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MarketScreener Homepage  >  Equities  >  Nyse  >  Macy's    M

MACY'S

(M)
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MACY'S : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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09/03/2020 | 05:13pm EDT
For purposes of the following discussion, all references to "second quarter of
2020" and "second quarter of 2019" are to the Company's 13-week fiscal periods
ended August 1, 2020 and August 3, 2019, respectively. References to "2020" and
"2019" are to the Company's 26-week periods ended August 1, 2020 and August 3,
2019, 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 pages 38 and 39.

Impact of COVID-19


The COVID-19 pandemic has caused significant disruption to organizations and
communities across the globe and the Company has continued to move its business
forward with a focus on prudent cash management, strengthening liquidity,
executing Holiday 2020 and re-prioritizing strategic initiatives. In addition,
as its stores began to reopen in the second quarter of 2020, the Company
prioritized the implementation of enhanced health and safety measures to allow
its customers and colleagues to feel safe in the Company's stores and
facilities. In response to the operational and financial challenges caused by
the COVID-19 pandemic, the specific steps taken by the Company to manage its
business through this uncertain period, include, but are not limited to, the
following:

•The Company temporarily closed all stores on March 18, 2020, which included all
Macy's, Bloomingdale's, Bluemercury, Macy's Backstage, Bloomingdales the Outlet
and Market by Macy's stores. Stores began reopening on May 4, 2020 and
substantially all of the Company's stores have been reopened as of August 1,
2020. In conjunction with the reopening of its stores and facilities, the
Company implemented a number of health and safety measures, including:
•implementation of enhanced sanitization and cleaning processes,
•reducing store hours,
•requiring all colleagues and customers to wear masks and providing such
personal protective equipment when needed,
•establishing maximum store density requirements and installing markers to
promote and facilitate social distancing,
•installing sneeze guards at all registers, and
•adding curb side pick-up to enable contactless transactions at all of the
Company's stores.

•In an effort to increase liquidity, the Company fully drew on its $1,500
million credit facility, announced the suspension of quarterly cash dividends
beginning in the second quarter of 2020 and took additional steps to reduce
discretionary spending. The Company's Board of Directors also rescinded its
authorization of any unused amounts under the Company's share repurchase
program. In June 2020, the Company completed financing activities totaling
nearly $4.5 billion and used a portion of the proceeds from these activities, as
well as cash on hand, to repay its credit facility. To create greater
flexibility for future liquidity needs, the Company executed an exchange offer
and consent solicitation in July 2020 for $465 million of previously issued
unsecured notes.

•To improve the Company's cash position and reduce its cash expenditures, the
Company's Board of Directors and Chief Executive Officer did not receive
compensation from April 1, 2020 through June 30, 2020. In addition, the Company
deferred cash expenditures where possible and temporarily implemented a furlough
for the majority of its colleague population which ended for most colleagues at
the beginning of July 2020, with the remainder expected to return in the third
quarter of 2020. Certain executives not impacted by the furlough took a
temporary reduction of their pay through June 30, 2020.

In June 2020, the Company announced a restructuring that aligns its cost base
with anticipated near-term sales as the business recovers from the impact of the
COVID-19 pandemic. The Company reduced corporate and management headcount by
approximately 3,900. Additionally, the Company reduced staffing across its
stores portfolio, supply chain and customer support network, which it will
adjust as sales recover. The Company expects the actions
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                                  MACY'S, INC.
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. During
the second quarter of 2020, the Company recognized $154 million of expense for
severance related to this reduction in force, of which nearly half was paid
during the quarter.

During the 13 and 26 weeks ended August 1, 2020, the Company deferred rent
payments for a significant number of its stores. Such COVID-19 pandemic-related
rent deferrals are included in accounts payable and accrued liabilities. The
Company continues to recognize expense during the deferral periods based on the
contractual terms of the lease agreements.

•Where possible, the Company utilized the benefits provided in the CARES Act
signed into law on March 27, 2020, which included payroll tax credits for
employee retention, deferral of payroll taxes, and several income tax
provisions, including modifications to the net interest deduction limitation,
changes to certain property depreciation and 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.

Management Overview

The Company's performance during the second quarter of 2020 was stronger than
anticipated but continued to be impacted by the COVID-19 pandemic. As the
Company's stores began to re-open, sales volumes recovered faster than expected
and digital sales remained strong throughout the quarter. The Company's gross
margin increased as compared to the first quarter of 2020, driven by improved
sell-through of merchandise during the quarter which also enabled the Company to
exit the quarter with improved inventory levels heading into the second half of
2020. The Company is approaching the back half of the fiscal year conservatively
given an anticipation of continued turbulence associated with the COVID-19
pandemic and a moderation of its stores' recovery.

Second Quarter of 2020 Financial Highlights


•Comparable sales were down 34.7% on an owned basis; and down 35.1% on an owned
plus licensed basis, better than expected due to faster paced stores recovery
and continued growth of digital.

•Digital sales remained strong, growing 53% over second quarter 2019. Digital sales penetrated at 54% of total owned comparable sales.

•Delivered gross margin of 23.6%, an improvement of approximately 650 basis points from first quarter 2020.

•Inventory down 29% from a year ago.


•Selling, general and administrative ("SG&A") expense of $1.4 billion, down $779
million from second quarter of 2019 and driven by efficient expense management
undertaken in response to the COVID-10 pandemic as well as our Polaris strategy.
SG&A expense rate of 39.2%, approximately the same as the SG&A expense rate for
the second quarter of 2019.

•Diluted loss per share of $1.39 and adjusted diluted loss per share of $0.81.

•Finished the quarter in a strong liquidity position with approximately $1.4 billion in cash and approximately $3 billion of untapped capacity in the company's new asset-based credit facility.

Polaris Strategy


On February 4, 2020, Macy's, Inc. announced its Polaris strategy, a three-year
plan designed to stabilize profitability and position the Company for
sustainable, profitable growth. Over the course of the COVID-19 pandemic, the
Company has refined the components of the Polaris strategy to focus where the
Company can drive competitive advantage and differentiation to first recover the
business and then drive both top- and bottom-line growth. The five major
components of the Polaris strategy are
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                                  MACY'S, INC.
unchanged to those presented in February 2020 however the components have been
re-focused, as needed, to align with customer demand in the COVID-19 pandemic
environment.

•Strengthen Customer Relationships: The Company is focusing on building customer
lifetime value, which included expanding the Macy's Star Rewards loyalty program
with the launch of Loyalty 3.0 in early February 2020 that allows every Star
Rewards member to earn loyalty rewards on their purchases regardless of tender.
Going forward the Company will continue to increase customer lifetime value
through improving personalization. The Company will also pursue the growth of
on-site and off-site monetization income as an enterprise priority.

•Curate Quality Fashion: The Company is repositioning its merchandise category
focus to drive sales and improve gross margin. In conjunction, the Company is
focused on four merchandise categories that resonate best with customers in this
environment: big ticket, beauty, fine jewelry and off-price at Macy's and
luxury, advanced contemporary, textiles and off-price at Bloomingdale's.

•Accelerate Digital Growth: The Company will continue to invest in its websites and mobile apps to deliver a superior fashion experience and improve its customers' end-to-end digital experience, including enhancements to product discovery and the checkout process.


•Optimize the Omni Experience: The Company will modernize customer choices and
enhance its omni-channel capabilities to deliver efficient, cost effective
transactions while providing expanded order and fulfillment options to allow
customers the flexibility to receive products how, where and when they want.
Additionally, the Company plans to test a revised retail ecosystem model with a
mix of store formats within a geographic market, including smaller format,
off-mall locations.

•SG&A Cost Savings: After resetting the Company's cost base in the first half of
2020, the Company will continue to execute its operations with a disciplined
cost focus to identify additional savings and drive the highest returns on its
investments and expenditures.

At the center of the above strategies is an enhanced focus on the cultivation of
a Company workplace and culture rooted in social equity where all colleagues
have the opportunity to connect, grow and thrive. All of the above components of
the Polaris strategy will continue to evolve as the Company navigates the
COVID-19 pandemic in order to focus on achievable short-term results and also
position itself for long-term sustainability and growth.
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                                  MACY'S, INC.

Results of Operations
Comparison of the Second Quarter of 2020 and the Second Quarter of 2019
                                                             Second Quarter of 2020                                                    Second Quarter of 2019
                                                        Amount             % to Net Sales                  Amount               % to Net Sales
                                                                                      (dollars in millions, except per share figures)
Net sales                                            $    3,559$ 5,546
Credit card revenues, net                                   168                  4.7        %                           176                         3.2      %

Cost of sales                                            (2,718)               (76.4)       %                        (3,395)                      (61.2)     %
Selling, general and administrative expenses             (1,398)               (39.2)       %                        (2,177)                      (39.3)     %
Gains on sale of real estate                                  -                    -        %                             7                         0.1      %
 Restructuring, impairment and other costs                 (242)                (6.8)       %                            (2)                          -      %
Operating income (loss)                                    (631)               (17.7)       %                           155                         2.8      %
Benefit plan income, net                                     12                                                8
Settlement charges                                          (38)                                               -
Interest expense, net                                       (69)                                             (47)
Financing costs                                              (3)                                               -
Income (loss) before income taxes                          (729)                                             116
Federal, state and local income tax benefit
(expense)                                                   298                                              (30)
Net income (loss)                                    $     (431)$    86

Diluted earnings (loss) per share                    $    (1.39)$  0.28

Supplemental Financial Measure
Gross margin (a)                                     $      841                 23.6        %                       $ 2,151                        38.8

%


Supplemental Non-GAAP Financial Measure
Diluted earnings (loss) per share, excluding
the impact of certain items                          $    (0.81)$  0.28


(a) Gross margin is defined as net sales less cost of sales.
Net Sales
Net sales for the second quarter of 2020 decreased $1,987 million, or 35.8%,
compared to the second quarter of 2019. The Company's second quarter of 2020
sales were negatively impacted by the closure of all stores on March 18, 2020.
During the current quarter, stores began reopening, with substantially all
stores fully reopened by the end of the quarter. Digital sales during the second
quarter of 2020 improved 53% compared to the second quarter of 2019 and
accounted for 54% of comparable sales on an owned basis. The improvement in
digital sales was driven by changes in consumer behavior, specifically an
unprecedented consumer spending shift to e-commerce. The strongest performing
categories during the second quarter of 2020 were home, particularly housewares
and textiles, fine jewelry, fragrances, activewear and sleepwear. Sales
performance continued to be weaker in men's tailored clothing and dresses driven
by the work-from-home environment.
Credit Card Revenues, Net
Net credit card revenues were $168 million in the second quarter of 2020, a
decrease of $8 million, or 4.5%, compared to $176 million recognized in the
second quarter of 2019. Proprietary credit penetration was down 590 basis
points, at 40.8%, in the second quarter of 2020 compared to 46.7% in the second
quarter of 2019. New accounts were down significantly in the second quarter of
2020 versus the second quarter of 2019, which is primarily a reflection of the
majority of the Company's stores being only open for a portion of the quarter as
well as lower in-store traffic driven by the COVID-19 pandemic once the stores
reopened.


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                                  MACY'S, INC.
Gross Margin
Gross margin was 23.6% in the second quarter of 2020 compared to 38.8% in the
second quarter of 2019. The decline was due to increased net markdowns as
compared to the second quarter of 2019 as well as higher delivery expense driven
by the increase in digital sales as compared to the second quarter of 2019.
Selling, General and Administrative Expenses
SG&A expenses for the second quarter of 2020 decreased $779 million from the
second quarter of 2019. The decrease in SG&A expense dollars corresponds with
lower net sales but also reflects the expense management strategies implemented
by the Company in response to the COVID-19 pandemic as well as execution against
the Polaris strategy.
Restructuring, Impairment and Other Costs
During the 13 weeks ended August 1, 2020, the Company recognized expense of $242
million primarily related to restructuring and other costs, including severance
of $154 million associated with the reduction in force in response to the
COVID-19 pandemic. See the discussion at Note 3, "Impairment, Restructuring and
Other Costs" to the accompanying Consolidated Financial Statements for further
information.
Settlement Charges
During the 13 weeks ended August 1, 2020, the Company recognized expense of $38
million related to the pro-rata recognition of net actuarial losses associated
with the Company's defined benefit plans and are the result of an increase in
lump sum distributions associated with retiree distribution elections and
restructuring activity.
Interest Expense, Net
During the second quarter of 2020, the Company recognized expense of $69 million
compared to $47 million in the second quarter of 2019. The increase is primarily
driven by the issuance of the new $1,300 million secured notes in June 2020.
Effective Tax Rate
The Company's effective tax rate of 40.9% on the pretax loss for the second
quarter of 2020 reflects the impact of the carryback of net operating losses as
permitted under the CARES Act.
Diluted Earnings (Loss) Per Share
Diluted loss per share for the second quarter of 2020 decreased $1.67 compared
to the second quarter of 2019, reflecting lower net income resulting from the
impact of the COVID-19 pandemic.



















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                                  MACY'S, INC.

Comparison of the 26 Weeks Ended August 1, 2020 and August 3, 2019

                                                                     2020                                                                    2019
                                                       Amount            % to Net Sales                  Amount                % to Net Sales
                                                                                   (dollars in millions, except per share figures)
Net sales                                            $  6,576$ 11,050
Credit card revenues, net                                 299                  4.5        %                            348                          3.1    %

Cost of sales                                          (5,219)               (79.4)       %                         (6,798)                       (61.5)   %
Selling, general and administrative expenses           (2,995)               (45.4)       %                         (4,287)                       (38.8)   %
Gains on sale of real estate                               16                  0.2        %                             49                          0.4    %
 Restructuring, impairment and other costs             (3,426)               (52.1)       %                             (3)                           -    %
Operating income (loss)                                (4,749)               (72.2)       %                            359                          3.2    %
Benefit plan income, net                                   21                                                15
Settlement charges                                        (38)                                                -
Interest expense, net                                    (117)                                              (94)
Financing costs                                            (3)                                                -
Income (loss) before income taxes                      (4,886)                                              280
Federal, state and local income tax benefit
(expense)                                                 874                                               (57)
Net income (loss)                                    $ (4,012)$   223

Diluted earnings (loss) per share                    $ (12.91)$   0.71

Supplemental Financial Measure
Gross margin (a)                                     $  1,357                 20.6        %                        $ 4,252                         38.5 

%


Supplemental Non-GAAP Financial Measure
Diluted earnings (loss) per share, excluding
the impact of certain items                          $  (2.83)$   0.72


(a) Gross margin is defined as net sales less cost of sales.
Net Sales
Net sales for 2020 decreased $4,474 million, or 40.5%, compared to 2019. The
Company's 2020 sales were negatively impacted by the closure of all stores on
March 18, 2020, resulting in stores sales being significantly down compared to
2019. Stores began to reopen in early May 2020 and substantially all stores were
fully reopened by August 1, 2020. As discussed within the quarterly analysis,
digital sales experienced significant growth due to changes in consumer shopping
behaviors and increased during 2020 by nearly 24% compared to 2019 and accounted
for nearly 50% of comparable sales on an owned basis. The strongest performing
categories during 2020 were home, particularly housewares, fine jewelry,
fragrances, activewear, and sleepwear. Sales performance continued to be weaker
in women's and men's apparel, including dresses and suits.
Credit Card Revenues, Net
Net credit card revenues were $299 million in 2020, a decrease of $49 million,
or 14.1%, compared to $348 million recognized in 2019. Proprietary credit
penetration was down 320 basis points at 43.3% in 2020 compared to 46.5% in
2019. Consistent with the quarterly analysis, new accounts were down
significantly compared to the prior year driven by the aforementioned store
closures resulting from the COVID-19 pandemic.
Gross Margin
Gross margin was 20.6% in 2020 compared to 38.5% in 2019. The reason for the
decline was due to increased net markdowns as compared to 2019 as well as higher
delivery expense.


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                                  MACY'S, INC.
Selling, General and Administrative Expenses
SG&A expenses for 2020 decreased $1,292 million from 2019. The decrease in SG&A
expense dollars is a reflection of lower sales as well as the implementation of
various expense management strategies undertaken in response to the COVID-19
pandemic, including a discretionary spending freeze, as well as the Company's
Polaris strategy.
Impairment, Restructuring and Other Costs
During the 26 weeks ended August 1, 2020, the Company recognized expense of
$3,426 million primarily as a result of the COVID-19 pandemic, including
non-cash impairment charges totaling $3,164 million the majority of which
consisted of:

•$3,080 million of goodwill impairments, with $2,982 million attributable to the
Macy's reporting unit and $98 million attributable to the Bluemercury reporting
unit. See discussion at Note 4, "Goodwill and Indefinite Lived Intangible
Assets" to the accompanying Consolidated Financial Statements for more
information.

•$80 million of impairments on long-lived tangible and right of use assets to
adjust the carrying value of certain store locations to their estimated fair
value.

Additionally, the Company recognized $194 million related to restructuring and
other costs, including severance of $154 million associated with the reduction
in force in response to the COVID-19 pandemic. See discussion at Note 3,
"Impairment, Restructuring and Other Costs" to the accompanying Consolidated
Financial Statements for more information.
Settlement Charges
During the 26 weeks ended August 1, 2020, the Company recognized expense of $38
million related to the pro-rata recognition of net actuarial losses associated
with the Company's defined benefit plans and are the result of an increase in
lump sum distributions associated with retiree distribution elections and
restructuring activity.
Interest Expense, Net
During 2020, the Company recognized expense of $117 million compared to $94
million in 2019. As noted previously, the increase is primarily driven by the
issuance of the new $1,300 million secured notes in June 2020.
Effective Tax Rate
The Company's effective tax rate of 17.9% on the pretax loss for 2020 reflects
the impact of the carryback of net operating losses as permitted under the CARES
Act offset by the impact of the non-tax deductible component of the goodwill
impairment charge and additional income tax expense associated with the deferred
tax remeasurement recognized during the first quarter of 2020. Additionally, the
effective tax rate for 2020 and the effective tax rate for 2019 of 20.4% were
favorably impacted by the settlement or expiration of certain tax matters.
Diluted Earnings (Loss) Per Share
Diluted loss per share for 2020 decreased $13.62 compared to 2019, reflecting
lower net income resulting from the impact of the COVID-19 pandemic and goodwill
impairment.

Cash Flow, Liquidity and Capital Resources
The Company's principal sources of liquidity are cash from operations, cash on
hand and the credit facility described below.
Because of the COVID-19 outbreak, there is significant uncertainty surrounding
the potential impact on the Company's results of operations and cash flows. The
Company's liquidity has been negatively impacted by store closures. 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 during
the first quarter of 2020, and executing additional financing transactions
during the second quarter of 2020 as discussed in more detail below. While the
Company has obtained additional financing, further actions may be required to
improve the Company's cash position, including but not limited to, monetizing
Company assets, reinstituting colleague furloughs, and foregoing capital
expenditures and other discretionary expenses.
Operating Activities
Net cash used by operating activities in 2020 was $7 million, compared to net
cash provided of $350 million in 2019. The decline in operating cash flows
period over period is due to the operating losses in 2020 driven by the impact
of the COVID-19 pandemic, primarily resulting from the temporary closure of the
Company's physical store locations. These losses were offset by net working
capital inflows driven by a sell through of inventory during the period coupled
with a reduction in inventory receipts as the Company executed its inventory
management strategies in response to the COVID-19 pandemic.
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                                  MACY'S, INC.
Investing Activities
Net cash used by investing activities was $272 million in 2020, compared to $454
million in 2019. The decrease in 2020 is primarily due to a $212 million
reduction in capital spending compared to 2019 as a result of the COVID-19
pandemic.
Financing Activities
Net cash provided by the Company for financing activities was $950 million for
2020, including debt issued of $2,780 million related to a $1,500 million draw
on its revolving credit agreement and issuance of $1,300 million 8.375% senior
secured notes, partially offset by repayment of the $1,500 million of credit
agreement draw. 2020 also included $117 million of cash dividends paid. See
below for further discussion on 2020 financing activities. Net cash used by the
Company for financing activities was $397 million for 2019, driven by payment of
$233 million of cash dividends.
Secured Debt Issuance

On June 8, 2020, the Company issued $1,300 million aggregate principal amount of
8.375% senior secured notes due 2025 (the "Notes"). The Notes bear interest at a
rate of 8.375% per annum, which accrues from June 8, 2020 and is payable in
arrears on June 15 and December 15 of each year, commencing on December 15,
2020. The Notes mature on June 15, 2025, unless earlier redeemed or repurchased,
and are subject to the terms and conditions set forth in the related indenture.
The Notes were issued by Macy's, Inc. and are secured on a first-priority basis
by (i) a first mortgage/deed of trust in certain real property of subsidiaries
of Macy's, Inc. that was transferred to subsidiaries of Macy's Propco Holdings,
LLC, a newly created direct, wholly owned subsidiary of Macy's, Inc. ("Propco"),
and (ii) a pledge by Propco of the equity interests in its subsidiaries that own
such transferred real property. The Notes are, jointly and severally,
unconditionally guaranteed on a secured basis by Propco and its subsidiaries and
unconditionally guaranteed on an unsecured basis by Macy's Retail Holdings, LLC.
(f/k/a Macy's Retail Holdings, Inc.) ("MRH"), a direct, wholly owned subsidiary
of Macy's, Inc. The Company used the proceeds of the Notes offering, along with
cash on hand, to repay the outstanding borrowings under the existing $1,500
million unsecured credit agreement.

Entry into Asset-Based Credit Facility


On June 8, 2020, Macy'sInventory Funding LLC (the "ABL Borrower"), an indirect
wholly owned subsidiary of the Company, and its parent, Macy's Inventory
Holdings LLC (the "ABL Parent"), entered into an asset-based credit agreement
(the "ABL Credit Facility") with Bank of America, N.A., as administrative agent
and collateral agent, and the lenders party thereto. The ABL Credit Facility
provides the ABL Borrower with (i) a $2,926 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. As of August 1, 2020, the Company had $98 million of
standby letters of credit outstanding under the ABL credit facility, which
reduces the available borrowing capacity. The Company had no borrowings
outstanding under the ABL credit facility as of August 1, 2020.

Additionally on June 8, 2020 and concurrently with closing the ABL Credit
Facility, the ABL Borrower purchased all presently existing inventory, and
assumed the liabilities in respect of all presently existing and outstanding
trade payables owed to vendors in respect of such inventory, from MRH and
certain wholly owned subsidiaries of MRH. The ABL Credit Facility is secured on
a first priority basis (subject to customary exceptions) by (i) all assets of
the ABL Borrower including all such inventory and the proceeds thereof and (ii)
the equity of the ABL Borrower. The ABL Parent guaranteed the ABL Borrower's
obligations under the ABL Credit Facility. The Revolving ABL Facility matures on
May 9, 2024, and the Bridge Facility matures on December 30, 2020.

The ABL Credit Facility contains customary borrowing conditions including a
borrowing base equal to the sum of (a) 80% (which shall automatically increase
to 90% upon the satisfaction of certain conditions, including the delivery of an
initial appraisal of the inventory) of the net orderly liquidation percentage of
eligible inventory, minus (b) customary reserves. Amounts borrowed under the ABL
Credit Facility are subject to interest at a rate per annum equal to (i) prior
to the Step Down Date (as defined in the ABL Credit Facility), at the ABL
Borrower's option, either (a) adjusted LIBOR plus a margin of 2.75% to 3.00% or
(b) a base rate plus a margin of 1.75% to 2.00%, in each case depending on
revolving line utilization and (ii) after the Step Down Date, at the ABL
Borrower's option, either (a) adjusted LIBOR plus a margin of 2.25% to 2.50% or
(b) a base rate plus a margin of 1.25% to 1.50%, in each case depending on
revolving line utilization. The ABL Credit Facility also contains customary
covenants that provide for, among other things, limitations on indebtedness,
liens, fundamental changes, restricted payments, cash hoarding, and prepayment
of certain indebtedness as well as customary representations and warranties and
events of default typical for credit facilities of this type.

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                                  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 after April 30, 2021 if (a) certain
events of default have occurred and are continuing or (b) Availability plus
Suppressed Availability (each as defined in the ABL Credit Facility) is less
than the greater of (x) 10% of the Loan Cap (as defined in the ABL Credit
Facility) and (y) $250 million, in each case, as of the end of such fiscal
quarter and (2) prior to April 30, 2021, that the ABL Borrower not permit
Availability plus Suppressed Availability to be lower than the greater of (x)
10% of the Loan Cap and (y) $250 million.

Amendment to Existing Credit Agreement


On June 8, 2020, 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 $25 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 were eliminated as covenant requirements. As of August 1, 2020,
the Company had no borrowings outstanding under the credit agreement.

Exchange Offers and Consent Solicitations for Certain Outstanding Debt Securities of Macy's Retail Holdings, LLC


During the second quarter of 2020, MRH completed exchange offers (each, an
"Exchange Offer" and, collectively, the "Exchange Offers") with eligible holders
and received related consents in consent solicitations for each series of notes
as follows:

(i) $81 million aggregate principal amount of 6.65% Senior Secured Debentures
due 2024 ("New 2024 Notes") issued by MRH for validly tendered (and not validly
withdrawn) outstanding 6.65% Senior Debentures due 2024 issued by MRH ("Old 2024
Notes");
(ii) $74 million aggregate principal amount of 6.7% Senior Secured Debentures
due 2028 ("New 2028 Notes") issued by MRH for validly tendered (and not validly
withdrawn) outstanding 6.7% Senior Debentures due 2028 issued by MRH ("Old 2028
Notes");
(iii) $13 million aggregate principal amount of 8.75% Senior Secured Debentures
due 2029 ("New 2029 Notes") issued by MRH for validly tendered (and not validly
withdrawn) outstanding 8.75% Senior Debentures due 2029 issued by MRH ("Old 2029
Notes");
(iv) $5 million aggregate principal amount of 7.875% Senior Secured Debentures
due 2030 ("New 2030 Notes") issued by MRH for validly tendered (and not validly
withdrawn) outstanding 7.875% Senior Debentures due 2030 issued by MRH ("Old
2030 Notes");
(v) $5 million aggregate principal amount of 6.9% Senior Secured Debentures due
2032 ("New 2032 Notes") 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) $183 million aggregate principal amount of 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") 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 has
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 are MRH's and Macy's
general, senior obligations and are secured by a second-priority lien on the
same collateral securing the Notes. Following the settlement, the aggregate
principal amounts of each series of Old Notes outstanding are: (i) $41 million
Old 2024 Notes, (ii) $29 million Old 2028 Notes, (iii) $5 million Old 2030
Notes, (iv) $12 million Old 2032 Notes and (v) $18 million Old 2034 Notes.

In addition, MRH solicited and received consents from holders of each series of
Old Notes (each, a "Consent Solicitation" and, collectively, the "Consent
Solicitations") pursuant to a separate Consent Solicitation Statement 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"). MRH
received consents from holders of (i) $85 million aggregate principal amount of
outstanding Old 2024 Notes, (ii) $77 million aggregate principal amount of
outstanding Old 2028 Notes, (iii) $13 million aggregate principal amount of
outstanding Old 2029 Notes, (iv) $5 million aggregate principal amount of
outstanding Old 2030
                                       36
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                                  MACY'S, INC.
Notes, (v) $6 million aggregate principal amount of outstanding Old 2032 Notes,
and (vi) $185 million aggregate principal amount of outstanding Old 2034 Notes.
Contractual Obligations

As of August 1, 2020, other than the financing transactions discussed previously
and in Note 7 to the accompanying Consolidated Financial Statements, there were
no material changes to our contractual obligations and commitments outside the
ordinary course of business since February 1, 2020, as reported in the 2019 Form
10-K.

Expectations

The Company expects the COVID-19 pandemic to have a material impact on its
financial condition, results of operations and cash flows from operations in
future periods. The extent of the impact of the COVID-19 pandemic on the
Company's operational and financial performance depends on future developments
outside of the Company's control, including the duration and spread of the
pandemic and related actions taken by federal, state and local government
officials, and international governments to prevent disease spread. The
following reflects the Company's best estimate of performance expectations for
Fall Season and fiscal 2020 but acknowledges the significant uncertainty
surrounding consumer behavior and economic conditions in the current
environment. For a more complete discussion of the COVID-19 pandemic related
risks facing the Company's business, refer to the "Risk Factors" section
included in Part II, Item 1A.

•Comparable sales owned plus licensed are expected to be down in the low to
mid-20% range for Fall Season. Annual digital sales penetration is estimated in
the mid-40% range.
•Credit card revenues as a percentage of net sales is expected to be relatively
consistent with prior year Fall Season.
•Gross margin as a percentage of net sales is expected to improve during the
third and fourth quarters of 2020 as compared to the second quarter of 2020.
Fall gross margin is expected to be mid-single-digit percentage points lower
than prior year Fall Season.
•SG&A as a percentage of net sales for the Fall Season is expected to be low to
mid-single digit percentage points higher than the prior year Fall Season.
•Gains on sale of real estate is estimated to be approximately $50 million for
fiscal 2020.
•Earnings before interest, taxes, depreciation and amortization, excluding the
impact of certain items, is expected to improve from the second quarter of 2020
sequentially in the third quarter and fourth quarter.
•Interest expense, net is expected to be approximately $300 million for fiscal
2020.
•The effective tax rate, excluding the impact of certain items, is expected to
be 35% to 38% in fiscal 2020.
•Capital expenditures are expected to be approximately $450 million for fiscal
2020.

                                       37
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                                  MACY'S, INC.

Important Information Regarding Non-GAAP Financial Measures
The Company reports its financial results in accordance with U.S. GAAP. However,
management believes that certain non-GAAP financial measures provide users of
the Company's financial information with additional useful information in
evaluating operating performance. Management believes that providing
supplemental changes in comparable sales on an owned plus licensed basis and
changes in comparable sales on an owned plus licensed basis, which includes
adjusting for growth in comparable sales of departments licensed to third
parties, assists in evaluating the Company's ability to generate sales growth,
whether through owned businesses or departments licensed to third parties, and
in evaluating the impact of changes in the manner in which certain departments
are operated. In addition, management believes that excluding certain items from
net income (loss) and diluted earnings (loss) per share that are not associated
with the Company's core operations and that may vary substantially in frequency
and magnitude from period-to-period provides useful supplemental measures that
assist in evaluating the Company's ability to generate earnings 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. Additionally, the amounts received by the Company on
account of sales of departments licensed to third parties are limited to
commissions received on such sales. The methods used by the Company to calculate
its non-GAAP financial measures may differ significantly from methods used by
other companies to compute similar measures. As a result, any non-GAAP financial
measures presented herein may not be comparable to similar measures provided by
other companies.
Changes in Comparable Sales

                                                               13 Weeks Ended               26 Weeks Ended
                                                               August 1, 2020August 1, 2020

Decrease in comparable sales on an owned basis (Note 1)

                                                                       (34.7) %                     (40.0) %
Comparable sales growth impact of departments
licensed to third parties (Note 2)                                        (0.4) %                      (0.2) %
Decrease in comparable sales on an owned plus
licensed basis                                                           (35.1) %                     (40.2) %

                                                               13 Weeks Ended               26 Weeks Ended
                                                               August 3, 2019               August 3, 2019

Increase in comparable sales on an owned basis (Note 1)

                                                                         0.2  %                       0.4  %
Comparable sales growth impact of departments
licensed to third parties (Note 2)                                         0.1  %                       0.1  %
Increase in comparable sales on an owned plus
licensed basis                                                             0.3  %                       0.5  %



Notes:

(1) Represents the period-to-period percentage change in net sales from stores
in operation throughout the year  presented and the immediately preceding year
and all online sales, excluding commissions from departments licensed to third
parties. Stores impacted by a natural disaster or undergoing significant
expansion or shrinkage remain in the comparable sales calculation unless the
store, or material portion of the store, is closed for a significant period of
time. No stores have been excluded as a result of the COVID-19 pandemic.
Definitions and calculations of comparable sales may differ among companies in
the retail industry.

(2) Represents the impact of including the sales of departments licensed to
third parties occurring in stores in operation throughout the year presented and
the immediately preceding year and all online sales in the calculation of
comparable sales. The company licenses third parties to operate certain
departments in its stores and online and receives commissions from these third
parties based on a percentage of their net sales. In its financial statements
prepared in conformity with GAAP, the company includes these commissions (rather
than sales of the departments licensed to third parties) in its net sales. The
company does not, however, include any amounts in respect of
                                       38
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                                  MACY'S, INC.
licensed department sales (or any commissions earned on such sales) in its
comparable sales in accordance with GAAP (i.e., on an owned basis). The amounts
of commissions earned on sales of departments licensed to third parties are not
material to its net sales for the periods presented.

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.
                                                                                                                     Second Quarter of
                                                          Second Quarter of 2020                                           2019

                                                                            Diluted
                                                                            Earnings                                   Diluted
                                                      Net Income           (Loss) Per                               Earnings Per
                                                        (Loss)               Share              Net Income              Share
As reported                                         $      (431)         $  

(1.39) $ 86 $ 0.28 Restructuring, impairment and other costs (Note 3)

                                                    242                 0.78                     2                   -
Settlement charges                                           38                 0.12                     -                   -
Losses on early retirement of debt                            3                 0.01                     -                   -
Income tax impact of certain items noted
above                                                      (103)               (0.33)                    -                   -
As adjusted                                         $      (251)$     (0.81)         $         88          $     0.28



                                                                  2020                                                    2019
                                                                                                                      Diluted
                                                   Net Income         Diluted Earnings                             Earnings Per
                                                     (Loss)           (Loss) Per Share         Net Income              Share
As reported                                       $   (4,012)         $    

(12.91) $ 223$ 0.71 Impairment, restructuring and other costs

              3,426                   11.02                   3                  0.01
Settlement charges                                        38                    0.12                   -                     -
Financing costs                                            3                    0.01                   -                     -
Income tax impact of certain items
identified above (Note 3)                               (336)                  (1.07)                 (1)                    -
As adjusted                                       $     (881)$        (2.83)$      225$       0.72

(3) The impact during the 13 and 26 weeks ended August 3, 2019 represents a value less than zero for net income or $0.01 per diluted share.
















                                       39
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                                  MACY'S, INC.

Critical Accounting Policies
Goodwill and Intangible Assets
The Company reviews the carrying value of its goodwill and other intangible
assets with indefinite lives at least annually, as of the end of fiscal May, or
more frequently if an event occurs or circumstances change, for possible
impairment in accordance with ASC Topic 350, Intangibles - Goodwill and Other.
For impairment testing, goodwill has been assigned to reporting units which
consist of the Company's retail operating divisions. Macy's and bluemercury are
the only reporting units with goodwill as of August 1, 2020, and 98% of the
Company's goodwill is allocated to the Macy's reporting unit.
U.S. GAAP Accounting Methodologies
The Company may elect to evaluate qualitative factors to determine if it is more
likely than not that the fair value of a reporting unit or fair value of
indefinite lived intangible assets is less than its carrying value. If the
qualitative evaluation indicates that it is more likely than not that the fair
value of a reporting unit or indefinite lived intangible asset is less than its
carrying amount, a quantitative impairment test is required. Alternatively, the
Company may bypass the qualitative assessment for a reporting unit or indefinite
lived intangible asset and directly perform the quantitative assessment. This
determination can be made on an individual reporting unit or asset basis, and
performance of the qualitative assessment may resume in a subsequent period.
The quantitative impairment test involves estimating the fair value of each
reporting unit and indefinite lived intangible asset and comparing these
estimated fair values with the respective reporting unit or indefinite lived
intangible asset carrying value. If the carrying value of a reporting unit
exceeds its fair value, an impairment loss will be recognized in an amount equal
to such excess, limited to the total amount of goodwill allocated to the
reporting unit. If the carrying value of an individual indefinite lived
intangible asset exceeds its fair value, such individual indefinite lived
intangible asset is written down by an amount equal to such excess.
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.
2020 Impairment Analysis
During the first quarter of 2020, 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 or a combination of a market approach and income
approach, as appropriate. Relative to the prior assessment, as part of this
current assessment, it was determined that an increase in the discount rate
applied in the valuation was required to align with market-based assumptions and
company-specific risk. This higher discount rate, in conjunction with revised
long-term projections resulted in lower fair values of the reporting units. As a
result, the Company recognized $2,982 million and $98 million of goodwill
impairment for the Macy's and bluemercury reporting units, respectively, during
the 26 weeks ended August 1, 2020.

As of May 2, 2020, the Company elected to perform a qualitative impairment test
on its intangible assets with indefinite lives and concluded that it is more
likely than not that the fair values exceeded the carrying values and the
intangible assets with indefinite lives were not impaired.

For the Company's annual impairment assessment as of the end of fiscal May, the
Company elected to perform a qualitative impairment test on its goodwill and
intangible assets with indefinite lives and concluded that it is more likely
than not that the fair values exceeded the carrying values and goodwill and
intangible assets with indefinite lives were not impaired.
                                       40
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                                  MACY'S, INC.

The Company continues to monitor the key inputs to the fair values of its reporting units. A 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 Note 1, "Organization and Summary of Significant Accounting Policies" to the
accompanying Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes to the Company's market risk as described in
the Company's 2019 10-K. For a discussion of the Company's exposure to market
risk, refer to the Company's market risk disclosures set forth in Part II, Item
7A, "Quantitative and Qualitative Disclosures About Market Risk" of the 2019
10-K.

© Edgar Online, source Glimpses


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