For purposes of the following discussion, all references to "first quarter of 2020" and "first quarter of 2019" are to the Company's 13-week fiscal periods endedMay 2, 2020 andMay 4, 2019 , respectively. References to "2020" and "2019" are to the Company's 52-week periods endedJanuary 30, 2021 andFebruary 1, 2020 , respectively. The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes included elsewhere in this report, as well as the financial and other information included in the 2019 10-K. The following discussion contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed below and elsewhere in this report (particularly in "Risk Factors" and in "Forward-Looking Statements") and in the 2019 10-K (particularly in "Risk Factors" and in "Forward-Looking Statements"). This discussion includes non-GAAP financial measures. For information about these measures, see the disclosure under the caption "Important Information Regarding Non-GAAP Financial Measures" on page 32.
Impact of COVID-19
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughoutthe United States . The COVID-19 pandemic has had a negative impact on the Company's fiscal 2020 operations and financial results to date, and the full financial impact of the pandemic cannot be reasonably estimated at this time due to uncertainty as to the severity and duration of the pandemic. The following summarizes the actions taken and impacts from the COVID-19 pandemic during and subsequent to the 13 weeks endedMay 2, 2020 .
• The Company temporarily closed all stores on
included all
Bloomingdales the Outlet and Market by
stores began reopening onMay 4, 2020 and as ofJuly 1, 2020 , nearly all the Company's stores have been reopened.
As a result of store closures, the Company recognized an approximate
• In an effort to increase liquidity, the Company fully drew on its
million credit facility, announced the suspension of quarterly cash
dividends beginning in the second quarter of 2020 and took additional
steps to reduce discretionary spending. The Company's Board of Directors
rescinded its authorization of any unused amounts under the Company's
share repurchase program. In
activities of nearly
further discussion on these activities. • To improve the Company's current cash position and reduce its cash
expenditures during this uncertain time, the Company's Board of Directors
and Chief Executive Officer did not receive compensation from the beginning of the COVID-19 crisis throughJune 30, 2020 . In addition, the Company deferred cash expenditures where possible and temporarily implemented a furlough for the majority of its employee population that
will end at the beginning of
the furlough took a temporary reduction of their pay throughJune 30, 2020 .
In the first quarter of 2020, the Company deferred rent payments for a significant number of its stores. The Company has elected to treat the COVID-19 pandemic-related rent deferrals as accrued liabilities. The Company will continue to recognize expense during the deferral periods.
InJune 2020 , the Company announced a restructuring that will align its cost base with anticipated near-term sales as the business recovers from the impact of the COVID-19 pandemic. The Company will reduce corporate and management headcount by approximately 3,900. Additionally, the Company has reduced staffing across its stores portfolio, supply chain and customer support network, which it will adjust as sales recover. The Company expects the actions announced to generate expense savings of approximately$365 million in fiscal 2020 and approximately$630 million on an annualized basis. These savings will be on top of the anticipated$1.5 billion in annual expense savings announced in February, which the Company expects to fully realize by year-end 2022. For fiscal 2020, the Company expects pre-tax costs of approximately$180 million for these restructuring activities, the majority of which will be recorded in the second quarter of 2020 and all of which will be in cash. 26 --------------------------------------------------------------------------------MACY'S, INC.
• During the 13 weeks ended
impairment charges on long-lived tangible and right of use assets to
adjust the carrying value of certain store locations to their estimated
fair value. The Company also incurred a non-cash impairment charge on
goodwill as a result of the sustained decline in the Company's market
capitalization and decline in projected cash flows primarily as a result
of the COVID-19 pandemic. See Note 3, "Impairment, Restructuring and Other
Costs" and Note 4, "
respectively, for further discussion of these charges.
• On
tax credits for employee retention, deferral of payroll taxes, and several
income tax provisions including modifications to the net interest
deduction limitation, changes to certain property depreciation and allows
for carryback of certain operating losses.
The COVID-19 pandemic continues to have a material adverse impact on the Company's operational performance, financial results and cash flows, although the full impact will depend on future developments, including the continued spread and duration of the outbreak and any related restrictions, all of which are highly uncertain and cannot be predicted. The Company continues to monitor the situation closely. Polaris Strategy
On
• Strengthen Customer Relationships: The Company is focusing on building
customer lifetime value and expanding the
program with the launch of Loyalty 3.0 in early
allows every Star Rewards member to earn loyalty rewards on their purchases regardless of tender.
• Curate Quality Fashion: The Company is repositioning its merchandise
category focus to drive sales and improve gross margin. • Accelerate Digital Growth: The Company will continue to invest in its websites and mobile apps to deliver a superior fashion experience and accelerate growth. The Company will grow its customer franchise with a strong focus on personalization and continued innovation to deliver the best digital fashion experience to its customers.
• Optimize the Store Portfolio: The Company completed a rigorous evaluation
of the
each store's overall value to the fleet, including predicted profitability
based on consumer trends and demographics. As a result, the Company plans to close approximately 125 of its least productive stores over the next three years, including approximately 30 stores that were announced for closure in the spring of 2020. • Reset Cost Base: The Company is streamlining and right-sizing the
organization and expense base to drive improvement in working capital and
operating results. This includes reductions in corporate and support
functions, campus consolidations and the consolidation of the Company's
sole headquarters to
further reshaping its supply chain to support omnichannel customer behavior and the Company's new retail ecosystem. The impact of the COVID-19 pandemic has caused the Company to examine every aspect of the Polaris strategy to determine where the Company should accelerate, where the Company will continue but with an adjusted focus and where the Company will pause initiatives. The Company may incur significant additional charges in future periods as it more fully defines incremental Polaris strategy initiatives and moves into the execution phases of these projects. Since the scope of such efforts are not fully known at this time, the benefits of such initiatives, and any related charges or capital expenditures, are not currently quantifiable. Actions associated with the Polaris strategy are currently expected to continue through 2022. 27
--------------------------------------------------------------------------------MACY'S , INC. Results of Operations Comparison of the First Quarter of 2020 and the First Quarter of 2019 First Quarter of 2020 First Quarter of 2019 % to % to Net Net Amount Sales Amount Sales (dollars in millions, except per share figures) Net sales$ 3,017 $ 5,504 Credit card revenues, net 131 4.3 % 172 3.1 % Cost of sales (2,501 ) (82.9 ) % (3,403 ) (61.8 ) % Selling, general and administrative expenses (1,598 ) (52.9 ) % (2,112 ) (38.4 ) % Gains on sale of real estate 16 0.5 % 43 0.8 % Impairment, restructuring and other costs (3,184 ) (105.5 ) % (1 ) - % Operating income (loss) (4,119 ) (136.5 ) % 203 3.7 % Benefit plan income, net 9 7 Interest expense, net (47 ) (47 ) Income (loss) before income taxes (4,157 )
163
Federal, state and local income tax benefit (expense) 576 (27 ) Net income (loss)$ (3,581 ) $ 136 Diluted earnings (loss) per share$ (11.53 )
Supplemental Financial Measure Gross margin (a)$ 516 17.1 %
Supplemental Non-GAAP Financial Measure Diluted earnings (loss) per share, excluding the impact of certain items$ (2.03 )
(a) Gross margin is defined as net sales less cost of sales.Net Sales Net sales for the first quarter of 2020 decreased$2,487 million , or 45.2%, compared to the first quarter of 2019. The Company's first quarter of 2020 sales were negatively impacted by the closure of all stores onMarch 18, 2020 , resulting in stores sales being significantly down compared to first quarter of 2019. However, while digital sales also slowed during the first quarter of 2020, the decline in digital sales was in the low single digits versus the prior year quarter. The strongest performing categories during the first quarter of 2020 were home, fine jewelry, beauty, active wear, sleepwear and kids. Sales performance was weaker in women's and men's apparel, including dresses and suits. Credit Card Revenues,Net Credit card revenues, net were$131 million in the first quarter of 2020, a decrease of$41 million , or 23.8%, compared to$172 million recognized in the first quarter of 2019 with credit penetration versus the first quarter of 2019 being approximately the same at 46%. New accounts were down significantly in the first quarter of 2020 versus the first quarter of 2019, which is primarily a reflection of stores not being open for the last six weeks of the quarter and drove the year-over-year decline. Gross Margin Gross margin was 17.1% in the first quarter of 2020 compared to 38.2% in the first quarter of 2019. The reason for the decline was due to increased net markdowns as compared to the first quarter of 2019 as well as the recognition of an approximate$300 million inventory write-down primarily on fashion merchandise during the 13 weeks endedMay 2, 2020 . Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses for the first quarter of 2020 decreased$514 million from the first quarter of 2019. The decrease in SG&A expense dollars reflects the discretionary spending freeze implemented by the Company in response to the COVID-19 pandemic. 28 --------------------------------------------------------------------------------MACY'S, INC.
Impairment, Restructuring and Other Costs
During the 13 weeks ended
•
to theMacy's reporting unit and$98 million attributable to theBluemercury reporting unit. See discussion at Note 4, "Goodwill and Indefinite Lived Intangible Assets."
•
to adjust the carrying value of certain store locations to their estimated
fair value.
The first quarter of 2020 also included$34 million of restructuring and other costs related to severance activity and other costs associated with organizational restructuring, primarily associated with the Polaris strategy. See discussion at Note 3, "Impairment, Restructuring and Other Costs." Effective Tax Rate The Company's effective tax rate of 13.9% on the pretax loss for the first quarter of 2020 reflects the impact of the non-tax deductible component of the goodwill impairment charge offset partially by the carryback of net operating losses as permitted under the CARES Act. Additionally, the first quarter of 2019 effective tax rate of 16.6% was favorably impacted by the settlement of certain tax matters. Diluted Earnings (Loss) Per Share Diluted loss per share for the first quarter of 2020 decreased$11.97 compared to the first quarter of 2019, reflecting lower net income resulting from the impact of the COVID-19 pandemic. Cash Flow, Liquidity and Capital ResourcesThe Company's principal sources of liquidity are cash from operations, cash on hand and the credit facility described below. Because of the COVID-19 outbreak, there is significant uncertainty surrounding the potential impact on the Company's results of operations and cash flows. The Company has proactively taken steps to increase available cash on hand including, but not limited to, targeted reductions in discretionary operating expenses and capital expenditures, suspension of the Company's quarterly dividend, drawing the full$1,500 million available under the Company's credit agreement as ofMay 2, 2020 , and executing additional financing transactions subsequent to the first quarter of 2020 as discussed in more detail below. Operating Activities Net cash used by operating activities in the first quarter of 2020 was$164 million , compared to$38 million in the first quarter of 2019. The difference in operating cash flows period over period is due to the net loss driven by the impact of the COVID-19 pandemic, primarily resulting from the temporary closure of the Company's physical store location partially offset by the cash management strategies including reduced spending and extension of payment terms during the COVID-19 pandemic. Investing Activities Net cash used by investing activities was$113 million in the first quarter of 2020, compared to$237 million in the first quarter of 2019. The decrease in the first quarter of 2020 is primarily due to a$104 million reduction in capital spending compared to the first quarter of 2019 as a result of the COVID-19 pandemic. Financing Activities Net cash provided by the Company for financing activities was$1,148 million for the first quarter of 2020, including debt issued of$1,500 million , partially offset by a decrease in outstanding checks of$231 million resulting from the Company's reduction in spending and$117 million of cash dividends. Net cash used by the Company for financing activities was$158 million for the first quarter of 2019, including payment of$116 million of cash dividends. As ofMay 2, 2020 , the Company was party to a credit agreement with certain financial institutions. The credit agreement provided for revolving credit borrowings and letters of credit in an aggregate amount not to exceed$1,500 million . The credit agreement was scheduled to expire onMay 9, 2024 , subject to up to two one-year extensions that may be requested by the Company and agreed to by the lenders. As ofMay 2, 2020 , the Company had$1,500 million of borrowings outstanding under the credit agreement. 29 --------------------------------------------------------------------------------MACY'S, INC. The Company is party to a$1,500 million unsecured commercial paper program. The Company may issue and sell commercial paper in an aggregate amount outstanding at any particular time not to exceed its then-current combined borrowing availability under its bank credit agreement. As ofMay 2, 2020 , the Company did not have any borrowings outstanding under its commercial paper program. As ofMay 2, 2020 , the Company was required under its credit agreement to maintain a specified interest coverage ratio for the latest four quarters of no less than 3.25 and a specified leverage ratio as of and for the latest four quarters of no more than 3.75. The Company's interest coverage ratio for the first quarter of 2020 was 6.55 and its leverage ratio atMay 2, 2020 was 4.69, in each case as calculated in accordance with the credit agreement. OnJune 8, 2020 , the Company amended the credit agreement in conjunction with the additional financing as discussed further below. The amendment of the credit agreement, discussed further below, removed the interest coverage and leverage ratio requirements.June 2020 Financing Activities
Secured Debt Issuance
OnJune 8, 2020 , the Company issued$1,300 million aggregate principal amount of 8.375% senior secured notes due 2025 (the "Notes"). The Notes bear interest at a rate of 8.375% per annum, which accrues fromJune 8, 2020 and is payable in arrears onJune 15 andDecember 15 of each year, commencing onDecember 15, 2020 . The Notes mature onJune 15, 2025 , unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the related indenture. The Notes were issued byMacy's, Inc. and are secured on a first-priority basis by (i) a first mortgage/deed of trust in certain real property of subsidiaries ofMacy's, Inc. that were transferred toMacy's Propco Holdings, LLC , a newly created direct, wholly-owned subsidiary ofMacy's, Inc. ("Propco"), and (ii) a pledge by Propco of the equity interests in its subsidiaries that own such transferred real property. The Notes are, jointly and severally, unconditionally guaranteed on a secured basis by Propco and its subsidiaries and unconditionally guaranteed on an unsecured basis byMacy's Retail Holdings, LLC . (f/k/aMacy's Retail Holdings, Inc. ) ("MRH"), a direct, wholly owned subsidiary ofMacy's, Inc. The Company used the proceeds of the Notes offering, along with cash on hand, to repay the outstanding borrowings under the existing$1,500 million unsecured credit agreement.
Entry into Asset-Based Credit Facility
OnJune 8, 2020 ,Macy's Inventory Funding LLC (the "ABL Borrower"), an indirect wholly owned subsidiary of the Company, and its parent,Macy's Inventory Holdings LLC (the "ABL Parent"), entered into an asset-based credit agreement (the "ABL Credit Facility") withBank of America, N.A ., as administrative agent and collateral agent, and the lenders party thereto. The ABL Credit Facility provides the ABL Borrower with (i) a$2,851 million revolving credit facility (the "Revolving ABL Facility"), including a swingline sub-facility and a letter of credit sub-facility, and (ii) a bridge revolving credit facility of up to$300 million (the "Bridge Facility"). The ABL Borrower may request increases in the size of the Revolving ABL Facility up to an additional aggregate principal amount of$750 million . Additionally onJune 8, 2020 and concurrently with closing the ABL Credit Facility, the ABL Borrower purchased all presently existing inventory, and assumed the liabilities in respect of all presently existing and outstanding trade payables owed to vendors in respect of such inventory, from MRH and certain wholly owned subsidiaries of MRH. The ABL Credit Facility is secured on a first priority basis (subject to customary exceptions) by (i) all assets of the ABL Borrower including all such inventory and the proceeds thereof and (ii) the equity of the ABL Borrower. The ABL Parent guaranteed the ABL Borrower's obligations under the ABL Credit Facility. The Revolving ABL Facility matures onMay 9, 2024 , and the Bridge Facility matures onDecember 30, 2020 . The ABL Credit Facility contains customary borrowing conditions including a borrowing base equal to the sum of (a) 80% (which shall automatically increase to 90% upon the satisfaction of certain conditions, including the delivery of an initial appraisal of the inventory) of the net orderly liquidation percentage of eligible inventory, minus (b) customary reserves. Amounts borrowed under the ABL Credit Facility are subject to interest at a rate per annum equal to (i) prior to the Step Down Date (as defined in the ABL Credit Facility), at the ABL Borrower's option, either (a) adjusted LIBOR plus a margin of 2.75% to 3.00% or (b) a base rate plus a margin of 1.75% to 2.00%, in each case depending on revolving line utilization and (ii) after the Step Down Date, at the ABL Borrower's option, either (a) adjusted LIBOR plus a margin of 2.25% to 2.50% or (b) a base rate plus a margin of 1.25% to 1.50%, in each case depending on revolving line utilization. The ABL Credit Facility also contains customary covenants that provide for, among other things, limitations on indebtedness, liens, fundamental changes, restricted payments, cash hoarding, and prepayment of certain indebtedness as well as customary representations and warranties and events of default typical for credit facilities of this type. 30 --------------------------------------------------------------------------------MACY'S, INC. The ABL Credit Facility also requires (1) the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the end of any fiscal quarter on or afterApril 30, 2021 if (a) certain events of default have occurred and are continuing or (b) Availability plus Suppressed Availability (each as defined in the ABL Credit Facility) is less than the greater of (x) 10% of the Loan Cap (as defined in the ABL Credit Facility) and (y)$250 million , in each case, as of the end of such fiscal quarter and (2) prior toApril 30, 2021 , that the ABL Borrower not permit Availability plus Suppressed Availability to be lower than the greater of (x) 10% of the Loan Cap and (y)$250 million .
Amendment to Existing Credit Agreement
The Company substantially reduced the credit commitments of its existing$1,500 million unsecured credit agreement which now provides the Company with unsecured revolving credit of up to$75 million . The unsecured revolving credit facility contains covenants that provide for, among other things, limitations on fundamental changes, use of proceeds, and maintenance of property, as well as customary representations and warranties and events of default. In conjunction with this amendment the interest coverage ratio and leverage ratio, as previously discussed, were eliminated as covenant requirements.
Commencement of Exchange Offers and Consent Solicitations for
InJune 2020 , MRH commenced offers to eligible holders to exchange (each, an "Exchange Offer" and, collectively, the "Exchange Offers") (i) new 6.65% Senior Secured Debentures due 2024 ("New 2024 Notes") to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.65% Senior Debentures due 2024 issued by MRH ("Old 2024 Notes"), (ii) new 6.7% Senior Secured Debentures due 2028 ("New 2028 Notes") to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.7% Senior Debentures due 2028 issued by MRH ("Old 2028 Notes"), (iii) new 8.75% Senior Secured Debentures due 2029 ("New 2029 Notes") to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 8.75% Senior Debentures due 2029 issued by MRH ("Old 2029 Notes"), (iv) new 7.875% Senior Secured Debentures due 2030 ("New 2030 Notes") to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 7.875% Senior Debentures due 2030 issued by MRH ("Old 2030 Notes"), (v) new 6.9% Senior Secured Debentures due 2032 ("New 2032 Notes") to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.9% Senior Debentures due 2032 issued by MRH ("Old 2032 Notes"), and (vi) new 6.7% Senior Secured Debentures due 2034 ("New 2034 Notes" and, together with the New 2024 Notes, New 2028 Notes, New 2029 Notes, New 2030 Notes and New 2032 Notes, the "New Notes" and each series, a "series of New Notes") to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.7% Senior Debentures due 2034 issued by MRH ("Old 2034 Notes" and, together with the Old 2024 Notes, Old 2028 Notes, Old 2029 Notes, Old 2030 Notes and Old 2032 Notes, the "Old Notes" and each series, a "series of Old Notes"). Each New Note issued in the Exchange Offers for a validly tendered Old Note will have an interest rate and maturity date that is identical to the interest rate and maturity date of the tendered Old Note, as well as identical interest payment dates and optional redemption prices. The New Notes will be MRH's andMacy's general, senior obligations and will be secured by a second-priority lien on the same collateral securing the Notes. In addition, MRH is soliciting consents from holders of each series of Old Notes (each, a "Consent Solicitation" and, collectively, the "Consent Solicitations") pursuant to the separate Consent Solicitation Statement (as defined below) to adopt certain proposed amendments to the indenture governing the Old Notes (the "Existing Indenture") to conform certain provisions in the negative pledge covenant in the Existing Indenture to the provisions of the negative pledge covenant in MRH's most recent indenture (the "Proposed Amendments").
The Exchange Offers are scheduled to expire on
31
--------------------------------------------------------------------------------MACY'S , INC. Important Information Regarding Non-GAAP Financial MeasuresThe Company reports its financial results in accordance withU.S. GAAP. However, management believes that certain non-GAAP financial measures provide users of the Company's financial information with additional useful information in evaluating operating performance. Management believes that excluding certain items from net income (loss) and diluted earnings (loss) per share that are no longer associated with the Company's core operations and that may vary substantially in frequency and magnitude period-to-period provides useful supplemental measures that assist in evaluating the Company's ability to generate earnings and leverage sales and to more readily compare these metrics between past and future periods. Non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, the Company's financial results prepared in accordance with GAAP. Certain of the items that may be excluded or included in non-GAAP financial measures may be significant items that could impact the Company's financial position, results of operations or cash flows and should therefore be considered in assessing the Company's actual and future financial condition and performance. The methods used by the Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. Adjusted Net Income (Loss) and Adjusted Diluted Earnings (Loss) Per Share The following is a tabular reconciliation of the non-GAAP financial measures of net income (loss) and diluted earnings (loss) per share, excluding certain items identified below, to GAAP net income (loss) and diluted earnings (loss) per share, which the Company believes to be the most directly comparable GAAP measures. First Quarter of 2020 First Quarter of 2019 Diluted Earnings Diluted Earnings Net Income (Loss) (Loss) Per Share Net Income Per Share As reported $ (3,581 )$ (11.53 ) $ 136 $ 0.44 Impairment, restructuring and other costs 3,184 10.25 1 - Income tax impact of certain items noted above (233 ) (0.75 ) - - As adjusted $ (630 )$ (2.03 ) $ 137 $ 0.44 Critical Accounting PoliciesGoodwill 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 ofMay 2, 2020 , and 98% of the Company's goodwill is allocated to theMacy's reporting unit.U.S. GAAP Accounting Methodologies The Company may elect to evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit or fair value of indefinite lived intangible assets is less than its carrying value. If the qualitative evaluation indicates that it is more likely than not that the fair value of a reporting unit or indefinite lived intangible asset is less than its carrying amount, a quantitative impairment test is required. Alternatively, the Company may bypass the qualitative assessment for a reporting unit or indefinite lived intangible asset and directly perform the quantitative assessment. This determination can be made on an individual reporting unit or asset basis, and performance of the qualitative assessment may resume in a subsequent period. The quantitative impairment test involves estimating the fair value of each reporting unit and indefinite lived intangible asset and comparing these estimated fair values with the respective reporting unit or indefinite lived intangible asset carrying value. If the carrying value of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to such excess, limited to the total amount of goodwill allocated to the reporting unit. If the carrying value of an individual indefinite lived intangible asset exceeds its fair value, such individual indefinite lived intangible asset is written down by an amount equal to such excess. 32 --------------------------------------------------------------------------------MACY'S , INC. Estimating the fair values of reporting units and indefinite lived intangible assets involves the use of significant assumptions, estimates and judgments with respect to a variety of factors, including sales, gross margin and SG&A rates, capital expenditures, cash flows and the selection and use of an appropriate discount rate and market values and multiples of earnings and revenues of similar public companies. Projected sales, gross margin and SG&A expense rate assumptions and capital expenditures are based on the Company's annual business plan or other forecasted results. Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting unit or indefinite lived intangible asset. The use of different assumptions, estimates or judgments in the goodwill impairment testing process, including with respect to the estimated future cash flows of the Company's reporting units, the discount rate used to discount such estimated cash flows to their net present value, and the reasonableness of the resultant implied control premium relative to the Company's market capitalization, could materially increase or decrease the fair value of the reporting unit and/or its net assets and, accordingly, could materially increase or decrease any related impairment charge. First Quarter of 2020 Impairment Analysis As a result of the sustained decline in the Company's market capitalization and changes in the Company's long-term projections driven largely by the impacts of the COVID-19 pandemic, the Company determined a triggering event had occurred that required an interim impairment assessment for all of its reporting units and indefinite lived intangible assets. The Company determined the fair value of each of its reporting units using a market approach, an income approach, or a combination of both, where appropriate. Relative to the prior assessment, as part of this current assessment, it was determined that an increase in the discount rate applied in the valuation was required to align with market-based assumptions and company-specific risk. This higher discount rate, in conjunction with revised long-term projection resulted in lower fair values of the reporting units. As a result, the Company recognized$2,972 million and$98 million of goodwill impairment for theMacy's and bluemercury reporting units during the first quarter of 2020. As ofMay 2, 2020 , the Company elected to perform a qualitative impairment test on its intangible assets with indefinite lives and concluded that it is more likely than not that the fair values exceeded the carrying values and the intangible assets with indefinite lives were not impaired. The Company continues to monitor the key inputs to the fair values of its reporting units. A continued decline in market capitalization or future declines in macroeconomic factors or business conditions may result in additional impairment charges in future periods. New Pronouncements Accounting Pronouncements Recently Adopted See Part I, Item 1, "Financial Statements - Note 1 - Organization and Summary of Significant Accounting Policies." 33 --------------------------------------------------------------------------------MACY'S , INC.
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