M-11.02.2013-10Q

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

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

For the quarterly period ended November 2, 2013

OR

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

For the transition period from    to

Commission file number: 1-13536
 
 

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
 
Accelerated filer  o
 
Non-accelerated filer  o
 
Smaller reporting company  o
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at November 29, 2013
Common Stock, $0.01 par value per share
 
368,481,994 shares
 



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

(millions, except per share figures)
 
 
 
 
 
 
 
 
 
 
13 Weeks Ended
 
39 Weeks Ended
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
Net sales
$
6,276

 
$
6,075

 
$
18,729

 
$
18,336

Cost of sales
(3,817
)
 
(3,672
)
 
(11,261
)
 
(10,984
)
Gross margin
2,459

 
2,403

 
7,468

 
7,352

Selling, general and administrative expenses
(2,099
)
 
(2,078
)
 
(6,139
)
 
(6,082
)
Operating income
360

 
325

 
1,329

 
1,270

Interest expense
(97
)
 
(104
)
 
(291
)
 
(322
)
Interest income
1

 
1

 
2

 
2

Income before income taxes
264

 
222

 
1,040

 
950

Federal, state and local income tax expense
(87
)
 
(77
)
 
(365
)
 
(345
)
Net income
$
177

 
$
145

 
$
675

 
$
605

Basic earnings per share
$
.47

 
$
.36

 
$
1.77

 
$
1.48

Diluted earnings per share
$
.47

 
$
.36

 
$
1.74

 
$
1.45


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

2


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

(millions)

 
 
 
 
 
 
 
 
 
13 Weeks Ended
 
39 Weeks Ended
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
Net income
$
177

 
$
145

 
$
675

 
$
605

Other comprehensive income:
 
 
 
 
 
 
 
Amortization of net actuarial loss and prior service credit
on post employment and postretirement benefit plans
included in net income, before tax
38

 
37

 
117

 
115

Tax effect related to items of other comprehensive income
(14
)
 
(13
)
 
(45
)
 
(44
)
Total other comprehensive income, net of tax effect
24

 
24

 
72

 
71

Comprehensive income
$
201

 
$
169

 
$
747

 
$
676


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


3


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

(millions)
 
 
 
 
 
 
 
 
November 2, 2013
 
February 2, 2013
 
October 27, 2012
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and cash equivalents
$
1,171

 
$
1,836

 
$
1,264

Receivables
276

 
371

 
281

Merchandise inventories
7,716

 
5,308

 
7,208

Prepaid expenses and other current assets
397

 
361

 
410

Total Current Assets
9,560

 
7,876

 
9,163

Property and Equipment - net of accumulated depreciation and
amortization of
$6,555, $5,947 and $6,584
7,950

 
8,196

 
8,212

Goodwill
3,743

 
3,743

 
3,743

Other Intangible Assets – net
535

 
561

 
570

Other Assets
658

 
615

 
582

Total Assets
$
22,446

 
$
20,991

 
$
22,270

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
Short-term debt
$
465

 
$
124

 
$
123

Merchandise accounts payable
3,897

 
1,579

 
3,627

Accounts payable and accrued liabilities
2,323

 
2,610

 
2,419

Income taxes
78

 
355

 
89

Deferred income taxes
423

 
407

 
426

Total Current Liabilities
7,186

 
5,075

 
6,684

Long-Term Debt
6,732

 
6,806

 
6,817

Deferred Income Taxes
1,225

 
1,238

 
1,182

Other Liabilities
1,861

 
1,821

 
2,024

Shareholders’ Equity
5,442

 
6,051

 
5,563

Total Liabilities and Shareholders’ Equity
$
22,446

 
$
20,991

 
$
22,270


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


4


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

(millions)
 
 
 
 
 
39 Weeks Ended
 
November 2, 2013
 
October 27, 2012
Cash flows from operating activities:
 
 
 
Net income
$
675

 
$
605

Adjustments to reconcile net income to net cash
provided by operating activities:
 
 
 
Depreciation and amortization
761

 
782

Stock-based compensation expense
48

 
47

Amortization of financing costs and premium on acquired debt
(7
)
 
(10
)
Changes in assets and liabilities:
 
 
 
 Decrease in receivables
102

 
91

 Increase in merchandise inventories
(2,408
)
 
(2,091
)
(Increase) decrease in prepaid expenses and other current assets
(25
)
 
58

 Decrease in other assets not separately identified
1

 
23

 Increase in merchandise accounts payable
2,155

 
1,941

 Decrease in accounts payable and accrued
liabilities not separately identified
(320
)
 
(323
)
 Decrease in current income taxes
(277
)
 
(282
)
 Increase (decrease) in deferred income taxes
(43
)
 
14

 Increase in other liabilities not separately identified
157

 
34

Net cash provided by operating activities
819

 
889

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(381
)
 
(464
)
Capitalized software
(180
)
 
(169
)
Disposition of property and equipment
30

 
36

Other, net
(10
)
 
(18
)
Net cash used by investing activities
(541
)
 
(615
)
Cash flows from financing activities:
 
 
 
Debt issued
400

 

Financing costs
(10
)
 

Debt repaid
(121
)
 
(803
)
Dividends paid
(267
)
 
(246
)
Increase in outstanding checks
73

 
38

Acquisition of treasury stock
(1,228
)
 
(1,018
)
Issuance of common stock
210

 
192

Net cash used by financing activities
(943
)
 
(1,837
)
Net decrease in cash and cash equivalents
(665
)
 
(1,563
)
Cash and cash equivalents beginning of period
1,836

 
2,827

Cash and cash equivalents end of period
$
1,171

 
$
1,264

Supplemental cash flow information:
 
 
 
Interest paid
$
268

 
$
304

Interest received
1

 
2

Income taxes paid (net of refunds received)
582

 
591


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

5


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

1.    Summary of Significant Accounting Policies
Nature of Operations
Macy's, Inc. and subsidiaries (the "Company") is an omnichannel retail organization operating stores and Internet websites under two brands (Macy's and Bloomingdale's) that sell a wide range of merchandise, including apparel and accessories (men's, women's and children's), cosmetics, home furnishings and other consumer goods. The Company's operations include approximately 840 stores, including thirteen Bloomingdale's Outlets, in 45 states, the District of Columbia, Guam and Puerto Rico, as well as macys.com and bloomingdales.com. In addition, Bloomingdale's in Dubai, United Arab Emirates is operated under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC.
A description of the Company's significant accounting policies is included in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2013 (the "2012 10-K"). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 2012 10-K.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions are subject to inherent uncertainties, which may result in actual amounts differing from reported amounts.
The Consolidated Financial Statements for the 13 and 39 weeks ended November 2, 2013 and October 27, 2012, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly, in all material respects, the consolidated financial position and results of operations of the Company.
Seasonality
Because of the seasonal nature of the retail business, the results of operations for the 13 and 39 weeks ended November 2, 2013 and October 27, 2012 (which do not include the Christmas season) are not necessarily indicative of such results for the full fiscal year.
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 component of total comprehensive income for the 13 and 39 weeks ended November 2, 2013 and October 27, 2012 is the amortization of post employment and postretirement plan items. These reclassifications out of accumulated other comprehensive loss are included in the computation of net periodic benefit costs and are included in selling, general and administrative expenses on the Consolidated Statements of Income. See Note 4, "Benefit Plans," for further information.


6

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


2.    Earnings Per Share
The following tables set forth the computation of basic and diluted earnings per share:
 
13 Weeks Ended
 
November 2, 2013
 
October 27, 2012
 
Net
Income
 
 
 
Shares
 
Net
Income
 
 
 
Shares
 
(millions, except per share data)
Net income and average number of shares outstanding
$
177

 
 
 
373.9

 
$
145

 
 
 
400.3

Shares to be issued under deferred
compensation and other plans
 
 
 
 
0.9

 
 
 
 
 
1.0

 
$
177

 
 
 
374.8

 
$
145

 
 
 
401.3

Basic earnings per share
 
 
$
0.47

 
 
 
 
 
$
0.36

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock and restricted stock units
 
 
 
 
5.4

 
 
 
 
 
6.6

 
$
177

 
 
 
380.2

 
$
145

 
 
 
407.9

Diluted earnings per share
 
 
$
0.47

 
 
 
 
 
$
0.36

 
 
 
 
39 Weeks Ended
 
November 2, 2013
 
October 27, 2012
 
Net
Income
 
 
 
Shares
 
Net
Income
 
 
 
Shares
 
(millions, except per share data)
Net income and average number of shares outstanding
$
675

 
 
 
380.8

 
$
605

 
 
 
408.7

Shares to be issued under deferred
compensation and other plans
 
 
 
 
1.0

 
 
 
 
 
1.2

 
$
675

 
 
 
381.8

 
$
605

 
 
 
409.9

Basic earnings per share
 
 
$
1.77

 
 
 
 
 
$
1.48

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock and restricted stock units
 
 
 
 
6.2

 
 
 
 
 
6.6

 
$
675

 
 
 
388.0

 
$
605

 
 
 
416.5

Diluted earnings per share
 
 
$
1.74

 
 
 
 
 
$
1.45

 
 

In addition to the stock options, restricted stock and restricted stock units reflected in the foregoing tables, stock options to purchase 6.6 million shares of common stock and restricted stock units relating to 1.8 million shares of common stock were outstanding at November 2, 2013, but were not included in the computation of diluted earnings per share for the 13 or 39 weeks ended November 2, 2013 because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.
In addition to the stock options, restricted stock and restricted stock units reflected in the foregoing tables, stock options to purchase 7.6 million shares of common stock and restricted stock units relating to 2.5 million shares of common stock were outstanding at October 27, 2012, but were not included in the computation of diluted earnings per share for the 13 or 39 weeks ended October 27, 2012 because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.


7

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


3.    Financing Activities
The following table shows the detail of debt repayments:
 
 
39 Weeks Ended
 
November 2, 2013
 
October 27, 2012
 
(millions)
7.625% Senior debentures due 2013
$
109

 
$

5.35% Senior notes due 2012

 
616

8.0% Senior debentures due 2012

 
173

9.5% amortizing debentures due 2021
4

 
4

9.75% amortizing debentures due 2021
2

 
2

Capital leases and other obligations
6

 
8

 
$
121

 
$
803

During the 39 weeks ended November 2, 2013, the Company repaid $109 million of indebtedness at maturity.
On March 29, 2012, the Company redeemed the $173 million of 8.0% senior debentures due July 15, 2012, 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 $4 million. In addition, the Company repaid $616 million of 5.35% senior notes due March 15, 2012 at maturity.
On September 6, 2013, the Company issued $400 million aggregate principal amount of 4.375% senior notes due 2023. The proceeds will be used for general corporate purposes, which may include working capital, capital expenditures, retirement of indebtedness and repurchasing outstanding common stock.
During the 39 weeks ended November 2, 2013, the Company repurchased approximately 27.6 million shares of its common stock pursuant to existing stock purchase authorizations for a total of approximately $1,254 million. As of November 2, 2013, the Company had $1,748 million of authorization remaining under its share repurchase program. The Company may continue or, from time to time, suspend repurchases of shares under its share repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors.
The Company entered into a credit agreement with certain financial institutions on May 10, 2013 providing for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing) outstanding at any particular time. This agreement is set to expire May 10, 2018 and replaces the previous facility which was set to expire June 20, 2015. As of and during the 39 weeks ended November 2, 2013, the Company had no borrowings outstanding under its then existing credit agreements, and as of the date of this report, the Company does not expect to borrow under its new credit agreement during fiscal 2013.

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

8

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


In March 2010, President Obama signed into law the "Patient Protection and Affordable Care Act" and the "Health Care and Education Affordability Reconciliation Act of 2010" (the "2010 Acts"). The 2010 Acts contain provisions which impact the accounting for postretirement obligations. Based on the analysis to date, the impact of the provisions in the 2010 Acts on the Company's postretirement obligations has not and is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows. The Company continues to evaluate the impact of the 2010 Acts on the active and retiree benefit plans offered by the Company.
The actuarially determined components of the net periodic benefit cost are as follows:
 
 
13 Weeks Ended
 
39 Weeks Ended
 
November 2, 2013
 
October 27, 2012
 
November 2, 2013
 
October 27, 2012
 
(millions)
Pension Plan
 
 
 
 
 
 
 
Service cost
$
28

 
$
30

 
$
84

 
$
88

Interest cost
36

 
40

 
107

 
118

Expected return on assets
(60
)
 
(64
)
 
(181
)
 
(190
)
Recognition of net actuarial loss
34

 
35

 
105

 
106

Amortization of prior service credit

 
(1
)
 

 
(1
)
 
$
38

 
$
40

 
$
115

 
$
121

Supplementary Retirement Plan
 
 
 
 
 
 
 
Service cost
$
2

 
$
1

 
$
5

 
$
4

Interest cost
8

 
9

 
24

 
26

Recognition of net actuarial loss
4

 
4

 
14

 
13

Amortization of prior service credit

 

 

 

 
$
14

 
$
14

 
$
43

 
$
43

Postretirement Obligations
 
 
 
 
 
 
 
Service cost
$

 
$

 
$

 
$

Interest cost
2

 
3

 
7

 
9

Recognition of net actuarial gain

 
(1
)
 
(2
)
 
(3
)
Amortization of prior service cost

 

 

 

 
$
2

 
$
2

 
$
5

 
$
6


5.    Fair Value Measurements
The following table shows the Company's financial assets that are required to be measured at fair value on a recurring basis, by level within the hierarchy as defined by applicable accounting standards:
 
 
November 2, 2013
 
October 27, 2012
 
 
 
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
$
78

 
$

 
$
78

 
$

 
$
83

 
$

 
$
83

 
$



9

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


Other financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, receivables, short-term debt, merchandise accounts payable, accounts payable and accrued liabilities and long-term debt. With the exception of long-term debt, the carrying amount approximates fair value because of the short maturity of these instruments. The fair values of long-term debt, excluding capitalized leases, are generally estimated based on quoted market prices for identical or similar instruments, and are classified as Level 2 measurements within the hierarchy as defined by applicable accounting standards.
The following table shows the estimated fair value of the Company's long-term debt:
 
 
November 2, 2013
 
October 27, 2012
 
Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
(millions)
Long-term debt
$
6,522

 
$
6,701

 
$
7,002

 
$
6,583

 
$
6,784

 
$
7,736


6.    Condensed Consolidating Financial Information
Certain debt obligations of the Company, which constitute debt obligations of Macy's Retail Holdings, Inc. ("Subsidiary Issuer"), a 100%-owned subsidiary of Macy's, Inc. ("Parent"), are fully and unconditionally guaranteed by Parent. In the following condensed consolidating financial statements, "Other Subsidiaries" includes all other direct subsidiaries of Parent, including FDS Bank, West 34th Street Insurance Company (prior to a merger, known separately as Leadville Insurance Company and Snowdin Insurance Company) and its subsidiary West 34th Street Insurance Company New York, Macy's Merchandising Corporation, Macy's Merchandising Group, Inc. and its subsidiaries Macy's Merchandising Group (Hong Kong) Limited, Macy's Merchandising Group Procurement, LLC, Macy's Merchandising Group International, LLC, and Macy's Merchandising Group International (Hong Kong) Limited. "Subsidiary Issuer" includes operating divisions and non-guarantor subsidiaries of the Subsidiary Issuer on an equity basis. The assets and liabilities and results of operations of the non-guarantor subsidiaries of the Subsidiary Issuer are also reflected in "Other Subsidiaries."
Condensed Consolidating Balance Sheets as of November 2, 2013, October 27, 2012 and February 2, 2013, the related Condensed Consolidating Statements of Comprehensive Income for the 13 and 39 weeks ended November 2, 2013 and October 27, 2012, and the related Condensed Consolidating Statements of Cash Flows for the 39 weeks ended November 2, 2013 and October 27, 2012 are presented on the following pages.

10

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



Condensed Consolidating Balance Sheet
As of November 2, 2013
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
807

 
$
21

 
$
343

 
$

 
$
1,171

Receivables

 
44

 
232

 

 
276

Merchandise inventories

 
3,946

 
3,770

 

 
7,716

Prepaid expenses and other current assets

 
99

 
298

 

 
397

Income taxes
38

 

 

 
(38
)
 

Total Current Assets
845

 
4,110

 
4,643

 
(38
)
 
9,560

Property and Equipment – net

 
4,531

 
3,419

 

 
7,950

Goodwill

 
3,315

 
428

 

 
3,743

Other Intangible Assets – net

 
103

 
432

 

 
535

Other Assets
4

 
73

 
581

 

 
658

Deferred income taxes
3

 

 

 
(3
)
 

Intercompany Receivable
464

 

 
3,218

 
(3,682
)
 

Investment in Subsidiaries
4,320

 
2,753

 

 
(7,073
)
 

Total Assets
$
5,636

 
$
14,885

 
$
12,721

 
$
(10,796
)
 
$
22,446

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

 
$
463

 
$
2

 
$

 
$
465

Merchandise accounts payable

 
1,812

 
2,085

 

 
3,897

Accounts payable and accrued liabilities
107

 
965

 
1,251

 

 
2,323

Income taxes

 
6

 
110

 
(38
)
 
78

Deferred income taxes

 
322

 
101

 

 
423

Total Current Liabilities
107

 
3,568

 
3,549

 
(38
)
 
7,186

Long-Term Debt

 
6,711

 
21

 

 
6,732

Intercompany Payable

 
3,682

 

 
(3,682
)
 

Deferred Income Taxes

 
450

 
778

 
(3
)
 
1,225

Other Liabilities
87

 
619

 
1,155

 

 
1,861

Shareholders' Equity (Deficit)
5,442

 
(145
)
 
7,218

 
(7,073
)
 
5,442

Total Liabilities and Shareholders' Equity
$
5,636

 
$
14,885

 
$
12,721

 
$
(10,796
)
 
$
22,446


11

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



Condensed Consolidating Statement of Comprehensive Income
For the 13 Weeks Ended November 2, 2013
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
2,979

 
$
6,337

 
$
(3,040
)
 
$
6,276

Cost of sales

 
(1,930
)
 
(4,913
)
 
3,026

 
(3,817
)
Gross margin

 
1,049

 
1,424

 
(14
)
 
2,459

Selling, general and administrative expenses
(2
)
 
(1,113
)
 
(998
)
 
14

 
(2,099
)
Operating income (loss)
(2
)
 
(64
)
 
426

 

 
360

Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External
1

 
(96
)
 
(1
)
 

 
(96
)
Intercompany
(1
)
 
(39
)
 
40

 

 

Equity in earnings of subsidiaries
178

 
(15
)
 

 
(163
)
 

Income (loss) before income taxes
176

 
(214
)
 
465

 
(163
)
 
264

Federal, state and local income
tax benefit (expense)
1

 
56

 
(144
)
 

 
(87
)
Net income (loss)
$
177

 
$
(158
)
 
$
321

 
$
(163
)
 
$
177

Comprehensive income (loss)
$
201

 
$
(134
)
 
$
331

 
$
(197
)
 
$
201




12

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



Condensed Consolidating Statement of Comprehensive Income
For the 39 Weeks Ended November 2, 2013
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
8,911

 
$
16,716

 
$
(6,898
)
 
$
18,729

Cost of sales

 
(5,590
)
 
(12,529
)
 
6,858

 
(11,261
)
Gross margin

 
3,321

 
4,187

 
(40
)
 
7,468

Selling, general and administrative expenses
(7
)
 
(3,217
)
 
(2,955
)
 
40

 
(6,139
)
Operating income (loss)
(7
)
 
104

 
1,232

 

 
1,329

Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External
1

 
(289
)
 
(1
)
 

 
(289
)
Intercompany
(1
)
 
(118
)
 
119

 

 

Equity in earnings of subsidiaries
679

 
129

 

 
(808
)
 

Income (loss) before income taxes
672

 
(174
)
 
1,350

 
(808
)
 
1,040

Federal, state and local income
tax benefit (expense)
3

 
93

 
(461
)
 

 
(365
)
Net income (loss)
$
675

 
$
(81
)
 
$
889

 
$
(808
)
 
$
675

Comprehensive income (loss)
$
747

 
$
(9
)
 
$
919

 
$
(910
)
 
$
747



13

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



Condensed Consolidating Statement of Cash Flows
For the 39 Weeks Ended November 2, 2013
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
675

 
$
(81
)
 
$
889

 
$
(808
)
 
$
675

Equity in earnings of subsidiaries
(679
)
 
(129
)
 

 
808

 

Dividends received from subsidiaries
458

 

 

 
(458
)
 

Depreciation and amortization

 
349

 
412

 

 
761

Increase in working capital
(34
)
 
(185
)
 
(554
)
 

 
(773
)
Other, net
16

 
107

 
33

 

 
156

Net cash provided by operating activities
436

 
61

 
780

 
(458
)
 
819

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

 
(206
)
 
(325
)
 

 
(531
)
Other, net

 

 
(10
)
 

 
(10
)
Net cash used by investing activities

 
(206
)
 
(335
)
 

 
(541
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Debt issued, net of debt repaid

 
281

 
(2
)
 

 
279

Dividends paid
(267
)
 

 
(458
)
 
458

 
(267
)
Common stock acquired, net of
issuance of common stock
(1,018
)
 

 

 

 
(1,018
)
Intercompany activity, net
224

 
(159
)
 
(65
)
 

 

Other, net
(106
)
 
3

 
166

 

 
63

Net cash provided (used) by
financing activities
(1,167
)
 
125

 
(359
)
 
458

 
(943
)
Net increase (decrease) in cash
and cash equivalents
(731
)
 
(20
)
 
86

 

 
(665
)
Cash and cash equivalents at beginning of period
1,538

 
41

 
257

 

 
1,836

Cash and cash equivalents at end of period
$
807

 
$
21

 
$
343

 
$

 
$
1,171


14

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



Condensed Consolidating Balance Sheet
As of October 27, 2012
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
938

 
$
36

 
$
290

 
$

 
$
1,264

Receivables

 
31

 
250

 

 
281

Merchandise inventories

 
3,712

 
3,496

 

 
7,208

Prepaid expenses and other current assets

 
103

 
307

 

 
410

Income taxes
127

 

 

 
(127
)
 

Total Current Assets
1,065

 
3,882

 
4,343

 
(127
)
 
9,163

Property and Equipment – net

 
4,696

 
3,516

 

 
8,212

Goodwill

 
3,315

 
428

 

 
3,743

Other Intangible Assets – net

 
131

 
439

 

 
570

Other Assets
4

 
65

 
513

 

 
582

Deferred Income Taxes
11

 

 

 
(11
)
 

Intercompany Receivable
1,260

 

 
3,114

 
(4,374
)
 

Investment in Subsidiaries
3,467

 
2,675

 

 
(6,142
)
 

Total Assets
$
5,807

 
$
14,764

 
$
12,353

 
$
(10,654
)
 
$
22,270

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

 
$
121

 
$
2

 
$

 
$
123

Merchandise accounts payable

 
1,730

 
1,897

 

 
3,627

Accounts payable and accrued liabilities
212

 
919

 
1,288

 

 
2,419

Income taxes

 
54

 
162

 
(127
)
 
89

Deferred income taxes

 
322

 
104

 

 
426

Total Current Liabilities
212

 
3,146

 
3,453

 
(127
)
 
6,684

Long-Term Debt

 
6,793

 
24

 

 
6,817

Intercompany Payable

 
4,374

 

 
(4,374
)
 

Deferred Income Taxes

 
389

 
804

 
(11
)
 
1,182

Other Liabilities
32

 
746

 
1,246

 

 
2,024

Shareholders' Equity (Deficit)
5,563

 
(684
)
 
6,826

 
(6,142
)
 
5,563

Total Liabilities and Shareholders' Equity
$
5,807

 
$
14,764

 
$
12,353

 
$
(10,654
)
 
$
22,270


15

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



Condensed Consolidating Statement of Comprehensive Income
For the 13 Weeks Ended October 27, 2012
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
2,979

 
$
5,820

 
$
(2,724
)
 
$
6,075

Cost of sales

 
(1,901
)
 
(4,480
)
 
2,709

 
(3,672
)
Gross margin

 
1,078

 
1,340

 
(15
)
 
2,403

Selling, general and administrative expenses
(2
)
 
(1,132
)
 
(959
)
 
15

 
(2,078
)
Operating income (loss)
(2
)
 
(54
)
 
381

 

 
325

Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External

 
(103
)
 

 

 
(103
)
Intercompany

 
(35
)
 
35

 

 

Equity in earnings of subsidiaries
147

 
29

 

 
(176
)
 

Income (loss) before income taxes
145

 
(163
)
 
416

 
(176
)
 
222

Federal, state and local income
tax benefit (expense)

 
50

 
(127
)
 

 
(77
)
Net income (loss)
$
145

 
$
(113
)
 
$
289

 
$
(176
)
 
$
145

Comprehensive income (loss)
$
169

 
$
(89
)
 
$
299

 
$
(210
)
 
$
169




16

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



Condensed Consolidating Statement of Comprehensive Income
For the 39 Weeks Ended October 27, 2012
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
9,024

 
$
15,672

 
$
(6,360
)
 
$
18,336

Cost of sales

 
(5,640
)
 
(11,661
)
 
6,317

 
(10,984
)
Gross margin

 
3,384

 
4,011

 
(43
)
 
7,352

Selling, general and administrative expenses
(6
)
 
(3,282
)
 
(2,837
)
 
43

 
(6,082
)
Operating income (loss)
(6
)
 
102

 
1,174

 

 
1,270

Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External
1

 
(320
)
 
(1
)
 

 
(320
)
Intercompany
(1
)
 
(106
)
 
107

 

 

Equity in earnings of subsidiaries
609

 
222

 

 
(831
)
 

Income (loss) before income taxes
603

 
(102
)
 
1,280

 
(831
)
 
950

Federal, state and local income
tax benefit (expense)
2

 
87

 
(434
)
 

 
(345
)
Net income (loss)
$
605

 
$
(15
)
 
$
846

 
$
(831
)
 
$
605

Comprehensive income
$
676

 
$
56

 
$
876

 
$
(932
)
 
$
676



17

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



Condensed Consolidating Statement of Cash Flows
For the 39 Weeks Ended October 27, 2012
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
605

 
$
(15
)
 
$
846

 
$
(831
)
 
$
605

Equity in earnings of subsidiaries
(609
)
 
(222
)
 

 
831

 

Dividends received from subsidiaries
455

 

 

 
(455
)
 

Depreciation and amortization

 
356

 
426

 

 
782

Increase in working capital
(173
)
 
(66
)
 
(367
)
 

 
(606
)
Other, net
(17
)
 
64

 
61

 

 
108

Net cash provided by operating activities
261

 
117

 
966

 
(455
)
 
889

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

 
(210
)
 
(387
)
 

 
(597
)
Other, net

 

 
(18
)
 

 
(18
)
Net cash used by investing activities

 
(210
)
 
(405
)
 

 
(615
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Debt repaid

 
(800
)
 
(3
)
 

 
(803
)
Dividends paid
(246
)
 

 
(455
)
 
455

 
(246
)
Common stock acquired, net of
issuance of common stock
(826
)
 

 

 

 
(826
)
Intercompany activity, net
(733
)
 
892

 
(159
)
 

 

Other, net
(51
)
 
(1
)
 
90

 

 
38

Net cash provided (used) by
financing activities
(1,856
)
 
91

 
(527
)
 
455

 
(1,837
)
Net increase (decrease) in cash and
cash equivalents
(1,595
)
 
(2
)
 
34

 

 
(1,563
)
Cash and cash equivalents at beginning of period
2,533

 
38

 
256

 

 
2,827

Cash and cash equivalents at end of period
$
938

 
$
36

 
$
290

 
$

 
$
1,264


18

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



Condensed Consolidating Balance Sheet
As of February 2, 2013
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,538

 
$
41

 
$
257

 
$

 
$
1,836

Receivables

 
58

 
313

 

 
371

Merchandise inventories

 
2,804

 
2,504

 

 
5,308

Prepaid expenses and other current assets

 
97

 
264

 

 
361

Income taxes
30

 

 

 
(30
)
 

Total Current Assets
1,568

 
3,000

 
3,338

 
(30
)
 
7,876

Property and Equipment – net

 
4,649

 
3,547

 

 
8,196

Goodwill

 
3,315

 
428

 

 
3,743

Other Intangible Assets – net

 
124

 
437

 

 
561

Other Assets
3

 
71

 
541

 

 
615

Intercompany Receivable
641

 

 
3,190

 
(3,831
)
 

Investment in Subsidiaries
4,027

 
2,595

 

 
(6,622
)
 

Total Assets
$
6,239

 
$
13,754

 
$
11,481

 
$
(10,483
)
 
$
20,991

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

 
$
121

 
$
3

 
$

 
$
124

Merchandise accounts payable

 
733

 
846

 

 
1,579

Accounts payable and accrued liabilities
119

 
1,023

 
1,468

 

 
2,610

Income taxes

 
69

 
316

 
(30
)
 
355

Deferred income taxes

 
323

 
84

 

 
407

Total Current Liabilities
119

 
2,269

 
2,717

 
(30
)
 
5,075

Long-Term Debt

 
6,783

 
23

 

 
6,806

Intercompany Payable

 
3,831

 

 
(3,831
)
 

Deferred Income Taxes
11

 
410

 
817

 

 
1,238

Other Liabilities
58

 
596

 
1,167

 

 
1,821

Shareholders' Equity (Deficit)
6,051

 
(135
)
 
6,757

 
(6,622
)
 
6,051

Total Liabilities and Shareholders' Equity
$
6,239

 
$
13,754

 
$
11,481

 
$
(10,483
)
 
$
20,991





19


MACY'S, INC.

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

For purposes of the following discussion, all references to "third quarter of 2013" and "third quarter of 2012" are to the Company's 13-week fiscal periods ended November 2, 2013 and October 27, 2012, respectively, and all references to "2013" and "2012" are to the Company's 39-week fiscal periods ended November 2, 2013 and October 27, 2012, respectively.
The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes included elsewhere in this report, as well as the financial and other information included in the 2012 10-K. The following discussion contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed below and elsewhere in this report (particularly in "Forward-Looking Statements") and in the 2012 10-K (particularly in "Risk Factors").
Overview
The Company is an omnichannel retail organization operating stores and websites under two brands (Macy's and Bloomingdale's) that sell a wide range of merchandise, including apparel and accessories (men's, women's and children's), cosmetics, home furnishings and other consumer goods. The Company's operations include approximately 840 stores, including thirteen Bloomingdale's Outlets, in 45 states, the District of Columbia, Guam and Puerto Rico, as well as macys.com and bloomingdales.com. In addition, Bloomingdale's in Dubai, United Arab Emirates is operated under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC.
The Company is focused on three key strategies for continued growth in sales, earnings and cash flow in the years ahead: (i) maximizing the My Macy's localization initiative; (ii) driving the omnichannel business; and (iii) embracing customer centricity, including engaging customers on the selling floor through the MAGIC Selling program.
Through the My Macy's localization initiative, the Company has invested in talent, technology and marketing which ensures that core customers surrounding each Macy's store find merchandise assortments, size ranges, marketing programs and shopping experiences that are custom-tailored to their needs. My Macy's has provided for more local decision-making in every Macy's community, and involves tailoring merchandise assortments, space allocations, service levels, visual merchandising and special events on a store-by-store basis.
The Company's omnichannel strategy allows customers to shop seamlessly in stores, online and via mobile devices. A pivotal part of the omnichannel strategy is the Company's ability to allow associates in any store to sell a product that may be unavailable locally by selecting merchandise from other stores or online fulfillment centers for shipment to the customer's door. Likewise, the Company's online fulfillment centers can draw on store inventories nationwide to fill orders that originate on the Internet or via mobile devices. As of November 2, 2013, approximately 500 Macy's stores are fulfilling orders from other stores, the Internet and mobile devices, compared to 292 stores as of February 2, 2013.
Macy's MAGIC Selling program is an approach to customer engagement that helps Macy's to better understand the needs of customers, as well as to provide options and advice. This comprehensive ongoing training and coaching program is designed to improve the in-store shopping experience.
During 2013, the Company opened new Macy's stores in Gurnee, Illinois and Victorville, California, expanded into an additional Macy's location in an existing mall in Las Vegas, Nevada, opened a Macy's replacement store in Bay Shore, New York and opened a new Bloomingdale's Outlet store in Rosemont, Illinois. In addition, a new Bloomingdale's store in Glendale, California opened in early November 2013. A Macy's store was closed in St. Louis, Missouri and the Macy's men's and furniture store in Sacramento, California was consolidated into a nearby full-line store during 2013.
During 2012 and including November 2012, the Company opened new Macy's stores in Milwaukee, Wisconsin and Salt Lake City, Utah and new Bloomingdale's Outlet stores in Dallas, Texas; Garden City, New York; Grand Prairie, Texas; Livermore, California; and Merrimack, New Hampshire.

20


MACY'S, INC.

The Company's operations are impacted by competitive pressures from department stores, specialty stores, mass merchandisers, Internet websites 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, a slowly improving housing market, a rising stock market, uncertainty regarding governmental spending and tax policies, high unemployment levels and tightened consumer credit. 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.
The effects of economic conditions have been, and may continue to be, experienced differently, or at different times, in the various geographic regions in which the Company operates, in relation to the different types of merchandise that the Company offers for sale, or in relation to the Company's Macy's-branded and Bloomingdale's-branded operations. All economic conditions, however, ultimately affect the Company's overall operations.
Based on its assessment of current and anticipated market conditions and its recent performance, the Company is assuming that its comparable sales in fiscal 2013 will increase in the range of 2.0% to 2.9% from 2012 levels and that its diluted earnings per share in fiscal 2013 will be in the range of $3.80 to $3.90.

Results of Operations
Comparison of the Third Quarter of 2013 and the Third Quarter of 2012
 
 
Third Quarter of 2013
 
 
Third Quarter of 2012
 
 
 
 
Amount
 
% to Sales
 
 
Amount
 
% to Sales
 
 
 
 
(dollars in millions, except per share figures)
Net sales
 
$
6,276

 
 
 
 
$
6,075

 
 
 
 
Increase in sales
 
3.3

%
 
 
3.8

%
 
 
Increase in comparable sales
 
3.5

%
 
 
3.7

%
 
 
Cost of sales
 
(3,817
)
 
(60.8
)
%
(3,672
)
 
(60.4
)
%
Gross margin
 
2,459

 
39.2

%
2,403

 
39.6

%
Selling, general and administrative expenses
 
(2,099
)
 
(33.5
)
%
(2,078
)
 
(34.2
)
%
Operating income
 
360

 
5.7

%
325

 
5.4

%
Interest expense - net
 
(96
)
 
 
 
 
(103
)
 
 
 
 
Income before income taxes
 
264

 
 
 
 
222

 
 
 
 
Federal, state and local income tax expense
 
(87
)
 
 
 
 
(77
)
 
 
 
 
Net income
 
$
177

 
2.8

%
$
145

 
2.4

%
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.47

 
 
 
 
$
0.36

 
 
 
 
Net Income
Net income for the third quarter of 2013 increased $32 million or 22.1% compared to the third quarter of 2012, reflecting the benefits of the key strategies at Macy's and lower net interest expense.
Net Sales
Net sales for the third quarter of 2013 increased $201 million or 3.3% compared to the third quarter of 2012. The Company benefited from the successful execution of the My Macy's localization, Omnichannel and MAGIC selling strategies. Geographically, sales in the third quarter of 2013 were strongest in the southern regions and the northeast. Bloomingdale's also had strong sales during the third quarter of 2013. By family of business, sales in the third quarter of 2013 were stronger in women's apparel and center core, including handbags, cosmetics, fine jewelry, intimate apparel and boots. Men's active, tailored clothing and cold weather merchandise also had strong sales in the third quarter of 2013, as did furniture, mattresses, textiles and housewares. Sales in the third quarter of 2013 were less strong in juniors, watches and luggage.

21


MACY'S, INC.

On a comparable basis, net sales for the third quarter of 2013 were up 3.5% compared to the third quarter of 2012. Together with sales from departments licensed to third parties, third quarter of 2013 sales on a comparable basis were up 4.6%. (See page 24 for a reconciliation of this non-GAAP measure to the most comparable GAAP measure and other important information.) The Company calculates comparable sales as sales from stores in operation throughout 2012 and 2013 and all Internet sales. The Company licenses third parties to operate certain departments in its stores and receives commissions from these third parties based on a percentage of their net sales. Neither the licensed department sales nor the commissions received are included in the calculation of comparable sales. 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 figures differ among companies in the retail industry.
Cost of Sales
Cost of sales for the third quarter of 2013 increased $145 million from the third quarter of 2012. The cost of sales rate as a percent to net sales was 40 basis points higher, compared to the third quarter of 2012, reflecting higher markdowns as a percent to net sales, as well as the growth in the omnichannel business 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.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses for the third quarter of 2013 increased $21 million or 1.0% from the third quarter of 2012. The SG&A rate as a percent to net sales was 70 basis points lower in the third quarter of 2013, as compared to the third quarter of 2012, reflecting increased net sales. SG&A expenses in the third quarter of 2013 were impacted by continued investments in the Company's omnichannel operations and additional marketing expense, partially offset by lower depreciation and amortization expense and higher income from credit operations. Income from credit operations was $170 million in the third quarter of 2013, compared to $162 million in the third quarter of 2012, reflecting continued improvement in collection rates. The Company expects to continue to experience higher income from credit operations in the near term; however, the increase for the fourth quarter of 2013 compared to the fourth quarter of 2012 is expected to be more comparable to the period-over-period increase experienced for the third quarter of 2013, as opposed to the greater period-over-period increases experienced for the first and second quarters of 2013.
Net Interest Expense
Net interest expense for the third quarter of 2013 decreased $7 million from the third quarter of 2012. Net interest expense for the third quarter of 2013 benefited from lower rates on outstanding borrowings as compared to the third quarter of 2012.
 Effective Tax Rate
The Company's effective tax rate of 33.0% for the third quarter of 2013 and 34.5% for the third quarter of 2012 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, and also from the benefit of tax credits.

22


MACY'S, INC.

Comparison of the 39 Weeks Ended November 2, 2013 and October 27, 2012
 
 
2013
 
 
2012
 
 
 
 
Amount
 
% to Sales
 
 
Amount
 
% to Sales
 
 
 
 
(dollars in millions, except per share figures)
Net sales
 
$
18,729

 
 
 
 
$
18,336

 
 
 
 
Increase in sales
 
2.1

%
 
 
3.7

%
 
 
Increase in comparable sales
 
2.2

%
 
 
3.7

%
 
 
Cost of sales
 
(11,261
)
 
(60.1
)
%
(10,984
)
 
(59.9
)
%
Gross margin
 
7,468

 
39.9

%
7,352

 
40.1

%
Selling, general and administrative expenses
 
(6,139
)
 
(32.8
)
%
(6,082
)
 
(33.2
)
%
Operating income
 
1,329

 
7.1

%
1,270

 
6.9

%
Interest expense - net
 
(289
)
 
 
 
 
(320
)
 
 
 
 
Income before income taxes
 
1,040

 
 
 
 
950

 
 
 
 
Federal, state and local income tax expense
 
(365
)
 
 
 
 
(345
)
 
 
 
 
Net income
 
$
675

 
3.6

%
$
605

 
3.3

%
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
1.74

 
 
 
 
$
1.45

 
 
 
 
Net Income
Net income for 2013 increased $70 million or 11.6% compared to net income for 2012, reflecting the benefits of the key strategies at Macy's and lower net interest expense.
Net Sales
Net sales for 2013 increased $393 million or 2.1% compared to 2012. The Company benefited from the successful execution of the My Macy's localization, Omnichannel and MAGIC selling strategies. Geographically, sales in 2013 were strongest in the southern regions. By family of business, sales in 2013 were strongest in handbags, active apparel, men's, home textiles, furniture and mattresses. Sales in 2013 were less strong in juniors.
On a comparable basis, net sales for 2013 were up 2.2% compared to 2012. Together with sales from departments licensed to third parties, 2013 sales on a comparable basis were up 3.1%. (See page 24 for a reconciliation of this non-GAAP measure to the most comparable GAAP measure and other important information.) The Company calculates comparable sales as sales from stores in operation throughout 2012 and 2013 and all Internet sales. The Company licenses third parties to operate certain departments in its stores and receives commissions from these third parties based on a percentage of their net sales. Neither the licensed department sales nor the commissions received are included in the calculation of comparable sales. 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 figures differ among companies in the retail industry.
Cost of Sales
Cost of sales for 2013 increased $277 million from 2012. The cost of sales rate as a percent to net sales was 20 basis points higher, compared to 2012, reflecting the growth in the omnichannel business 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.

23


MACY'S, INC.

Selling, General and Administrative Expenses
SG&A expenses for 2013 increased $57 million or 0.9% from 2012. The SG&A rate as a percent to net sales was 40 basis points lower in 2013, as compared to 2012, reflecting increased net sales. SG&A expenses in 2013 were impacted by higher selling costs as a result of higher sales and continued investments in the Company's omnichannel operations, partially offset by higher income from credit operations. Income from credit operations was $513 million in 2013, compared to $451 million in 2012, reflecting continued improvement in collection rates. The Company expects to continue to experience higher income from credit operations in the near term; however, the increase for the fourth quarter of 2013 compared to the fourth quarter of 2012 is expected to be more comparable to the period-over-period increase experienced for the third quarter of 2013, as opposed to the greater period-over-period increases experienced for the first and second quarters of 2013.
Net Interest Expense
Net interest expense for 2013 decreased $31 million from 2012. Net interest expense for 2013 benefited from lower levels of borrowings and lower rates on outstanding borrowings as compared to 2012.
 Effective Tax Rate
The Company's effective tax rate of 35.1% for 2013 and 36.3% for 2012 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, and also from the benefit of tax credits.

Important Information Regarding Non-GAAP Financial Measures
The Company reports its financial results in accordance with generally accepted accounting principles (GAAP). However, management believes that certain non-GAAP financial measures provide users of the Company's financial information with additional useful information. See the table below for supplemental financial data and a corresponding reconciliation to the most directly comparable GAAP financial measure. The Company's 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 these 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 financial condition and performance. The methods used by the Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies.
The Company believes that providing comparable sales growth including the impact of growth in comparable sales of departments licensed to third parties supplementally to its results of operations calculated in accordance with generally accepted accounting principles provides useful information to investors. In particular, the Company believes that this supplemental information assists in evaluating the Company's ability to generate sales growth, whether through owned businesses or departments licensed to third parties, on a comparable basis, and in evaluating the impact of changes in the manner in which certain departments are operated (e.g. the conversion in 2013 of most of the Company's previously owned athletic footwear business to licensed Finish Line shops).
 
 
Third Quarter of 2013
 
2013
 
 
 
 
 
 
 
Increase in comparable sales (Note 1)
 
 
3.5
%
 
 
2.2
%
Impact of growth in comparable sales of departments licensed to third parties (Note 2)
 
 
1.1

 
 
0.9

Comparable sales growth including impact of growth in comparable sales of departments
licensed to third parties
 
 
4.6
%
 
 
3.1
%
Notes:
(1)
Represents the period-to-period change in net sales from stores in operation throughout 2013 and 2012 and all net Internet sales, excluding commissions from departments licensed to third parties.
(2)
Represents the impact on comparable sales of including the sales of departments licensed to third parties occurring in stores in operation throughout 2013 and 2012 and via the Internet in the calculation. 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 in its comparable sales in accordance with GAAP.


24


MACY'S, INC.

Liquidity and Capital Resources
The Company's principal sources of liquidity are cash from operations, cash on hand and the credit facility described below.
Operating Activities
Net cash provided by operating activities in 2013 was $819 million, compared to $889 million provided in 2012, reflecting a higher increase in merchandise inventories, partially offset by a higher increase in merchandise accounts payable and higher net income in 2013. The increase in inventory, net of payables, was caused by a calendar shift resulting from the 53rd week in fiscal 2012. The Company aims to have inventory in the stores on the same calendar date regardless of when it falls in the fiscal calendar to coincide with when customers shop.
Investing Activities
Net cash used by investing activities was $541 million for 2013, compared to net cash used by investing activities of $615 million for 2012. Investing activities for 2013 include purchases of property and equipment totaling $381 million and capitalized software of $180 million, compared to purchases of property and equipment totaling $464 million and capitalized software of $169 million for 2012. Purchases of property and equipment during 2012 included the purchase of two parcels of the Macy's flagship Union Square location in San Francisco.
Financing Activities
Net cash used by the Company for financing activities was $943 million for 2013, including $1,228 million for the acquisition of the Company's common stock, primarily under its share repurchase program, the payment of $267 million of cash dividends and the repayment of $121 million of debt, partially offset by the issuance of $400 million of debt, $210 million from the issuance of common stock, primarily related to the exercise of stock options, and an increase in outstanding checks of $73 million. The debt repaid during 2013 included $109 million of 7.625% senior debentures due August 15, 2013 paid at maturity.
On September 6, 2013, the Company issued $400 million aggregate principal amount of 4.375% senior notes due 2023. The proceeds will be used for general corporate purposes, which may include working capital, capital expenditures, retirement of indebtedness and repurchasing outstanding common stock.
During 2013, the Company repurchased approximately 27.6 million shares of its common stock pursuant to existing stock purchase authorizations for a total of approximately $1,254 million. As of November 2, 2013, the Company had $1,748 million of authorization remaining under its share repurchase program. The Company may continue or, from time to time, suspend repurchases of shares under its share repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors.
Net cash used by the Company for financing activities was $1,837 million for 2012, and included the repayment of $803 million of debt, $1,018 million for the acquisition of the Company's common stock under its share repurchase program and to cover employee tax liabilities related to stock plan activity and the payment of $246 million of cash dividends, partially offset by the issuance of $192 million of common stock, primarily related to the exercise of stock options, and an increase in outstanding checks of $38 million. The debt repaid during 2012 included $616 million of 5.35% senior notes due March 15, 2012 paid at maturity and the early redemption on March 29, 2012 of $173 million of 8.0% senior debentures due July 15, 2012.
The Company entered into a new credit agreement with certain financial institutions on May 10, 2013 providing for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing) outstanding at any particular time. This agreement is set to expire May 10, 2018 and replaces the prior agreement which was set to expire June 20, 2015. As of November 2, 2013 and throughout all of 2013, the Company had no borrowings outstanding under its then existing credit agreements, and as of the date of this report, the Company does not expect to borrow under its new credit agreement during fiscal 2013.
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 the third quarter of 2013 was 9.13 and its leverage ratio at November 2, 2013 was 1.87, in each case as calculated in accordance with the credit agreement.
On October 25, 2013, the Company's board of directors declared a quarterly dividend of 25 cents per share on its common stock, payable January 2, 2014 to Macy's shareholders of record at the close of business on December 13, 2013.

25


MACY'S, INC.

Liquidity and Capital Resources Outlook
Management believes that, with respect to the Company's current operations, cash on hand and funds from operations, together with its credit facility and other capital resources, will be sufficient to cover the Company's reasonably foreseeable working capital, capital expenditure and debt service requirements and other cash requirements in both the near term and over the longer term. The Company's ability to generate funds from operations may be affected by numerous factors, including general economic conditions and levels of consumer confidence and demand; however, the Company expects to be able to manage its working capital levels and capital expenditure amounts so as to maintain sufficient levels of liquidity. To the extent that the Company's cash balances from time to time exceed amounts that are needed to fund its immediate liquidity requirements, the Company will consider alternative uses of some or all of such excess cash. Such alternative uses may include, among others, the redemption or repurchase of debt, equity or other securities through open market purchases, privately negotiated transactions or otherwise, and the funding of pension related obligations. Depending upon its actual and anticipated sources and uses of liquidity, conditions in the capital markets and other factors, the Company will from time to time consider the issuance of debt or other securities, or other possible capital markets transactions, for the purpose of raising capital which could be used to refinance current indebtedness or for other corporate purposes including the redemption or repurchase of debt, equity or other securities through open market purchases, privately negotiated transactions or otherwise, and the funding of pension related obligations.
The Company intends from time to time to consider additional acquisitions of, and investments in, retail businesses and other complementary assets and companies. Acquisition transactions, if any, are expected to be financed from one or more of the following sources: cash on hand, cash from operations, borrowings under existing or new credit facilities and the issuance of long-term debt or other securities, including common stock.


26


MACY'S, INC.

Item 4.
Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer have carried out, as of November 2, 2013, with the participation of the Company's management, an evaluation of the effectiveness of the Company's disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in reports the Company files under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in the Company's internal controls over financial reporting that occurred during the Company's most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


27


MACY'S, INC.

PART II - OTHER INFORMATION
 
Item 1.
Legal Proceedings.
The Company and its subsidiaries are involved in various proceedings that are incidental to the normal course of their businesses. As of the date of this report, the Company does not expect that any of such proceedings will have a material adverse effect on the Company’s financial position or results of operations.

Item 1A.
Risk Factors.
There have been no material changes to the Risk Factors described in Part I, "Item 1A. Risk Factors" in the Company's Annual Report of Form 10-K for the fiscal year ended February 2, 2013 as filed with the SEC.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information regarding the Company's purchases of Common Stock during the third quarter of 2013.
 
Total
Number
of Shares
Purchased
 
Average
Price per
Share ($)
 
Number of Shares
Purchased under
Program (1)
 
Open
Authorization
Remaining (1)($)
 
(thousands)
 
 
 
(thousands)
 
(millions)
August 4, 2013 – August 31, 2013
1,770

 
44.75

 
1,770

 
2,116

September 1, 2013 – October 5, 2013
4,210

 
44.32

 
4,210

 
1,930

October 6, 2013 – November 2, 2013
4,117

 
44.12

 
4,117

 
1,748

 
10,097

 
44.32

 
10,097

 
 
 ___________________
(1)
During the period from January 2000 through November 2, 2013, the Company's board of directors has from time to time approved authorizations to purchase, in the aggregate, up to $13,500 million of Common Stock. All authorizations are cumulative and do not have an expiration date. As of November 2, 2013, $1,748 million of authorization remained unused. The Company may continue, discontinue or resume purchases of Common Stock under these or possible future authorizations in the open market, in privately negotiated transactions or otherwise at any time and from time to time without prior notice.

Item 4.
Mine Safety Disclosures.
Not Applicable.

28


MACY'S, INC.

Item 5.
Other Information.
Forward-Looking Statements
This report and other reports, statements and information previously or subsequently filed by the Company with the Securities and Exchange Commission (the "SEC") contain or may contain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the management of the Company at the time such statements are made. The following are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (i) statements preceded by, followed by or that include the words "may," "will," "could," "should," "believe," "expect," "future," "potential," "anticipate," "intend," "plan," "think," "estimate" or "continue" or the negative or other variations thereof, and (ii) statements regarding matters that are not historical facts. Such forward-looking statements are subject to various risks and uncertainties, including risks and uncertainties relating to:
the possible invalidity of the underlying beliefs and assumptions;
competitive pressures from department and specialty stores, general merchandise stores, manufacturers' outlets, off-price and discount stores, and all other retail channels, including the Internet, mail-order catalogs and television;
general consumer-spending levels, including the impact of general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, the costs of basic necessities and other goods and the effects of the weather or natural disasters;
conditions to, or changes in the timing of, proposed transactions and changes in expected synergies, cost savings and non-recurring charges;
possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions;
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 to deliver products in a timely manner or meet the Company's quality standards;
the Company's reliance on foreign sources of production, including risks related to the disruption of imports by labor disputes, regional health pandemics, and regional political and economic conditions;
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.
In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the statements in the immediately preceding sentence and the statements under captions such as "Risk Factors" and "Special Considerations" in reports, statements and information filed by the Company with the SEC from time to time constitute cautionary statements identifying important factors that could cause actual amounts, results, events and circumstances to differ materially from those expressed in or implied by such forward-looking statements.


29


MACY'S, INC.

Item 6.
Exhibits.

4.1
 
Fifth Supplemental Trust Indenture, dated as of September 6, 2013, among Macy's Retail Holdings, Inc., as issuer, Macy's, Inc., as guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.2 to Macy's, Inc. Current Report on Form 8-K (File No. 001-13536) filed on September 6, 2013)
 
 
 
10.1+
 
Letter Agreement, dated October 30, 2013, by and among Macy's, Inc., FDS Bank, Macy's Credit and Customer Services, Inc., Macy's West Stores, Inc., Bloomingdales, Inc., and Department Stores National Bank, a national banking association (as assignee of Citibank, N.A.)
 
 
 
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 Quarterly Report on Form 10-Q for the quarter ended November 2, 2013, filed on December 9, 2013, formatted in XBRL: (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.
___________________
+
Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The confidential portions have been provided to the SEC.
**
As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.


30


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
MACY’S, INC.
 
 
 
 
By:
/s/    DENNIS J. BRODERICK        
 
 
Dennis J. Broderick
Executive Vice President, General Counsel and
Secretary
 
 
 
 
By:
/s/    JOEL A. BELSKY
 
 
Joel A. Belsky
Executive Vice President and Controller
(Principal Accounting Officer)
Date: December 9, 2013

 


31