill—
 3,326
 582
 —
 3,908
Other Intangible Assets – net—
 38
 440
 —
 478
Other Assets—
 41
 685
 —
 726
Deferred Income Taxes12
 —
 —
 (12) —
Intercompany Receivable1,713
 —
 1,390
 (3,103) —
Investment in Subsidiaries4,030
 3,119
 —
 (7,149) —
Total Assets$6,644
 $12,423
 $10,391
 $(10,264) $19,194
LIABILITIES AND SHAREHOLDERS’ EQUITY:         
Current Liabilities:         
Short-term debt$—
 $42
 $1
 $—
 $43
Merchandise accounts payable—
 713
 942
 —
 1,655
Accounts payable and accrued liabilities170
 950
 2,246
 —
 3,366
Income taxes14
 52
 102
 —
 168
Total Current Liabilities184
 1,757
 3,291
 —
 5,232
Long-Term Debt—
 4,692
 16
 —
 4,708
Intercompany Payable—
 3,103
 —
 (3,103) —
Deferred Income Taxes—
 679
 571
 (12) 1,238
Other Liabilities24
 406
 1,150
 —
 1,580
Shareholders’ Equity:         
Macy's, Inc.6,436
 1,786
 5,363
 (7,149) 6,436
Noncontrolling Interest—
 —
 —
 —
 —
Total Shareholders’ Equity6,436
 1,786
 5,363
 (7,149) 6,436
Total Liabilities and Shareholders’ Equity$6,644
 $12,423
 $10,391
 $(10,264) $19,194

 Parent 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 Consolidated
ASSETS:         
Current Assets:         
Cash and cash equivalents$741
 $91
 $277
 $—
 $1,109
Receivables—
 217
 341
 —
 558
Merchandise inventories—
 2,702
 2,804
 —
 5,506
Prepaid expenses and other current assets—
 135
 344
 —
 479
Income taxes44
 —
 —
 (44) —
Total Current Assets785
 3,145
 3,766
 (44) 7,652
Property and Equipment – net—
 3,925
 3,691
 —
 7,616
Goodwill—
 3,315
 582
 —
 3,897
Other Intangible Assets – net—
 52
 462
 —
 514
Other Assets—
 154
 743
 —
 897
Deferred Income Taxes14
 —
 —
 (14) —
Intercompany Receivable—
 —
 3,800
 (3,800) —
Investment in Subsidiaries4,725
 3,804
 —
 (8,529) —
Total Assets$5,524
 $14,395
 $13,044
 $(12,387) $20,576
LIABILITIES AND SHAREHOLDERS’ EQUITY:         
Current Liabilities:         
Short-term debt$—
 $641
 $1
 $—
 $642
Merchandise accounts payable—
 667
 859
 —
 1,526
Accounts payable and accrued liabilities35
 1,439
 1,859
 —
 3,333
Income taxes—
 41
 230
 (44) 227
Total Current Liabilities35
 2,788
 2,949
 (44) 5,728
Long-Term Debt—
 6,976
 19
 —
 6,995
Intercompany Payable1,218
 2,582
 —
 (3,800) —
Deferred Income Taxes—
 693
 798
 (14) 1,477
Other Liabilities21
 558
 1,544
 —
 2,123
Shareholders’ Equity:         
Macy's, Inc.4,250
 798
 7,731
 (8,529) 4,250
Noncontrolling Interest—
 —
 3
 —
 3
Total Shareholders’ Equity4,250
 798
 7,734
 (8,529) 4,253
Total Liabilities and Shareholders’ Equity$5,524
 $14,395
 $13,044
 $(12,387) $20,576



F-52


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




MACY’S, INC.
Condensed Consolidating Statement of Cash Flows
For 20162019
(millions)
 
 Parent 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 Consolidated
Cash flows from operating activities:         
Net income (loss)$564
 $(474) $755
 $(281) $564
Restructuring, impairment, store closing and other costs—
 108
 246
 —
 354
Settlement charges—
 22
 36
 —
 58
Gains on sale of real estate—
 (37) (125) —
 (162)
Equity in (earnings) loss of subsidiaries(547) 266
 —
 281
 —
Dividends received from subsidiaries936
 —
 —
 (936) —
Depreciation and amortization—
 323
 658
 —
 981
Changes in assets, liabilities and other items not separately identified(4) (90) (93) —
 (187)
Net cash provided by
operating activities		949
 118
 1,477
 (936) 1,608
Cash flows from investing activities:         
Purchase of property and equipment and capitalized software, net—
 (198) (774) —
 (972)
Other, net—
 (2) (28) —
 (30)
Net cash used by investing activities—
 (200) (802) —
 (1,002)
Cash flows from financing activities:         
Debt repaid, including debt issuance costs—
 (598) (2) —
 (600)
Dividends paid(466) —
 (936) 936
 (466)
Issuance of common stock, net of common stock acquired5
 —
 —
 —
 5
Intercompany activity, net(915) 687
 228
 —
 —
Other, net(49) (7) (6) —
 (62)
Net cash provided (used) by
financing activities		(1,425) 82
 (716) 936
 (1,123)
Net decrease in cash, cash equivalents and restricted cash(476) —
 (41) —
 (517)
Cash, cash equivalents and restricted cash at
beginning of period		889
 64
 295
 —
 1,248
Cash, cash equivalents and restricted cash at
end of period		$413
 $64
 $254
 $—
 $731

 Parent 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 Consolidated
Cash flows from operating activities:         
Net income (loss)$619
 $(208) $1,074
 $(874) $611
Impairments, store closing and other costs—
 295
 184
 —
 479
Settlement charges—
 34
 64
 —
 98
Equity in earnings of subsidiaries(619) (255) —
 874
 —
Dividends received from subsidiaries957
 575
 —
 (1,532) —
Depreciation and amortization—
 407
 651
 —
 1,058
(Increase) decrease in working capital110
 (482) 92
 —
 (280)
Other, net28
 51
 (244) —
 (165)
Net cash provided by
operating activities		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)
Other, net—
 32
 20
 —
 52
Net cash provided (used) by investing activities—
 44
 (231) —
 (187)
Cash flows from financing activities:         
Debt repaid, net of debt issued—
 (750) 1
 —
 (749)
Dividends paid(459) —
 (1,532) 1,532
 (459)
Common stock acquired, net of
issuance of common stock		(280) —
 —
 —
 (280)
Proceeds from noncontrolling interest—
 —
 4
 —
 4
Intercompany activity, net(144) 255
 (111) —
 —
Other, net(15) 24
 49
 —
 58
Net cash used by
financing activities		(898) (471) (1,589) 1,532
 (1,426)
Net increase (decrease) in cash
and cash equivalents		197
 (10) 1
 —
 188
Cash and cash equivalents at
beginning of period		741
 91
 277
 —
 1,109
Cash and cash equivalents at
end of period		$938
 $81
 $278
 $—
 $1,297




 

F-53


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




MACY’S, INC.
Condensed Consolidating Statement of Cash Flows
For 20152018
(millions)
 
Parent 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 ConsolidatedParent 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 Consolidated
Cash flows from operating activities:                  
Net income$1,072
 $89
 $1,402
 $(1,493) $1,070
$1,108
 $45
 $1,394
 $(1,449) $1,098
Impairments, store closing and other costs—
 170
 118
 —
 288
Restructuring, impairment, store closing and other costs—
 33
 103
 —
 136
Settlement charges5
 30
 53
 —
 88
Gains on sale of real estate—
 (141) (248) —
 (389)
Equity in earnings of subsidiaries(1,072) (421) —
 1,493
 —
(1,104) (345) —
 1,449
 —
Dividends received from subsidiaries1,086
 —
 —
 (1,086) —
1,040
 200
 —
 (1,240) —
Depreciation and amortization—
 440
 621
 —
 1,061
—
 334
 628
 —
 962
(Increase) decrease in working capital25
 (340) (81) —
 (396)
Other, net(8) (78) 47
 —
 (39)
Net cash provided (used) by
operating activities		1,103
 (140) 2,107
 (1,086) 1,984
Changes in assets, liabilities and other items not separately identified(91) 198
 (266) (1) (160)
Net cash provided by
operating activities		958
 354
 1,664
 (1,241) 1,735
Cash flows from investing activities:                  
Purchase of property and equipment and capitalized software, net—
 (88) (821) —
 (909)—
 (135) (323) —
 (458)
Other, net—
 83
 (266) —
 (183)—
 (16) (33) 51
 2
Net cash used by
investing activities		—
 (5) (1,087) —
 (1,092)—
 (151) (356) 51
 (456)
Cash flows from financing activities:                  
Debt issued, net of debt repaid—
 348
 (1) —
 347
Debt repaid—
 (1,098) (1) (50) (1,149)
Dividends paid(456) —
 (1,086) 1,086
 (456)(463) —
 (1,240) 1,240
 (463)
Common stock acquired, net of
issuance of common stock		(1,838) —
 —
 —
 (1,838)
Issuance of common stock, net of common stock acquired45
 —
 —
 —
 45
Proceeds from noncontrolling interest—
 —
 5
 —
 5
—
 —
 7
 —
 7
Intercompany activity, net12
 (243) 231
 —
 —
(767) 875
 (108) —
 —
Other, net12
 37
 (136) —
 (87)7
 5
 4
 —
 16
Net cash provided (used) by financing activities(2,270) 142
 (987) 1,086
 (2,029)
Net increase (decrease) in
cash and cash equivalents		(1,167) (3) 33
 —
 (1,137)
Cash and cash equivalents at
beginning of period		1,908
 94
 244
 —
 2,246
Cash and cash equivalents at
end of period		$741
 $91
 $277
 $—
 $1,109
Net cash used by financing activities(1,178) (218) (1,338) 1,190
 (1,544)
Net decrease in cash, cash equivalents and restricted cash(220) (15) (30) —
 (265)
Cash, cash equivalents and restricted cash at
beginning of period		1,109
 79
 325
 —
 1,513
Cash, cash equivalents and restricted cash at
end of period		$889
 $64
 $295
 $—
 $1,248



F-54


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 




MACY’S, INC.
Condensed Consolidating Statement of Cash Flows
For 20142017
(millions)
 
 Parent 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 Consolidated
Cash flows from operating activities:         
Net income$1,566
 $775
 $1,561
 $(2,347) $1,555
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(1,574) (773) —
 2,347
 —
Dividends received from subsidiaries903
 450
 —
 (1,353) —
Depreciation and amortization—
 354
 637
 —
 991
Changes in assets, liabilities and other items not separately identified14
 79
 (410) —
 (317)
Net cash provided by
operating activities		909
 759
 1,661
 (1,353) 1,976
Cash flows from investing activities:         
Disposition (purchase) of property and equipment and capitalized software, net—
 68
 (417) —
 (349)
Other, net—
 7
 (9) —
 (2)
Net cash provided (used) by
investing activities		—
 75
 (426) —
 (351)
Cash flows from financing activities:         
Debt repaid—
 (987) (1) —
 (988)
Dividends paid(461) —
 (1,353) 1,353
 (461)
Issuance of common stock, net of common stock acquired5
 —
 —
 —
 5
Proceeds from noncontrolling interest—
 —
 13
 —
 13
Intercompany activity, net(427) 249
 178
 —
 —
Other, net145
 (98) (62) —
 (15)
Net cash used by
financing activities		(738) (836) (1,225) 1,353
 (1,446)
Net increase (decrease) in cash, cash equivalents and restricted cash171
 (2) 10
 —
 179
Cash, cash equivalents and restricted cash at
beginning of period		938
 81
 315
 —
 1,334
Cash, cash equivalents and restricted cash at
end of period		$1,109
 $79
 $325
 $—
 $1,513



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 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 subsidiaries1,088
 1
 —
 (1,089) —
Depreciation and amortization—
 454
 582
 —
 1,036
Increase (decrease) in working capital9
 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, net927
 (283) (644) —
 —
Other, net15
 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





17.Subsequent Events
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic and the virus has continued to spread throughout the United States. As a result of this outbreak, on March 18, 2020, the Company temporarily closed all stores and the stores will remain closed until it is safe to reopen to prioritize the health and safety of its customers, colleagues and communities. These closures include all Macy’s, Bloomingdale’s, Bluemercury, Macy’s Backstage, Bloomingdales the Outlet and Market by Macy’s stores. COVID-19 has had a negative impact on the Company's operations and financial results to date, and the full financial impact of the virus cannot be reasonably estimated at this time due to uncertainty as to its severity and duration. It is anticipated that the COVID-19 outbreak may ultimately have a material adverse impact on the Company's results of operations, financial position and cash flow in 2020. As a result, in March 2020, the Company fully drew on the $1,500 million credit facility, announced the suspension of quarterly cash dividends beginning in the second quarter of 2020, and took additional steps to reduce discretionary spending and other expenditures including a temporary furlough for the majority of its employee population. The Company's Board of Directors rescinded its authorization of any unused amounts under the Company's share repurchase program. The Company continues to monitor the situation closely and may implement further measures to provide additional financial flexibility and improve the Company's cash position and liquidity.


F-55F-63