Retail News: Macy’s, Inc. Reports Fourth Quarter and FY2016 Results

Diluted 2016 EPS is $1.99, or $3.11 as adjusted; Company provides 2017 sales and earnings guidance

Macy’s, Inc. (NYSE: M) today reported fiscal 2016 earnings per diluted share of $1.99, or $3.11 per diluted share excluding certain items discussed below.macyslogo

Macy’s, Inc., with corporate offices in Cincinnati and New York, is one of the nation’s premier retailers, with fiscal 2016 sales of $25.778 billion. The company operates more than 700 department stores under the nameplates Macy’s and Bloomingdale’s, and approximately 125 specialty stores that include Bloomingdale’s Outlet, Bluemercury and Macy’s Backstage, in 45 states, the District of Columbia, Guam and Puerto Rico, as well as the macys.com, bloomingdales.com, and bluemercury.com websites. Bloomingdale’s in Dubai is operated by Al Tayer Group LLC under a license agreement.

While 2016 was not the year we expected, we made significant progress on key initiatives that are starting to bear fruit. These include continued improvement in our digital platforms, the rollout of our new approach to fine jewelry and women’s shoes, an increase in exclusive merchandise and the refinement of our clearance and off-price strategy. We also took a big step forward in rightsizing our physical footprint and restructuring our entire organization. The combination of these initiatives will help us gain market share, return to growth and drive enhanced value for our shareholders over time,” said Terry J. Lundgren, Macy’s chairman and chief executive officer.

We will be investing for the future in 2017. Looking at the continued challenges in the retail environment and changing consumer shopping behaviors, we know we must evolve our strategy and execute faster,” Lundgren said. “Key to this is enhancing the customer experience in our stores where we are developing and testing concepts that feature new merchandise and entertainment options alongside enhanced technology to make shopping simpler. Additional initiatives that we believe will improve sales trends in 2017 include continued omnichannel improvements, an updated marketing strategy, and a simplified pricing structure.”

We continued to make progress on the execution of our real estate strategy in the fourth quarter of 2016 and will carry that momentum into 2017. Overall, real estate transactions in fiscal 2016 generated cash proceeds of approximately $675 million, which is helping to fund continued reinvestment in the business. We also began work on deriving value from our partnership with Brookfield Asset Management. We are excited by the potential of our real estate strategy, and in 2017, we will focus on advancing the Brookfield partnership and continuing to monetize the locations that we have closed or plan to close. We are also developing strategies that will help create value for Herald Square while making the store an even more vibrant retail experience,” Lundgren added.

For the full year 2016, adjusted earnings (excluding items described below) were $3.11 per diluted share. This exceeds the company’s most recent guidance for 2016 earnings of $2.95 to $3.10 on the same basis. Fiscal 2016 comparable sales on an owned basis declined by 3.5 percent. On an owned plus licensed basis, comparable sales for fiscal 2016 declined by 2.9 percent. This compares to the most recent guidance for 2016 sales on an owned plus licensed basis to be down 2.5 percent to 3.0 percent.

Sales

Sales in the fourth quarter of 2016 totaled $8.515 billion, down 4.0 percent from total sales of $8.869 billion in the fourth quarter of 2015. On an owned basis, fourth quarter comparable sales declined by 2.7 percent. Comparable sales on an owned plus licensed basis for the fourth quarter were down 2.1 percent.

Sales in fiscal 2016 totaled $25.778 billion, down 4.8 percent from total sales of $27.079 billion in fiscal 2015. On an owned basis, fiscal 2016 comparable sales were down 3.5 percent. Comparable sales on an owned plus licensed basis for fiscal 2016 declined by 2.9 percent.

In fiscal 2016, the company opened 27 stores and closed 66 stores, all as previously announced. Macy’s, Inc. plans to close an additional approximately 34 stores over the next few years for a total of approximately 100 stores. New stores opened in fiscal 2016 included one Macy’s store in Kapolei, HI, 24 Bluemercury freestanding stores, one Macy’s Backstage freestanding store in San Antonio, TX, and one Bloomingdale’s Outlet in Orange, CA.

Operating Income

Macy’s, Inc.’s operating income totaled $815 million, or 9.6 percent of sales, for the fourth quarter ended Jan. 28, 2017, compared with operating income of $936 million, or 10.6 percent of sales, for the fourth quarter of fiscal 2015.

Macy’s, Inc.’s fourth quarter 2016 operating income included $230 million of impairments, store closing, and other costs. The $230 million included $38 million of asset impairment charges primarily related to the store closings announced in January 2017, $166 million of severance and other costs primarily associated with organizational changes and store closings announced in January 2017 and $26 million of other related costs and expenses. Excluding these items, as well as non-cash settlement charges related to the company’s retirement plans of $17 million, operating income for the fourth quarter of 2016 was $1.062 billion or 12.5 percent of sales.

Fourth quarter 2015 operating income included $177 million of impairments, store closing, and other costs. Excluding these items, operating income for the fourth quarter of 2015 was $1.113 billion or 12.6 percent of sales.

For fiscal 2016, Macy’s, Inc.’s operating income totaled $1.315 billion, or 5.1 percent of sales, compared with operating income of $2.039 billion, or 7.5 percent of sales, for fiscal 2015.

Macy’s, Inc.’s fiscal 2016 operating income included $479 million of impairments, store closing, and other costs. The $479 million included $265 million of asset impairment charges primarily related to the store closings announced in January 2017, $168 million of severance and other costs primarily associated with organizational changes and store closings announced in January 2017 and $46 million of other related costs and expenses. Excluding these items, as well as non-cash settlement charges related to the company’s retirement plans of $98 million, operating income for fiscal 2016 was $1.892 billion or 7.3 percent of sales.

Macy’s, Inc.’s fiscal 2015 operating income included $288 million of impairments, store closing, and other costs. Excluding these items, operating income for fiscal 2015 was $2.327 billion or 8.6 percent of sales.

Earnings Per Share

Fourth quarter 2016 earnings per diluted share were $1.54. Excluding impairments, store closing, settlement charges and other costs of $247 million ($147 million after tax or 48 cents per diluted share), earnings per diluted share on an adjusted basis were $2.02 for the fourth quarter of 2016.

In 2015, fourth quarter earnings per diluted share were $1.73. Excluding impairments, store closing and other costs of $177 million ($115 million after tax or 36 cents per diluted share), earnings per diluted share on an adjusted basis were $2.09 for the fourth quarter of 2015.

Earnings per diluted share were $1.99 for fiscal 2016. Excluding impairments, store closing, settlement charges and other costs of $577 million ($349 million after-tax or $1.12 per diluted share), earnings per diluted share on an adjusted basis were $3.11 for fiscal 2016.

In fiscal 2015, earnings per diluted share were $3.22. Excluding impairments, store closing and other costs of $288 million ($184 million after tax or 55 cents per diluted share), earnings per diluted share on an adjusted basis were $3.77 for fiscal 2015.

Cash Flow

Net cash provided by operating activities was $1.801 billion in fiscal 2016, compared with $1.984 billion in fiscal 2015. Net cash used in investing activities in fiscal 2016 was $187 million, compared with $1.092 billion in the previous year. Operating cash flows net of investing were $1.614 billion in fiscal 2016, compared with $892 million in fiscal 2015.

In fiscal 2016, the company repurchased approximately 7.9 million shares of its common stock for approximately $316 million. As of Jan. 28, 2017, the company had remaining authorization to repurchase up to approximately $1.716 billion of its common stock.

Real Estate Update

In fiscal 2016, the company’s asset sales totaled $673 million in cash proceeds ($209 million in book gains).

Macy’s, Inc. continues to harvest real estate value opportunistically where the value of the real estate as a redevelopment exceeds that of non-strategic operating locations. In addition, the company is closing less productive stores and selling the associated real estate.

As an example of these actions, Macy’s, Inc. completed the previously announced sale of its Union Square Men’s building in San Francisco for $250 million in gross proceeds. The Men’s Store will be incorporated into the Union Square Main building. The company also anticipates additional enhancements to its Union Square Main building through the conversion of street-level selling space into high-end luxury retail shops that will be leased to third parties. Likewise, Macy’s, Inc. is exploring strategies that will help create value and further improve the customer experience at its Herald Square store in New York City. The company also expects to close shortly on the previously announced sale of its downtown Minneapolis store.

To further create value from its real estate portfolio, the company continues to work with its strategic partner, Brookfield Asset Management, on approximately 50 identified assets. Brookfield’s expertise will be invaluable in accelerating redevelopment and maximizing the value of these properties. Contemplated developments include retail, as well as alternative uses, such as multifamily housing, hotels, and offices. The projects range from the complete ground-up redevelopment of a building to the development of parcels in a parking area while maintaining a store presence.

CEO Transition

Macy’s, Inc. also announced today that its previously announced CEO transition will occur on March 23, 2017. As noted in the company’s June 23, 2016, announcement, Jeff Gennette, president of Macy’s, Inc., will assume the CEO role and Terry Lundgren will continue as executive chairman of the company.

Looking Ahead

In fiscal 2017, the company expects comparable sales on an owned basis to decline between 2.2 percent and 3.3 percent, with comparable sales on an owned plus licensed basis to decline between 2.0 percent and 3.0 percent. Total sales are expected to be down between 3.2 percent and 4.3 percent in fiscal 2017, reflecting the 66 stores closed in 2016. Total sales for fiscal 2017 reflect the 53rd week of sales, whereas comparable sales are on a 52-week basis. Adjusted diluted earnings per share of between $3.37 and $3.62 are expected in 2017, excluding the impact of the anticipated settlement charges related to the company’s defined benefit plans. Excluding the impact of the anticipated fourth quarter gain on the sale of the Union Square Men’s building in San Francisco and the anticipated settlement charges related to the company’s defined benefit plans, adjusted diluted earnings per share of $2.90 to $3.15 are expected in 2017.

Capital expenditures for 2017 are expected to be approximately $900 million.

In fiscal 2017, the company expects to open Macy’s stores in Westfield Century City, Los Angeles, CA, and Fashion Place, Murray, UT, as well as approximately 30 additional Bluemercury locations and approximately 30 Macy’s Backstage locations inside Macy’s stores. Announced new stores in future years include Bloomingdale’s in San Jose, CA (2019), and Norwalk, CT (2019). In addition, under license agreements with Al Tayer Group, a new Bloomingdale’s store is planned to open in 360 Mall in Al Zahra, Kuwait in spring 2017 and new Macy’s and Bloomingdale’s stores are planned to open in Al Maryah Central in Abu Dhabi, United Arab Emirates in 2018.

Investor Conferences

Macy’s, Inc. will present at the UBS Global Consumer & Retail Conference at 10:30 a.m. ET on Wednesday, March 8, 2017, in Boston. Media and investors may access the live webcast of the presentation at www.macysinc.com/ir at the appointed time. The webcast will be available for replay.

Macy’s, Inc. will present at the Bank of America Merrill Lynch 2017 Consumer & Retail Technology Conference at 8 a.m. ET on Tuesday, March 14, 2017, in New York City. Media and investors may access the live webcast of the presentation at www.macysinc.com/ir at the appointed time. The webcast will be available for replay.

Notes:

(1) Because of the seasonal nature of the retail business, the results of operations for the 13 weeks ended January 28, 2017, and January 30, 2016 (which include the Christmas season) are not necessarily indicative of such results for the fiscal year.

(2) Merchandise inventories are valued at the lower of cost or market using the last-in, first-out (LIFO) retail inventory method. Application of the LIFO retail inventory method did not result in the recognition of any LIFO charges or credits affecting the cost of sales for the 13 weeks ended January 28, 2017, or January 30, 2016.

(3) For the 13 weeks ended January 28, 2017, impairments, store closing and other costs amounted to $230 million on a pre-tax basis, $137 million after tax or $.45 per diluted share attributable to Macy’s, Inc. These costs include $38 million of asset impairment charges primarily related to the store closings announced in January 2017, $166 million of severance and other human resource-related costs associated with the organization changes and store closings announced in January 2017 and $26 million of other related costs and expenses. For the 13 weeks ended January 30, 2016, impairments, store closing and other costs amounted to $177 million on a pre-tax basis, $115 million after tax or $.36 per diluted share attributable to Macy’s, Inc. These costs included $37 million of asset impairment charges primarily related to the store closings announced in January 2016, $123 million of severance and other human resource-related costs associated with the organization changes and store closings announced in January 2016 and $17 million of other related costs and expenses.

(4) Non-cash settlement charges of $17 million on a pre-tax basis, $10 million after tax or $.03 per diluted share attributable to Macy’s, Inc., were recognized in the 13 weeks ended January 28, 2017. These charges relate to the pro-rata recognition of net actuarial losses associated with the Company’s defined benefit retirement plans and are the result of an increase in lump sum distributions associated with store closings, a voluntary separation program, organizational restructuring, and periodic distribution activity.

(5) Federal, state and local income taxes differ from the federal income tax statutory rate of 35%, principally because of the effect of state and local taxes, including the settlement of various tax issues and tax examinations.

All statements in this press release that are not statements of historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of Macy’s management and are subject to significant risks and uncertainties. Actual results could differ materially from those expressed in or implied by the forward-looking statements contained in this release because of a variety of factors, including conditions to, or changes in the timing of, proposed real estate and other transactions, prevailing interest rates and non-recurring charges, store closings, competitive pressures from specialty stores, general merchandise stores, off-price and discount stores, manufacturers’ outlets, the Internet, mail-order catalogs and television shopping and general consumer spending levels, including the impact of the availability and level of consumer debt, the effect of weather and other factors identified in documents filed by the company with the Securities and Exchange Commission. Macy’s disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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