MACY'S, INC. For purposes of the following discussion, all references to "first quarter of 2021" and "first quarter of 2020" are to the Company's 13-week fiscal periods endedMay 1, 2021 andMay 2, 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 2020 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 2020 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". COVID-19 Update As the COVID-19 pandemic continues into fiscal 2021, the Company remains focused on prudent cash management, maintaining strong liquidity, and executing its strategic initiatives. In addition, the Company continues to prioritize health and safety measures in its stores and facilities to protect the well-being of its customers and colleagues. The Company continuously monitors the ongoing impacts of COVID-19, including the evolving federal, state and local ordinances and health guidelines related to the mitigation of transmission risk associated with the pandemic. The Company has taken, and continues to take, numerous steps to promote health and safety at its stores and facilities, including establishment of vaccine distribution sites at different corporate facilities, increasing safety equipment in stores, offering contactless shopping opportunities, providing company-supplied personal protection equipment and wellness checks for colleagues, performing enhanced cleaning and continuing to offer remote work plans for certain colleagues. Under the terms of the Program Agreement between the Company and Citibank, if sales decrease by more than 34% over a twelve-month period as compared to the Benchmark Year, defined as the twelve-month period fromJuly 2006 toJune 2007 in the Program Agreement, Citibank has the ability to provide written notice to terminate the agreement prior to the end of its current term. Based on the results for the Company'sFebruary 2021 fiscal period, sales for the most recent twelve-month period endedFebruary 27, 2021 , have decreased by more than 34% as compared to the Benchmark Year. OnJune 4, 2021 , the Company received a written notice of termination of the Program Agreement from Citibank. The Company plans to continue negotiations with Citibank as well as evaluate a potential transfer of its Credit Card Program to another financial service entity. Upon receipt of the written notice of termination, the Company has six months to exercise, or not exercise, an option to purchase the assets of the Program Agreement, or nominate a third party to purchase such assets, and a subsequent six month period to complete such transfer, subject to potential extensions as more fully described in the Program Agreement. The Company and Citibank are required to continue to meet their respective obligations and provide support pursuant to the terms of the Program Agreement through this period. Given this timeline, the Company is confirming its guidance provided onMay 18, 2021 , for fiscal 2021 Credit Card Revenues, Net, equal to approximately 3% ofNet Sales . The Company has not provided guidance for periods beyond fiscal 2021. The Company is currently unable to estimate the impact beyond fiscal 2021 this termination event or transfer might have on the Program Agreement or on the Company's future financial results. Although the Company has experienced recovery in operating results through the first quarter of 2021 as compared to fiscal 2020, certain stores continued to operate under local governmental orders or restrictions. The full impact of COVID-19 will continue to depend on future developments, including the continued spread and duration of the outbreak, variant strains of COVID-19, the availability and distribution of effective medical treatments or vaccines as well as any related federal, state or local governmental orders or restrictions. In addition, numerous uncertainties continue to surround the pandemic and its ultimate impact on the Company, including the timing and extent of any recovery in consumer traffic and spending, and potential delays, interruptions and disruptions in the Company's supply chain, all of which are highly uncertain and cannot be predicted. Further discussion of the risks and uncertainties posed by the COVID-19 pandemic are disclosed in "Risk Factors" under Part I Item 1A of the Company's 2020 Form 10-K. Quarterly Overview During the first quarter of 2021, the Company continued to build on the momentum of the fourth quarter of 2020 and exceeded its expectations from both a sales and profit standpoint. The profitable first quarter results were driven by disciplined cost and inventory management through the ongoing execution of the Company's Polaris strategy, including investments in its digital platforms. Additionally, the Company's performance during the first quarter of 2021 reflects the benefits from rapidly improving macroeconomic conditions, driven by the government's stimulus program and heightened consumer confidence resulting from the roll-out of the COVID-19 vaccinations. 15 --------------------------------------------------------------------------------MACY'S, INC. In evaluating the performance of the first quarter of 2021, the Company considered its results against the first quarter of 2020 as well as the first quarter of 2019 given the impact of the pandemic and the closure of the Company's stores during the first and second quarters of 2020. Certain financial highlights are as follows:
• Comparable sales were up 62.5% on an owned basis; and up 63.9% on an owned
plus licensed basis compared to the first quarter of 2020. Compared to 2019,
this reflects a comparable sales decline of 10.5% on an owned basis and
10.0% on an owned plus licensed basis.
• Digital sales grew 34% over the first quarter of 2020 and 32% over the first
quarter of 2019. Digital penetration was at 37% of net sales for the first
quarter of 2021.
• Gross margin was 38.6%, compared to 17.1% in the first quarter of 2020,
representing an improvement of approximately 21.5 percentage
points. Compared to the first quarter of 2019, gross margin was up 40 basis
points.
• Net credit card revenues were
quarter of 2020, and representing 3.4% of sales. Net credit card revenues
were down
point improvement as a percent of net sales.
• Selling, general and administrative ("SG&A") expense was
2019, SG&A expenses were down approximately 17%. SG&A expense as a percent
of sales was 37.1%, down from 52.9% in the first quarter of 2020 and 130
basis points lower than the first quarter of 2019.
• Net income was
loss of
million in the first quarter of 2019. On an adjusted basis, net income
improved from a loss of $630 million in the first quarter of 2020 to net
income of $126 million for the first quarter of 2021. This compares to
adjusted net income of $137 in the first quarter of 2019.
• The first quarter of 2021 had positive earnings before interest, taxes,
depreciation and amortization ("EBITDA") of
negative EBITDA of
was
was
of net sales, and
of 2021, 2020, and 2019, respectively.
• Diluted earnings per share and adjusted diluted earnings per share were
include an earnings impact of
estate. This compares to a diluted loss per share and adjusted diluted loss
per share of
These include an earnings impact of
estate. This compares to diluted earnings per share and adjusted diluted
earnings per share of
the first quarter of 2019 included
estate.
• Inventory was down 14.1% from the first quarter of 2020.
• The Company ended the first quarter of 2021 in a strong liquidity position
with approximately
asset-based credit facility.
During the first quarter of 2021, the Company continued to execute its Polaris strategy and these actions impacted its operating results for the period, notably:
• Win With Fashion and Style: The Company experienced sales improvement from
off-price to luxury. In merchandise, strengths continued in pandemic-driven
products and categories but the Company also saw dormant categories improve
their performance trend compared to the fourth quarter of 2020, notably
dresses and men's tailored clothing. The Company has added hundreds of new
brands and categories over the past year and its flexibility in inventories
has enabled the Company to respond to new customer demands in emerging
categories such as toys, health and wellness, pet and home décor.
• Deliver Clear Value: The Company is improving and expanding location-level
pricing and strategically shifting its markdown cadence. With these actions,
higher full price sell-throughs and related higher merchandise margins are
being achieved. Along with advancing data-led capabilities in merchandising
pricing, allocation and personalization, these collective activities are
expected to improve average unit retail and gross margin performance.
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MACY'S, INC. • Excel in Digital Shopping: The Company improved fundamental digital
offerings during the first quarter of 2021 and took specific actions to
attract customers with an under-40 demographic, including the launch of acontemporary site within macys.com. The Company continued to experience
growth in its digital channels as previously disclosed and the
specifically saw double-digit increases in site visits and higher
conversation rates as compared to the first quarters of 2020 and 2019.
• Enhance Store Experience: Store sales continued to improve throughout the
quarter and as compared to the fourth quarter of 2020, with a sequential
improvement in comparable store sales from the fourth quarter of nearly 890
basis points. By maintaining leaner inventory levels, the Company's stores
have improved their layouts for easier navigation and to provide customers a
more streamlined shopping experience.
• Modernize Supply Chain: The Company has continued to update its supply chain
infrastructure and network, while leveraging improved data and analytics
capabilities in fulfillment strategies to meet customers' desire for speed
and convenience. The Company is navigating supply chain disruptions by
adjusting freight strategies and working closely with brand partners to
prioritize product.
• Enable Transformation: The Company has continued to modernize its technology
foundations to ensure agility to react to customers and the market
regardless of the channel in which customers interact. These activities are
coupled with others to build out data science and analytics capabilities
with a focus on areas to provide competitive differentiation.
The Company began to see its Platinum, Gold and Silver Star Rewards customers
re-engage with the Macy's brand during the first quarter of 2021, with the
average customer spend up 10% compared to the first quarter of 2019 and an 11
percentage point improvement from the fourth quarter of 2020. The Company's
Bronze Star Rewards tier continued to grow and had 3.2 million active customers
during the quarter. During the first quarter of 2021, the Company acquired 4.6
million new Macy's customers, of which approximately 47% occurred through Macy's
digital channel.
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MACY'S, INC. Results of Operations
The Company's operations during the first quarter of 2020 were significantly impacted by the closure of its stores due to the COVID-19 pandemic. The Company's performance during the first quarter of 2021 showed significant improvement over the results of the prior year period as it continued to recover from the pandemic.
Comparison of the First Quarter of 2021 and the First Quarter of 2020
First Quarter of 2021 First Quarter of 2020
% to Net % to Net
Amount Sales Amount Sales
(dollars in millions, except per share figures)
Net sales $ 4,706 $ 3,017
Credit card revenues, net 159 3.4 % 131 4.3 %
Cost of sales (2,889 ) (61.4 )% (2,501 ) (82.9 )%
Selling, general and administrative
expenses (1,748 ) (37.1 )% (1,598 ) (52.9 )%
Gains on sale of real estate 6 0.1 % 16 0.5 %
Impairment, restructuring and other
costs (19 ) (0.4 )% (3,184 ) (105.5 )%
Operating income (loss) 215 4.6 % (4,119 ) (136.5 )%
Benefit plan income, net 15 9
Losses on early retirement of debt (11 ) 0
Interest expense, net (79 ) (47 )
Income (loss) before income taxes 140 (4,157 )
Federal, state and local income tax
benefit (expense) (37 ) 576
Net income (loss) $ 103 $ (3,581 )
Diluted earnings (loss) per share $ 0.32 Supplemental Financial Measure Gross margin (a)$ 1,817 38.6 %$ 516 17.1 % Supplemental Non-GAAP Financial Measure Diluted earnings (loss) per share, excluding the impact of certain items$ 0.39 $ (2.03 )
(a) Gross margin is defined as net sales less cost of sales.
Net sales for the first quarter of 2021 increased$1.7 billion , or 56.0%, compared to the first quarter of 2020. The Company's first quarter of 2021 sales showed steady recovery across all three brands -Macy's ,Bloomingdale's and bluemercury. Digital sales during the first quarter of 2021 improved 34% compared to the first quarter of 2020 and accounted for approximately 37% of net sales. The Company experienced strength across all of its major merchandise categories driven by the continued recovery of its stores as well as continued growth in its digital channel.
Credit Card Revenues, Net
Net credit card revenues were$159 million in the first quarter of 2021, an increase of$28 million , or 21.0%, compared to$131 million recognized in the first quarter of 2020. This increase was driven by improvement in the credit card portfolio's delinquency rates and bad debt, partially offset by a decrease in proprietary credit card sales penetration, down approximately 400 basis points, at 42.0% in the first quarter of 2021 compared to 46.0% in the first quarter of 2020. Gross Margin Gross margin was 38.6% in the first quarter of 2021 compared to 17.1% in the first quarter of 2020. The increase in the gross margin rate in the first quarter of 2021 compared to the first quarter of 2020 was driven primarily by inventory productivity and the execution 18 --------------------------------------------------------------------------------MACY'S, INC. of the Polaris strategy. Due to the impact of COVID-19 and store closures, the first quarter of 2020 included an approximate$300 million inventory write-down from markdowns on fashion merchandise.
Selling, General and Administrative Expenses
SG&A expenses for the first quarter of 2021 increased$150 million from the first quarter of 2020 but decreased as a percentage of net sales by 15.8 percentage points. The increase in SG&A expense dollars corresponds with higher net sales but the improvement in the SG&A expense rate reflects the expense management strategies implemented by the Company in response to the COVID-19 pandemic as well as execution against the Polaris strategy.
Impairment, Restructuring and Other Costs
During the first quarter of 2021, the Company incurred impairment, restructuring and other costs totaling$19 million , primarily related to capitalized software assets. During the first quarter of 2020, primarily as a result of the COVID-19 pandemic, the Company incurred non-cash impairment charges totaling$3,150 million driven by recognition of$3,070 million of goodwill impairment and$80 million of impairments on long-lived tangible and right of use assets. 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.
Interest Expense, Net
Net interest expense, excluding losses on early retirement of debt, was$79 million during the first quarter of 2021, compared to$47 million during the first quarter of 2020. The increase is primarily driven by interest paid with respect to the$1,300 million of secured notes issued inJune 2020 .
Effective Tax Rate
The Company's effective tax rate was 26.3% for the first quarter of 2021 compared to the federal income statutory tax rate of 21%. The effective tax rate was impacted by the tax shortfalls associated with the vesting and cancellation of certain stock-based compensation awards.
Diluted Earnings (Loss) Per Share
Diluted earnings per share were$0.32 for the first quarter of 2021 compared to a diluted loss per share of$11.53 for the first quarter of 2020, reflecting higher net income as a result of the continued recovery from the impact of the COVID-19 pandemic.
Cash Flow, Liquidity and Capital Resources
The Company's principal sources of liquidity are cash from operations, cash on hand and the asset-based credit facility described below
The COVID-19 outbreak and related store closure in 2020 negatively impacted the Company's liquidity in 2020. The Company proactively took 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 and executing additional financing transactions during the second quarter of 2020. While the Company has obtained additional financing and, as ofMay 1, 2021 , estimates that it has sufficient cash on hand and other capital resources to cover the Company's reasonably foreseeable working capital, capital expenditure and debt service and other cash requirements in both the near term and over the longer term, the continued uncertainty associated with the COVID-19 pandemic could have a significant impact on the Company's cash flow and liquidity and further actions may be required to improve the Company's cash position.
Operating Activities
Net cash provided by operating activities for the first quarter of 2021 was$494 million , compared to net cash used by operating activities of$164 million for the first quarter of 2020. The increase in operating cash flows period over period is due to significant improvement in the Company's EBITDA, offset partly by lower working capital benefits.
Investing Activities
Net cash used by investing activities was$74 million for the first quarter of 2021, compared to$113 million for the first quarter of 2020. The decrease period over period is primarily due to a reduction in capital spending compared to 2020 as a result of the Company's updated plan for capital expenditures in response to the COVID-19 pandemic and alignment with its Polaris strategy. 19 --------------------------------------------------------------------------------MACY'S, INC.
Financing Activities
Net cash used by financing activities was$300 million for the first quarter of 2021, driven by a decrease in outstanding checks. Net cash provided by financing activities was$1,148 million for the first quarter of 2020, driven by the issuance of$1,500 million of debt related to a draw on the Company's revolving credit agreement, partly offset by cash dividend payments of$117 million and a decrease in outstanding checks. See below for further discussion of the Company's financing activities during the first quarter of 2021. OnMarch 17, 2021 ,Macy's Retail Holdings, LLC ("MRH"), a direct, wholly owned subsidiary ofMacy's, Inc. , completed an offering of$500 million in aggregate principal amount of 5.875% senior notes due 2029 (the "2029 Notes") in a private offering (the "Notes Offering"). The 2029 Notes mature onApril 1, 2029 . The 2029 Notes are senior unsecured obligations of MRH and are unconditionally guaranteed on a senior unsecured basis byMacy's, Inc. MRH used the net proceeds from the Notes Offering, together with cash on hand, to fund the tender offer discussed below. OnMarch 17, 2021 , the Company completed a tender offer in which$500 million of senior notes and debentures were tendered for early settlement and purchased by MRH onMarch 17, 2021 . The purchased senior notes and debentures included$156 million of 3.875% senior notes due 2022,$136 million of 2.875% senior notes due 2023,$49 million of 4.375% senior notes due 2023,$150 million of 3.625% senior notes due 2024,$5 million of 6.65% senior debentures due 2024, and$4 million of 7.6% senior debentures due 2025. The total cash cost for the tender offer was$17 million with the remainder funded through the net proceeds from the Notes Offering discussed above. The Company recognized$11 million of losses associated with this early retirement of debt on the Consolidated Statements of Operation during the first quarter of 2021. The Company is party to an asset-based credit facility ("the ABL Credit Facility") with certain financial institutions providing for a$2,941 million revolving credit facility (the "Revolving ABL Facility"), including a swingline sub-facility and a letter of credit sub- facility. The Company may request increases in the size of the Revolving ABL Facility up to an additional aggregate principal amount of$750 million . The ABL Credit Facility contains customary borrowing conditions including a borrowing base equal to the sum of (a) 90% 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 Company'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 Company'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. 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 Company not permit Availability plus Suppressed Availability to be lower than the greater of (x) 10% of the Loan Cap and (y)$250 million . As ofMay 1, 2021 , no such events had occurred triggering such requirement. As ofMay 1, 2021 , the Company had$158 million of standby letters of credit outstanding under the ABL Credit Facility, which reduces the available borrowing capacity. The borrowing capacity of the ABL Credit Facility was$2,444 million and the Company had no borrowings outstanding under the ABL Credit Facility as ofMay 1, 2021 . Contractual Obligations As ofMay 1, 2021 , other than the financing transactions discussed above and in Note 5 to the accompanying Consolidated Financial Statements, there were no material changes to our contractual obligations and commitments outside the ordinary course of business sinceJanuary 30, 2021 , as reported in the Company's 2020 Form 10-K. Capital Resources Management believes that, with respect to the Company's current operations, its cash on hand and funds from operations, together with the ABL 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. 20 --------------------------------------------------------------------------------MACY'S, INC. The Company's ability to generate funds from operations may be affected by numerous factors, including the COVID-19 pandemic, 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 payment of dividends. 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.
Guarantor Summarized Financial Information
The Company had$3,243 million and$3,246 million aggregate principal amount of senior unsecured notes and senior unsecured debentures (collectively the "Unsecured Notes") outstanding as ofMay 1, 2021 andJanuary 30, 2021 , respectively, with maturities ranging from 2022 to 2043. The Unsecured Notes constitute debt obligations of MRH ("Subsidiary Issuer"), a 100%-owned subsidiary ofMacy's, Inc. ("Parent" and together with the "Subsidiary Issuer," the "Obligor Group "), and are fully and unconditionally guaranteed on a senior unsecured basis by Parent. The Unsecured Notes rank equally in right of payment with all of the Company's existing and future senior unsecured obligations, senior to any of the Company's future subordinated indebtedness, and are structurally subordinated to all existing and future obligations of each of the Company's subsidiaries that do not guarantee the Unsecured Notes. Holders of the Company's secured indebtedness, including the Notes and any borrowings under the ABL Credit Facility, will have a priority claim on the assets that secure such secured indebtedness; therefore, the Unsecured Notes and the related guarantee are effectively subordinated to all of the Subsidiary Issuer's and Parent and their subsidiaries' existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness. The following tables include combined financial information of theObligor Group . Investments in non-Guarantor subsidiaries of$6,342 million and$6,126 million as ofMay 1, 2021 andJanuary 30, 2021 , respectively, have been excluded from the Summarized Balance Sheets. Equity in earnings of non-Guarantor subsidiaries of$428 million for the first quarter of 2021 has been excluded from the Summarized Statement of Operations. The combined financial information of theObligor Group is presented on a combined basis with intercompany balances and transactions within theObligor Group eliminated.
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