Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of the results of operations and financial condition of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This section generally discusses the results of operations for 2022 compared to 2021 and 2020. The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for the fiscal years ended January 28, 2023 to January 29, 2022 and January 30, 2021. For a full discussion of changes from the fiscal year ended January 29, 2022 to the fiscal year ended January 30, 2021, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 2022 (filed March 25, 2022). This section also 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 "Forward-Looking Statements."
Fiscal 2022 Overview
The Company successfully navigated 2022 from a position of financial and operational strength. Despite an increasingly volatile macroeconomic climate, through the ongoing execution of the Company's Polaris strategy detailed further below, it remained agile, pivoted to meet customer demand and elevated its approach to inventory management. The Company built a solid foundation for long-term, profitable sales growth through investments in its supply chain, data and analytics, pricing science, digital and technology which have enabled its operations and colleagues to become more efficient and flexible. In evaluating 2022 performance, the Company considered its results against 2021. Certain financial highlights are as follows:
•Comparable sales increased 0.3% on an owned basis and 0.6% on an owned-plus-licensed basis.
•Net credit card revenue increased $31 million to $863 million.
•The gross margin rate was 37.4%, a decrease from 38.9%.
•Selling, general & administrative (SG&A) expenses increased $270 million to $8,317 million, or 34.0% of net sales, an increase of 110 basis points.
•Net income was $1,177 million, a decrease from net income of $1,430 million. Net income adjusted for impairment, restructuring and other costs, settlement charges, and losses on early retirement of debt declined from adjusted net income of $1,668 million to adjusted net income of $1,259 million.
•Earnings before interest, taxes, depreciation and amortization excluding restructuring, impairment, store closings and other costs and settlement charges (Adjusted EBITDA) were $2,648 million, a decline from $3,320 million.
•Diluted earnings per share were $4.19, compared to diluted earnings per share of $4.55. On an adjusted basis, diluted earnings per share were $4.48, compared to adjusted diluted earnings per share of $5.31.
•Merchandise inventories were down 3% and inventory turnover decreased 4%.
See pages 30 to 32 for reconciliations of the non-GAAP financial measures presented above to the most comparable U.S. generally accepted accounting principles (GAAP) financial measures and other important information.
Company Strategy
During 2022, the Company continued to execute its Polaris strategy and these actions impacted its operating results for the year, notably:
•Win With Fashion and Style: By offering a wide assortment of categories, products and brands from off-price to luxury, the Company continued to reach a broad and diverse range of customers during 2022. The Company is committed to providing quality fashion newness through reimagining its private brand portfolio, which is in its early stages and is expected to begin to take shape in fiscal 2023, building best-in-class experiences though partnerships with brands such as, but not limited to, Pandora and Sunglass Hut and growing relevancy for the next generation of customers through its omni-channel brand platform Own Your Style. Modernizing the supply chain allowed the Company to maintain freshness in every category and brand during 2022, including those that were down-trending.
•Deliver Clear Value: The Company has leveraged data analytics and pricing tools to efficiently plan, place and price inventory, including location level pricing, competitive pricing and point-of -sale pricing work. With these actions, the Company is strategically taking markdowns and reducing broad-based promotions to improve the productivity of sell-throughs. These collective activities have contributed to nine consecutive quarters of higher average unit retail.
•Excel in Digital Shopping: While the Company experienced deceleration in the growth of its digital channel during 2022 as consumers shifted back to in-store shopping, the Company continued to make digital investments to serve customers' lifestyle needs through several initiatives. These included continued enhancements in personalized offers and communication with customers; enhancements to its mobile app to allow customers to shop their personal style, price check in-store, manage their Star Rewards and track orders; and, further develop its live shopping in-app experience. Macy's digital Marketplace launched in late September 2022, which features a collection of new brands, products and categories from third-party sellers, representing a pathway to introduce customers to new merchandise options while limiting inventory risk. Bloomingdale's is expected to launch a similar digital marketplace in the second half of 2023. Also, Macy's Media Network (MMN), an in-house media platform that enables business-to-business monetization of advertising partnerships, generated approximately $144 million of net income in 2022, an increase of 34% from 2021.
•Enhance Store Experience: The Company continues to invest in physical stores to support its omni-channel ecosystem and build new capabilities to help make the shopping experience convenient and compelling. The Company made strides in repositioning its store fleet through strategic expansion of off-mall, smaller format stores which now includes eight Market by Macy's and two Bloomies locations. The Company is currently evaluating the right number and mix of on and off-mall locations. Since February 2020, the Company has closed its most significant underperforming stores, exited failing centers and improved the existing store experience, while delaying closures of others that are cash flow positive. Finally, the Company introduced permanent Toys “R” Us shops within all Macy’s locations which resulted in toy sales for the year more than doubling from 2021.
•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 and improving inventory placement and productivity. Through its actions, the Company is building a faster, more efficient and flexible network through market-based mini-fulfillment centers in select stores and testing robotics and automation in select fulfillment centers. Finally, the Company plans to open a new distribution center in Texas in mid-2023 and a new fulfillment center in North Carolina in 2025.
•Enable Transformation: The Company is focused on investing in the right talent, technology infrastructure and data analytics to increase agility in reacting to customers and the market regardless of the channel in which customers interact. As part of the Company's ongoing commitment to attract and retain talent, it made significant investments in its colleagues’ benefit programs in 2022, including launching the Guild Education partnership that provides free education benefits, raising the company-wide minimum rate to $15 per hour and increasing compensation and benefits for colleagues across Macy’s Inc.
In addition to the pillars of the Polaris strategy above, the Company is committed to providing value to people, communities and the planet through the evolution of its Mission Every One social purpose platform. In early November, the Company launched S.P.U.R. Pathways: Shared Purpose, Unlimited Reach, with its partner Momentus Capital. S.P.U.R. Pathways is a multi-year, multi-faceted program that ultimately is expected to provide up to $200 million of funding. The Company is committed to contribute approximately $30 million over five years to empower new brands across the Company’s network of stores and broaden the Company’s range of suppliers. The funding is designed to advance entrepreneurial growth, close wealth gaps and address systemic barriers faced by diverse-owned and underrepresented businesses serving the retail industry.
Looking forward, in addition to the existing strategies and initiatives discussed above, the Company will focus on the following five primary growth vectors that represent strategic investments designed to target future long-term profitable sales growth:
•Macy's private brands reimagination - designed to drive customer loyalty, be a differentiator for the business, complement national brands matrix and benefit gross margin.
•Market by Macy's and Bloomies off-mall store expansion - integral role in supporting the omnichannel ecosystem, which we expect to unlock the full potential by testing and learning in 2023 and potentially incrementally accelerating openings in 2024 if stores continue to outperform.
•Digital marketplace - on a multi-year journey with marketplace, keeping a pulse on market dynamics and shifts to deliver the best experience for customers and sellers.
•Luxury brands - attracting and retaining luxury customer through differentiated products, services and experiences at Bloomingdale's, Bluemercury and beauty at Macy's.
•Personalized offers and communication - opportunity to build loyalty, grow customer lifetime value and product margins, creating tailored and intimate customer experience.
The Company will monitor its operating results against pillars of the Polaris strategy and the growth vectors as it progresses through 2023.
Analysis of Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | Amount | | % to Sales | | Amount | | % to Sales | | Amount | | % to Sales |
| | (dollars in millions, except per share figures) |
Net sales | | $ | 24,442 | | | | | $ | 24,460 | | | | | $ | 17,346 | | | |
Increase (decrease) in comparable sales | | 0.3 | % | | | | 43.0 | % | | | | (27.9) | % | | |
Credit card revenues, net | | 863 | | | 3.5 | % | | 832 | | | 3.4 | % | | 751 | | | 4.3 | % |
Cost of sales | | (15,306) | | | (62.6) | % | | (14,956) | | | (61.1) | % | | (12,286) | | | (70.8) | % |
Selling, general and administrative expenses | | (8,317) | | | (34.0) | % | | (8,047) | | | (32.9) | % | | (6,767) | | | (39.0) | % |
Gains on sale of real estate | | 89 | | | 0.4 | % | | 91 | | | 0.4 | % | | 60 | | | 0.2 | % |
Impairment, restructuring and other costs | | (41) | | | (0.2) | % | | (30) | | | (0.1) | % | | (3,579) | | | (20.6) | % |
Operating income (loss) | | $ | 1,730 | | | 7.1 | % | | $ | 2,350 | | | 9.6 | % | | $ | (4,475) | | | (25.8) | % |
| | | | | | | | | | | | |
Diluted earnings (loss) per share | | $ | 4.19 | | | | | $ | 4.55 | | | | | $ | (12.68) | | | |
| | | | | | | | | | | | |
Supplemental Financial Measure | | | | | | | | | | | | |
Gross margin | | $ | 9,136 | | | 37.4 | % | | $ | 9,504 | | | 38.9 | % | | $ | 5,060 | | | 29.2 | % |
Digital sales as a percent of net sales | | 33 | % | | | | 35 | % | | | | 44 | % | | |
| | | | | | | | | | | | |
Supplemental Non-GAAP Financial Measures | | | | | | | | | | | | |
Increase (decrease) in comparable sales on an owned plus licensed basis | | 0.6 | % | | | | 42.9 | % | | | | (27.9) | % | | |
Adjusted diluted earnings (loss) per share | | $ | 4.48 | | | | | $ | 5.31 | | | | | $ | (2.21) | | | |
EBITDA | | $ | 2,568 | | | | | $ | 3,194 | | | | | $ | (3,546) | | | |
Adjusted EBITDA | | $ | 2,648 | | | | | $ | 3,320 | | | | | $ | 117 | | | |
See pages 32 to 34 for reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measure and for other important information.
Comparison of 2022 and 2021
| | | | | | | | |
| 2022 | 2021 |
Net sales | $ | 24,442 | | $ | 24,460 | |
Increase in comparable sales | 0.3 | % | 43.0 | % |
Increase in comparable sales on an owned plus licensed basis | 0.6 | % | 42.9 | % |
Digital sales as a percent of net sales | 33 | % | 35 | % |
Net sales for 2022 were relatively flat to the same period in the prior year as the Company navigated a volatile macroeconomic environment and inflation; however, comparable store sales increased from 2021 on both an owned and owned plus licensed basis. During 2022, consumer shopping behavior shifted toward gifting and occasion-based categories, with strength in beauty, men's tailored apparel, dresses, shoes and luggage. Pandemic-driven categories such as active, casual and soft home, underperformed the prior year. Digital sales as a percent of net sales decreased compared to the prior year largely due to a shift back to in-store shopping.
| | | | | | | | |
| 2022 | 2021 |
Credit card revenues, net | $ | 863 | | $ | 832 | |
Credit card revenues, net as a percent of net sales | 3.5 | % | 3.4 | % |
Proprietary credit card sales penetration | 42.9 | % | 41.6 | % |
The increase in net credit card revenues was driven by better than expected bad debt levels, higher credit balances within the portfolio and higher spending on the co-brand credit card.
| | | | | | | | |
| 2022 | 2021 |
Cost of sales | $ | (15,306) | | $ | (14,956) | |
As a percent to net sales | 62.6 | % | 61.1 | % |
Gross margin | $ | 9,136 | | $ | 9,504 | |
As a percent to net sales | 37.4 | % | 38.9 | % |
The decrease in the gross margin rate was primarily due to lower merchandise margin (approximately 170 bps), which was driven by higher markdowns and promotions, particularly in pandemic related categories as a result of the shift in consumer demand as well as heightened competitive retail landscape due to elevated industry-wide inventory levels. This was partially offset by a reduction in delivery expense (approximately 20 basis points), which coincides with the reduction in the digital sales penetration rate. Inventory turnover decreased 4% over 2021 and inventory was down 3% compared to 2021, mainly due to disciplined inventory management, strategic use of data analytics, the alignment of the merchandising team and the successful integrations and modernization of the supply chain.
| | | | | | | | |
| 2022 | 2021 |
SG&A expenses | $ | (8,317) | | $ | (8,047) | |
As a percent to net sales | 34.0 | % | 32.9 | % |
SG&A expenses increased in 2022 both in dollars and as a percent to net sales. The increase in SG&A expense and as a percent to net sales corresponds with the Company filling a significant number of positions that were open in the prior year as well as adjustments to colleague compensation and benefits to remain competitive and attract the best talent, including increasing the Company's minimum wage to $15/hour starting May 1, 2022.
| | | | | | | | |
| 2022 | 2021 |
Gains on sale of real estate | $ | 89 | | $ | 91 | |
2022 asset sale gains mainly consist of gains from the sale of 6 properties, versus approximately 18 properties sold at a gain in 2021.
| | | | | | | | |
| 2022 | 2021 |
Impairment, restructuring and other costs | $ | (41) | | $ | (30) | |
Impairment, restructuring and other costs in 2022 and 2021 primarily related to the write-off of capitalized software assets.
| | | | | | | | |
| 2022 | 2021 |
Benefit plan income, net | $ | 20 | | $ | 66 | |
The Company records non-cash net benefit plan income relating to the Company's defined benefit plans. This income includes the net amount of interest cost, expected return on plan assets and amortization of prior service costs or credits and actuarial gains and losses. The decrease in benefit plan income from 2021 to 2022 was mainly driven by a decrease in the plan asset returns and higher discount rates as a result of market conditions.
| | | | | | | | |
| 2022 | 2021 |
Settlement charges | $ | (39) | | $ | (96) | |
The settlement charges in 2022 were primarily related to the pro-rata recognition of net actuarial losses associated with the Company's defined benefit retirement plans as the result of lump sum distributions associated with retiree distribution elections. The charges in 2021 were higher than 2022 as they primarily related to the transfer of fully funded pension obligations for certain retirees and beneficiaries through the purchase of a group annuity contract with an insurance company.
| | | | | | | | |
| 2022 | 2021 |
Net interest expense | $ | (162) | | $ | (255) | |
The decrease in net interest expense, excluding losses on early retirement of debt, was primarily driven by interest savings associated with the redemption of the Company's $1.3 billion aggregate principal amount of its senior secured notes due 2025 in August 2021, as well as the financing activities completed in the first quarter of 2022.
| | | | | | | | |
| 2022 | 2021 |
Losses on early retirement of debt | $ | (31) | | $ | (199) | |
In 2022, losses on early retirement of debt were recognized due to the early payment of $1.1 billion aggregate principal amount of senior notes and debentures in the first quarter of 2022. In 2021, losses on early retirement of debt were recognized primarily due to redemption of the entire outstanding $1.3 billion amount of the Company's senior secured notes due 2025 in the third quarter of 2021, as well as the repurchase of $500 million aggregate principal amount of notes in a tender offer in the first quarter of 2021.
| | | | | | | | |
| 2022 | 2021 |
Effective tax rate | 22.5 | % | 23.4 | % |
Federal income statutory rate | 21 | % | 21 | % |
In 2022, income tax expense of $341 million, or 22.5% of pretax income reflects a different effective tax rate as compared to the company’s federal income tax statutory rate of 21% driven primarily by the impact of state and local taxes, offset by the benefit of state tax settlements. In 2021, income tax expense of $436 million, or 23.4% of pretax income, reflects a different effective tax rate as compared to the company's federal income tax statutory rate of 21% primarily by the impact of state and local taxes.
Guidance
On March 2, 2023, the Company disclosed in its release of preliminary earnings its performance expectations for 2023, presented on a 53-week basis unless otherwise noted. The 2023 outlook was as follows:
•Net sales between $23.7 billion to $24.2 billion,
•Comparable owned-plus-licensed sales, on a 52-week basis, are expected to be down approximately 2% to 4% from 2022,
•Digital sales approximately 32% to 34% of net sales,
•Credit card revenue, net approximately 3.1% of net sales,
•Gross margin rate between approximately 38.7% and 39.2%,
•SG&A expenses as a percentage of net sales approximately 36.3%,
•Gains on sale of real estate between $60 million and $75 million,
•Benefit plan income of approximately $12 million,
•Depreciation and amortization expense of approximately $910 million,
•Adjusted EBITDA between approximately 10.3% and 10.8% of net sales,
•Net interest expense of approximately $165 million,
•An adjusted tax rate of approximately 24.5%,
•Diluted shares outstanding of approximately 282 million,
•Adjusted diluted EPS between $3.67 and $4.11, and
•Capital expenditures of approximately $1 billion.
The Company does not provide reconciliations of the forward-looking non-GAAP measures of comparable owned plus licensed sales change, adjusted EBITDA, adjusted tax rate and adjusted diluted earnings per share to the most directly comparable forward-looking GAAP measures because the timing and amount of excluded items are unreasonably difficult to fully and accurately estimate. See Important Information Regarding Non-GAAP Financial Measures.
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. Material contractual obligations arising in the normal course of business primarily consist of long-term debt and related interest payments, lease obligations, merchandise purchase obligations, retirement plan benefits, and self-insurance reserves. See Notes 4, 6 and 9 to the consolidated financial statements included in Item 8 of this Report for amounts outstanding on January 28, 2023, related to leases, debt, and retirement plans, respectively. Merchandise purchase obligations represent future merchandise payables for inventory purchased from various suppliers through contractual arrangements and are expected to be funded through cash from operations.
We believe that our available cash, together with expected future cash generated from operations, the amount available under our credit facility, and credit available in the market will be sufficient to satisfy our anticipated needs for working capital, capital expenditures, and cash dividends for at least the next 12 months and the foreseeable future thereafter.
Capital Allocation
The Company's capital allocation goals include maintaining a healthy balance sheet and investment-grade credit metrics to be best-positioned for access to bank and capital market funding under all economic scenarios, followed by investing in the business through initiatives to drive long-term profitable growth and returning capital to shareholders through modest yet predictable dividends and share repurchases, absent more attractive investment alternatives.
The Company ended the year with a cash and cash equivalents balance of $862 million, a decrease from $1,712 million in 2021. Also, the Company is party to the Asset Based Lending (ABL) Credit Facility with certain financial institutions providing for a $3,000 million Revolving ABL Facility. As of January 28, 2023, borrowing capacity of the ABL Credit Facility was $2,935 million, which considers a $65 million reduction due to standby letters of credit outstanding and borrowing availability was $2,531 million, which considers a further $404 million reduction due to inventory levels and its impact on the ABL borrowing base.
| | | | | | | | | | | |
| 2022 | 2021 | 2020 |
Net cash provided by operating activities | $ | 1,615 | | $ | 2,712 | | $ | 649 | |
Net cash used by investing activities | (1,169) | | (370) | | (325) | |
Net cash provided (used) by financing activities | (1,296) | | (2,381) | | 699 | |
Operating Activities
Net cash provided by operating activities was $1,615 million in 2022 compared to $2,712 million in 2021. The decrease from 2021 to 2022 was mainly driven by lower adjusted EBITDA and a $582 million income tax refund as a result of the CARES Act received in 2021.
The Company's future material contractual obligations and commitments as it relates to operating activities as of January 28, 2023 are approximately $6.8 billion of operating lease obligations primarily due after 2027 and $2.6 billion of other obligations, primarily consisting of merchandise purchase obligations due in less than one year. Note 4 and Note 14 to the Financial Statements provide additional information on operating leases and other obligations, respectively.
Investing Activities
The Company's 2022 capital expenditures were $1,295 million, mainly driven by enhanced omni-channel capabilities, digital and technology, data and analytics, and supply chain modernization. The Company also opened ten new stores in 2022 across nameplates and formats, and continued to invest in its current stores.
The Company expects capital expenditures to be approximately $1.0 billion during 2023. The Company's spend will be primarily focused on initiatives that will accelerate our profitable growth, including digital and technology investments, data and analytics, supply chain modernization and omni-channel capabilities, including our growth vectors. These expenditures are expected to be financed with cash from operations and existing cash and cash equivalents. There can be no assurance that current expectations will be realized and plans are subject to change upon further review of capital expenditure needs or based on the current economic environment.
Financing Activities
Dividends
The Company paid dividends totaling $173 million in 2022 and $90 million in 2021. The Board of Directors declared regular quarterly dividends of 15.75 cents per share on the Company’s common stock, paid on April 1, 2022, July 1, 2022, October 3, 2022 and January 3, 2023, to Macy’s, Inc. shareholders of record at the close of business on March 15, 2022, June 15, 2022, September 15, 2022 and December 15, 2022, respectively.
On February 24, 2023, the Company's Board of Directors declared a regular quarterly dividend of 16.54 cents per share on its common stock, payable April 3, 2023, to shareholders of record at the close of business on March 15, 2023. Subsequent dividends will be subject to approval of the Board of Directors, which will depend on market and other conditions.
Stock Repurchases
The Company completed its 2021 $500 million share repurchase program by January 29, 2022. During 2021, the Company repurchased 20.5 million shares of its common stock, which represents more than 6.5% of shares outstanding, at an average cost of $24.40 per share.
On February 22, 2022, the Company announced that its Board of Directors authorized a new $2.0 billion share repurchase program, which does not have an expiration date. During 2022, the Company repurchased approximately 24.0 million shares of its common stock at an average cost of $24.98 per share for $600 million. As of January 28, 2023, $1.4 billion remains available under the authorization. Repurchases may be made from time to time in the open market or through privately negotiated transactions in accordance with applicable securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, on terms determined by the Company.
Debt Transactions
The Company completed the following debt transactions in 2022:
•On March 3, 2022, the Company entered into a third amendment to the ABL Credit Facility which provides for a new Revolving Credit Facility of $3.0 billion.
•On March 8, 2022, the Company completed a tender offer in which $8 million of certain senior secured notes were tendered for early settlement and the collateral that secured the remaining $352 million of the Company’s senior secured notes was automatically released.
•On March 10, 2022, the Company issued $425 million of senior notes due 2030 and $425 million of senior notes due 2032 in a private offering. Proceeds from the issuance, together with cash on hand, were used to redeem $1.1 billion of certain of its outstanding senior notes and pay fees and expenses in connection with the offering.
•The Company borrowed and repaid $1,959 million under the ABL Credit Facility in 2022. The Company had no outstanding borrowings under the ABL Credit Facility as of January 28, 2023.
At January 28, 2023, no notes or debentures contained provisions requiring acceleration of payment upon a debt rating downgrade. However, the terms of approximately $2,409 million in aggregate principal amount of the Company's senior notes outstanding at that date require the Company to offer to purchase such notes at a price equal to 101% of their principal amount plus accrued and unpaid interest if there is both a change of control (as defined in the applicable indenture) of the Company and the notes are rated by specified rating agencies at a level below investment grade.
The Company's future contractual obligations and commitments as it relates to financing activities as of January 28, 2023 are $3.0 billion of long-term debt obligations and $1.8 billion of related interest, $65 million of standby letters of credit and $24 million of finance lease obligations. Note 6 and Note 4 to the Financial Statements provide additional information on debt and finance leases, respectively.
As of January 28, 2023, the Company's credit rating and outlook were as described in the table below, reflecting the substantially improved credit profile of the Company.
| | | | | | | | | | | | | | | | | |
| Moody's | | Standard & Poor's | | Fitch |
Long-term debt | Ba1 | | BB+ | | BBB- |
Outlook | Stable | | Stable | | Stable |
Guarantor Summarized Financial Information
The Company has senior unsecured notes and senior unsecured debentures (collectively the Unsecured Notes) outstanding with an aggregate principal amount of $3,007 million outstanding as of January 28, 2023, with maturities ranging from 2025 to 2043. The Unsecured Notes constitute debt obligations of Macy's Retail Holdings, LLC (MRH, or Subsidiary Issuer), a 100%-owned subsidiary of Macy's, Inc. (Parent together with the Subsidiary Issuer are 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 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 the Obligor Group. Investments in subsidiaries of $9,146 million as of January 28, 2023 have been excluded from the Summarized Balance Sheets. Equity in the earnings of non-Guarantor subsidiaries of $2,169 million have been excluded from the Summarized Statement of Operations. The combined financial information of the Obligor Group is presented on a combined basis with intercompany balances and transactions within the Obligor Group eliminated.
Summarized Balance Sheet
| | | | | |
| January 28, 2023 |
| (in millions) |
ASSETS | |
Current Assets | $ | 1,154 | |
Noncurrent Assets | 8,261 | |
| |
LIABILITIES | |
Current Liabilities | $ | 1,958 | |
Noncurrent Liabilities (a) | 12,517 | |
a)Includes net amounts due to non-Guarantor subsidiaries of $6,784 million
Summarized Statement of Operations
| | | | | |
| 2022 |
| (in millions) |
Net Sales | $ | 1,012 | |
Consignment commission income (a) | 3,807 | |
Cost of sales | (488) | |
Operating loss | (894) | |
Loss before income taxes (b) | (135) | |
Net loss | 16 | |
a)Income pertains to transactions with ABL Borrower, a non-Guarantor subsidiary
b)Includes $1,008 million of dividend income from non-Guarantor subsidiaries
Important Information Regarding Non-GAAP Financial Measures
The Company reports its financial results in accordance with 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, which includes the impact of 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, on a comparable basis, and in evaluating the impact of changes in the manner in which certain departments are operated. Earnings (loss) before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP financial measure that the company believes provides meaningful information about its operational efficiency by excluding the impact of changes in tax law and structure, debt levels and capital investment. In addition, management believes that excluding certain items that are not associated with the Company's core operations and that may vary substantially in frequency and magnitude period-to-period from net income (loss), diluted earnings (loss) per share attributable to Macy's, Inc. shareholders and EBITDA provide useful supplemental measures that assist in evaluating the Company's ability to generate earnings and leverage sales, respectively, and to more readily compare these metrics between past and future periods. Management also believes that EBITDA and Adjusted EBITDA are frequently used by investors and securities analysts in their evaluations of companies, and that such supplemental measures facilitate comparisons between companies that have different capital and financing structures and/or tax rates. The Company uses certain non-GAAP financial measures as performance measures for components of executive compensation.
The Company does not provide reconciliations of the forward-looking non-GAAP measures of comparable owned plus licensed sales change, adjusted EBITDA, adjusted tax rate and adjusted diluted earnings per share to the most directly comparable forward-looking GAAP measures because the timing and amount of excluded items are unreasonably difficult to fully and accurately estimate. For the same reasons, the Company is unable to address the probable significance of the unavailable information, which could be material to future results.
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
The following is a tabular reconciliation of the non-GAAP financial measure of changes in comparable sales on an owned plus licensed basis, to GAAP comparable sales (i.e., on an owned basis), which the Company believes to be the most directly comparable GAAP financial measure.
| | | | | | | | | | | | | | | | | |
Macy's, Inc. | 52 Weeks Ended January 28, 2023 vs. 52 Weeks Ended January 29, 2022 | | 52 Weeks Ended January 29, 2022 vs. 52 Weeks Ended January 30, 2021 | | 52 Weeks Ended January 30, 2021 vs. 52 Weeks Ended February 1, 2020 |
Increase (decrease) in comparable sales on an owned basis (Note 1) | 0.3 | % | | 43.0 | % | | (27.9) | % |
Impact of growth in comparable sales of departments licensed to third parties (Note 2) | 0.3 | % | | (0.1) | % | | — | % |
Increase (decrease) in comparable sales on an owned plus licensed basis | 0.6 | % | | 42.9 | % | | (27.9) | % |
(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 a 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 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 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 adjusted net income (loss) to GAAP net income (loss) and adjusted diluted earnings (loss) per share to GAAP diluted earnings (loss) per share, which the Company believes to be the most directly comparable GAAP measures.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Net Income | | Diluted Earnings Per Share | | Net Income | | Diluted Earnings Per Share | | Net Income (Loss) | | Diluted Earnings (Loss) Per Share |
| (millions, except per share data) |
As reported | $ | 1,177 | | | $ | 4.19 | | | $ | 1,430 | | | $ | 4.55 | | | $ | (3,944) | | | $ | (12.68) | |
Impairment, restructuring and other costs | 41 | | | 0.15 | | | 30 | | | 0.10 | | | 3,579 | | | 11.50 | |
Settlement charges | 39 | | | 0.14 | | | 96 | | | 0.31 | | | 84 | | | 0.27 | |
Losses on early retirement of debt | 31 | | | 0.11 | | | 199 | | | 0.63 | | | — | | | — | |
Financing costs | — | | | — | | | — | | | — | | | 5 | | | 0.02 | |
Income tax impact of certain items identified above | (29) | | | (0.11) | | | (87) | | | (0.28) | | | (412) | | | (1.32) | |
As adjusted | $ | 1,259 | | | $ | 4.48 | | | $ | 1,668 | | | $ | 5.31 | | | $ | (688) | | | $ | (2.21) | |
EBITDA and Adjusted EBITDA
The following is a tabular reconciliation of the non-GAAP financial measure EBITDA and Adjusted EBITDA to GAAP net income, which the Company believes to be the most comparable GAAP measure.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (millions) |
Net income (loss) | $ | 1,177 | | | $ | 1,430 | | | $ | (3,944) | |
Interest expense - net | 162 | | | 255 | | | 280 | |
Losses on early retirement of debt | 31 | | | 199 | | | — | |
Financing costs | — | | | — | | | 5 | |
Federal, state and local income tax expense (benefit) | 341 | | | 436 | | | (846) | |
Depreciation and amortization | 857 | | | 874 | | | 959 | |
EBITDA | $ | 2,568 | | | $ | 3,194 | | | $ | (3,546) | |
Impairment, restructuring and other costs | 41 | | | 30 | | | 3,579 | |
Settlement charges | 39 | | | 96 | | | 84 | |
Adjusted EBITDA | $ | 2,648 | | | $ | 3,320 | | | $ | 117 | |
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on assumptions that we believe to be reasonable, and we continue to review and evaluate these estimates. For further information on significant accounting policies, see discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the last-in, first-out (LIFO) retail inventory method. Under the retail inventory method, inventory is segregated into departments of merchandise having similar characteristics and its cost value is derived from the current retail selling value. The retail inventory method inherently requires management judgments and estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation as well as gross margins.
Permanent markdowns designated for clearance activity are recorded when the utility of the inventory has diminished. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise and fashion trends. When a decision is made to permanently mark down merchandise, the resulting gross margin reduction is recognized in the period the markdown is recorded.
Long-Lived Asset Impairment and Restructuring Charges
The carrying values of long-lived assets, inclusive of right of use (ROU) assets, are periodically reviewed by the Company whenever events or changes in circumstances indicate that the carrying value may not be recoverable, such as historical operating losses or plans to close stores before the end of their previously estimated useful lives. Additionally, on an annual basis, the recoverability of the carrying values of individual stores is evaluated. A potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management's assumptions of cash inflows and outflows directly resulting from the use of those assets in operations. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long-lived asset exceeds its fair value. The Company believes its estimated cash flows are sufficient to support the carrying value of its long-lived assets. If estimated cash flows significantly differ in the future, the Company may be required to record asset impairment write-downs.
If the Company commits to a plan to dispose of a long-lived asset before the end of its previously estimated useful life or changes its use of corporate assets, estimated cash flows are revised accordingly, and the Company may be required to record an asset impairment charge. Additionally, related liabilities arise such as severance, contractual obligations and other accruals associated with store closings from decisions to dispose of assets. The Company estimates these liabilities based on the facts and circumstances in existence for each restructuring decision. The amounts the Company will ultimately realize or disburse could differ from the amounts assumed in arriving at the asset impairment and restructuring charge recorded.
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 January 28, 2023, and 98% of the Company's goodwill is allocated to the Macy's reporting unit.
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 projected sales, gross margin and SG&A expense 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.
For the Company's annual impairment assessment as of the end of fiscal May 2022 and 2021, 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.
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.
Income Taxes
Income taxes are estimated based on the tax statutes, regulations and case law of the various jurisdictions in which the Company operates. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets are evaluated for recoverability based on all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. Deferred income tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred income tax assets will not be realized.
Uncertain tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Uncertain tax positions meeting the more-likely-than-not recognition threshold are then measured to determine the amount of benefit eligible for recognition in the financial statements. Each uncertain tax position is measured at the largest amount of benefit that is more likely than not to be realized upon ultimate settlement.
Uncertain tax positions are evaluated and adjusted as appropriate, while taking into account the progress of audits of various taxing jurisdictions. Resolution of these matters could have a material impact on the Company's consolidated financial position, results of operations or cash flows.
Significant judgment is required in evaluating the Company's uncertain tax positions, provision for income taxes, and any valuation allowance recorded against deferred tax assets. Although the Company believes that its judgments are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the Company's historical income provisions and accruals.
Pension and Supplementary Retirement Plans
The Company has a funded defined benefit pension plan (the Pension Plan) and an unfunded defined benefit supplementary retirement plan (the SERP). The Company accounts for these plans in accordance with ASC Topic 715, Compensation - Retirement Benefits. Under ASC Topic 715, an employer recognizes the funded status of a defined benefit postretirement plan as an asset or liability on the balance sheet and recognizes changes in that funded status in the year in which the changes occur through comprehensive income (loss). Additionally, pension expense is generally recognized on an accrual basis over the average remaining lifetime of participants. The pension expense calculation is generally independent of funding decisions or requirements.
The Pension Protection Act of 2006 provides the funding requirements for the Pension Plan which are different from the employer's accounting for the plan as outlined in ASC Topic 715. No funding contributions were required, and the Company made no funding contributions to the Pension Plan in 2022 and 2021. As of the date of this report, the Company does not anticipate making funding contributions to the Pension Plan in 2023.
The calculation of pension expense and pension liabilities requires the use of a number of assumptions. Changes in these assumptions can result in different expense and liability amounts, and future actual experience may differ significantly from current expectations. The Company believes that the most critical assumptions relate to the long-term rate of return on plan assets (in the case of the Pension Plan) and the discount rate used to determine the present value of projected benefit obligations.
The Company's assumed annual long-term rate of return for the Pension Plan's assets was 4.60% for 2022, 5.75% for 2021 and 6.25% for 2020 based on expected future returns on the portfolio of assets. As of January 28, 2023, the Company increased the assumed annual long-term rate of return for the Pension Plan's assets from 4.60% to 5.30% based on expected future returns on the portfolio of assets. The Company develops its expected long-term rate of return assumption by evaluating input from several professional advisors taking into account the asset allocation of the portfolio and long-term asset class return expectations, as well as long-term inflation assumptions. Pension expense increases or decreases as the expected rate of return on the assets of the Pension Plan decreases or increases, respectively. Lowering or raising the expected long-term rate of return assumption on the Pension Plan's assets by 0.25% would increase or decrease the estimated 2023 pension expense by approximately $6 million.
The Company discounted its future pension obligations using a weighted-average rate of 4.73% at January 28, 2023 and 3.06% at January 29, 2022 for the Pension Plan and 4.74% at January 28, 2023 and 3.10% at January 29, 2022 for the SERP. The discount rate used to determine the present value of the Company's Pension Plan and SERP obligations is based on a yield curve constructed from a portfolio of high quality corporate debt securities with various maturities. Each year's expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate for Pension Plan and SERP obligations. As the discount rate is reduced or increased, the pension liability would increase or decrease, respectively, and future pension expense would decrease or increase, respectively. Lowering the discount rates by 0.25% would increase the projected benefit obligations at January 28, 2023 by approximately $49 million and would decrease estimated 2023 pension expense by approximately $2 million. Increasing the discount rates by 0.25% would decrease the projected benefit obligations at January 28, 2023 by approximately $46 million and would increase estimated 2023 pension expense by approximately $2 million.
The Company estimates the service and interest cost components of net periodic benefit costs for the Pension Plan and SERP. This method uses a full yield curve approach in the estimation of these components of net periodic benefit costs. Under this approach, the Company applies discounting using individual spot rates from the yield curve composed of the rates of return from a portfolio of high quality corporate debt securities available at the measurement date. These spot rates align to each of the projected benefit obligation and service cost cash flows.
Item 8. Financial Statements and Supplementary Data.
Information called for by this item is set forth in the Company’s Consolidated Financial Statements and supplementary data contained in this report and is incorporated herein by this reference. Specific financial statements and supplementary data can be found at the pages listed in the following index:
INDEX
REPORT OF MANAGEMENT
To the Shareholders of Macy’s, Inc.:
The integrity and consistency of the Consolidated Financial Statements of Macy’s, Inc. and subsidiaries, which were prepared in accordance with accounting principles generally accepted in the United States of America, are the responsibility of management and properly include some amounts that are based upon estimates and judgments.
The Company maintains a system of internal accounting controls, which is supported by a program of internal audits with appropriate management follow-up action, to provide reasonable assurance, at appropriate cost, that the Company’s assets are protected and transactions are properly recorded. Additionally, the integrity of the financial accounting system is based on careful selection and training of qualified personnel, organizational arrangements which provide for appropriate division of responsibilities and communication of established written policies and procedures.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) and has issued Management’s Report on Internal Control over Financial Reporting.
The Consolidated Financial Statements of the Company have been audited by KPMG LLP. Their report expresses their opinion as to the fair presentation, in all material respects, of the financial statements and is based upon their independent audits.
The Audit Committee, composed solely of outside directors, meets periodically with KPMG LLP, the internal auditors and representatives of management to discuss auditing and financial reporting matters. In addition, KPMG LLP and the Company’s internal auditors meet periodically with the Audit Committee without management representatives present and have free access to the Audit Committee at any time. The Audit Committee is responsible for recommending to the Board of Directors the engagement of the independent registered public accounting firm and the general oversight review of management’s discharge of its responsibilities with respect to the matters referred to above.
Jeff Gennette
Chief Executive Officer, Chairman of the Board and Director
Adrian V. Mitchell
Executive Vice President and Chief Financial Officer
Paul Griscom
Senior Vice President, Controller
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Macy's, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Macy's, Inc. and subsidiaries (the Company) as of January 28, 2023 and January 29, 2022, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended January 28, 2023, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of January 28, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 28, 2023 and January 29, 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended January 28, 2023, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2023 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Merchandise inventories
As discussed in Note 1, merchandise inventories are valued at the lower of cost or market using the last-in, first-out retail inventory method. Under the retail inventory method, inventory is segregated into departments of merchandise having similar characteristics. Inventory retail values are converted to cost basis by applying specific average cost factors for each merchandise department. The calculation includes a number of inputs including the retail value of inventory and adjustments to inventory costs such as mark down allowances, shrinkage and permanent markdowns. The Company’s merchandise inventories were $4,267 million as of January 28, 2023.
We identified the sufficiency of audit evidence over the information technology (IT) elements of merchandise inventories as a critical audit matter. Complex auditor judgment was required to evaluate the sufficiency of audit evidence obtained due to the highly automated nature of the process to record merchandise inventories that involves interfacing significant volumes of data across multiple IT systems. IT professionals with specialized skills and knowledge were required to assess the Company’s IT systems used in the merchandise inventories process.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the merchandise inventories process. This included IT dependent controls, application controls, general IT controls, and interface controls over the data transfers between systems. We involved IT professionals with specialized skills and knowledge, who assisted in the identification and testing of certain IT systems used by the Company for calculating merchandise inventories and reconciling information produced by various systems to the Company’s general ledger. On a sample basis, we tested certain inputs used in the calculation of merchandise inventories, including comparing to vendor invoices, cash receipts, and vendor confirmations, and observed inventory, including comparing prices to the inventory records. We assessed the sufficiency of audit evidence obtained related to merchandise inventories by evaluating the cumulative results of the audit procedures.
/s/ KPMG LLP
We have served as the Company’s auditor since 1988.
Cincinnati, Ohio
March 24, 2023
| | |
MACY’S, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (millions, except per share data) |
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Net sales | $ | 24,442 | | | $ | 24,460 | | | $ | 17,346 | |
Credit card revenues, net | 863 | | | 832 | | | 751 | |
Cost of sales | (15,306) | | | (14,956) | | | (12,286) | |
Selling, general and administrative expenses | (8,317) | | | (8,047) | | | (6,767) | |
Gains on sale of real estate | 89 | | | 91 | | | 60 | |
Restructuring, impairment, store closing and other costs | (41) | | | (30) | | | (3,579) | |
Operating income (loss) | 1,730 | | | 2,350 | | | (4,475) | |
Benefit plan income, net | 20 | | | 66 | | | 54 | |
Settlement charges | (39) | | | (96) | | | (84) | |
Interest expense | (175) | | | (256) | | | (284) | |
Financing costs | — | | | — | | | (5) | |
Losses on early retirement of debt | (31) | | | (199) | | | — | |
Interest income | 13 | | | 1 | | | 4 | |
Income (loss) before income taxes | 1,518 | | | 1,866 | | | (4,790) | |
Federal, state and local income tax benefit (expense) | (341) | | | (436) | | | 846 | |
Net income (loss) | $ | 1,177 | | | $ | 1,430 | | | $ | (3,944) | |
Basic earnings (loss) per share | $ | 4.28 | | | $ | 4.66 | | | $ | (12.68) | |
Diluted earnings (loss) per share | $ | 4.19 | | | $ | 4.55 | | | $ | (12.68) | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
| | |
MACY’S, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (millions) |
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Net income (loss) | $ | 1,177 | | | $ | 1,430 | | | $ | (3,944) | |
Other comprehensive income (loss), net of taxes: | | | | | |
Net actuarial gain (loss) and prior service credit on post employment and postretirement benefit plans, net of tax effect of $(12) million, $23 million and $37 million | (38) | | | 69 | | | 107 | |
Reclassifications to net income (loss): | | | | | |
Net actuarial loss and prior service cost on post employment and postretirement benefit plans, net of tax effect of $4 million, $9 million and $12 million | 13 | | | 25 | | | 35 | |
Settlement charges, net of tax effect of $10 million, $24 million and $22 million | 29 | | | 72 | | | 62 | |
Total other comprehensive income | 4 | | | 166 | | | 204 | |
Comprehensive income (loss) | $ | 1,181 | | | $ | 1,596 | | | $ | (3,740) | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
| | |
MACY’S, INC. CONSOLIDATED BALANCE SHEETS (millions) |
| | | | | | | | | | | |
| January 28, 2023 | | January 29, 2022 |
ASSETS | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 862 | | | $ | 1,712 | |
Receivables | 300 | | | 297 | |
Merchandise inventories | 4,267 | | | 4,383 | |
Prepaid expenses and other current assets | 424 | | | 366 | |
Total Current Assets | 5,853 | | | 6,758 | |
Property and Equipment – net | 5,913 | | | 5,665 | |
Right of Use Assets | 2,683 | | | 2,808 | |
Goodwill | 828 | | | 828 | |
Other Intangible Assets – net | 432 | | | 435 | |
Other Assets | 1,157 | | | 1,096 | |
Total Assets | $ | 16,866 | | | $ | 17,590 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current Liabilities: | | | |
| | | |
Merchandise accounts payable | $ | 2,053 | | | $ | 2,222 | |
Accounts payable and accrued liabilities | 2,750 | | | 3,086 | |
Income taxes | 58 | | | 108 | |
Total Current Liabilities | 4,861 | | | 5,416 | |
Long-Term Debt | 2,996 | | | 3,295 | |
Long-Term Lease Liabilities | 2,963 | | | 3,098 | |
Deferred Income Taxes | 947 | | | 983 | |
Other Liabilities | 1,017 | | | 1,177 | |
Shareholders’ Equity: | | | |
Common stock (271.3 and 292.4 shares outstanding) | 3 | | | 3 | |
Additional paid-in capital | 467 | | | 517 | |
Accumulated equity | 6,268 | | | 5,268 | |
Treasury stock | (2,038) | | | (1,545) | |
Accumulated other comprehensive loss | (618) | | | (622) | |
Total Shareholders' Equity | 4,082 | | | 3,621 | |
Total Liabilities and Shareholders’ Equity | $ | 16,866 | | | $ | 17,590 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
| | |
MACY’S, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (millions) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Equity | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders’ Equity |
Balance at February 1, 2020 | $ | 3 | | | $ | 621 | | | $ | 7,989 | | | $ | (1,241) | | | $ | (995) | | | $ | 6,377 | |
Net loss | | | | | | | (3,944) | | | | | | | | | (3,944) | |
Other comprehensive income | | | | | | | | | | | | | 204 | | | 204 | |
Common stock dividends ($0.3775 per share) | | | | | | | (117) | | | | | | | | | (117) | |
Stock-based compensation expense | | | | 31 | | | | | | | | | | | | 31 | |
Stock issued under stock plans | | | | (81) | | | | | | 80 | | | | | | (1) | |
Other | | | | | | | | | | | | | 3 | | | 3 | |
Balance at January 30, 2021 | 3 | | | 571 | | | 3,928 | | | (1,161) | | | (788) | | | 2,553 | |
Net income | | | | | | | 1,430 | | | | | | | | | 1,430 | |
Other comprehensive income | | | | | | | | | | | | | 166 | | | 166 | |
Common stock dividends ($0.30 per share) | | | | | | | (90) | | | | | | | | | (90) | |
Stock repurchases | | | | | | | | | (500) | | | | | | (500) | |
Stock-based compensation expense | | | | 55 | | | | | | | | | | | | 55 | |
Stock issued under stock plans | | | | (109) | | | | | | 116 | | | | | | 7 | |
Balance at January 29, 2022 | 3 | | | 517 | | | 5,268 | | | (1,545) | | | (622) | | | 3,621 | |
Net income | | | | | | | 1,177 | | | | | | | | | 1,177 | |
Other comprehensive income | | | | | | | | | | | | | 4 | | | 4 | |
Common stock dividends ($0.63 per share) | | | | 4 | | | (177) | | | | | | | | | (173) | |
Stock repurchases | | | | | | | | | | (601) | | | | | | (601) | |
Stock-based compensation expense | | | | 54 | | | | | | | | | | | | 54 | |
Stock issued under stock plans | | | | (108) | | | | | | 108 | | | | | | — | |
Balance at January 28, 2023 | $ | 3 | | | $ | 467 | | | $ | 6,268 | | | $ | (2,038) | | | $ | (618) | | | $ | 4,082 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
| | |
MACY’S, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (millions) |
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | |
Net income (loss) | $ | 1,177 | | | $ | 1,430 | | | $ | (3,944) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
Impairment, restructuring and other costs | 41 | | | 30 | | | 3,579 | |
Settlement charges | 39 | | | 96 | | | 84 | |
Depreciation and amortization | 857 | | | 874 | | | 959 | |
Benefit plans | 17 | | | 34 | | | 47 | |
Stock-based compensation expense | 54 | | | 55 | | | 31 | |
Gains on sale of real estate | (89) | | | (91) | | | (60) | |
Deferred income taxes | (38) | | | 19 | | | (327) | |
Amortization of financing costs and premium on acquired debt | 11 | | | 70 | | | 18 | |
Changes in assets and liabilities: | | | | | |
(Increase) decrease in receivables | (3) | | | (21) | | | 132 | |
(Increase) decrease in merchandise inventories | 116 | | | (610) | | | 1,406 | |
(Increase) decrease in prepaid expenses and other current assets | (66) | | | (39) | | | 51 | |
Increase (decrease) in merchandise accounts payable | (129) | | | 218 | | | 237 | |
Increase (decrease) in accounts payable and accrued liabilities | (174) | | | 245 | | | (759) | |
Increase (decrease) in current income taxes | (75) | | | 588 | | | (617) | |
Change in other assets and liabilities | (123) | | | (186) | | | (188) | |
Net cash provided by operating activities | 1,615 | | | 2,712 | | | 649 | |
Cash flows from investing activities: | | | | | |
Purchase of property and equipment | (888) | | | (354) | | | (338) | |
Capitalized software | (407) | | | (243) | | | (128) | |
Disposition of property and equipment | 137 | | | 164 | | | 113 | |
Other, net | (11) | | | 63 | | | 28 | |
Net cash used by investing activities | (1,169) | | | (370) | | | (325) | |
Cash flows from financing activities: | | | | | |
Debt issued | 2,809 | | | 1,085 | | | 2,780 | |
Debt issuance costs | (21) | | | (9) | | | (95) | |
Debt repaid | (3,100) | | | (2,699) | | | (2,042) | |
Debt repurchase premium and expenses | (29) | | | (152) | | | (7) | |
Dividends paid | (173) | | | (90) | | | (117) | |
Increase (decrease) in outstanding checks | (181) | | | (23) | | | 181 | |
Acquisition of treasury stock | (601) | | | (500) | | | (1) | |
Issuance of common stock | — | | | 7 | | | — | |
Net cash provided (used) by financing activities | (1,296) | | | (2,381) | | | 699 | |
Net increase (decrease) in cash, cash equivalents and restricted cash | (850) | | | (39) | | | 1,023 | |
Cash, cash equivalents and restricted cash beginning of period | 1,715 | | | 1,754 | | | 731 | |
Cash, cash equivalents and restricted cash end of period | $ | 865 | | | $ | 1,715 | | | $ | 1,754 | |
Supplemental cash flow information: | | | | | |
Interest paid | $ | 188 | | | $ | 442 | | | $ | 257 | |
Interest received | 9 | | | 1 | | | 5 | |
Income taxes paid (received), net | 455 | | | (171) | | | 98 | |
Restricted cash, end of period | 3 | | | 3 | | | 75 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
1. Organization and Summary of Significant Accounting Policies
Nature of Operations
Macy's, Inc., together with its subsidiaries (the Company), is an omni-channel retail organization operating stores, websites and mobile applications under three brands (Macy's, Bloomingdale's and bluemercury) that sell a wide range of merchandise, including apparel and accessories (men's, women's and kids'), cosmetics, home furnishings and other consumer goods. The Company has stores in 43 states, the District of Columbia, Puerto Rico and Guam. As of January 28, 2023, the Company's operations and operating segments were conducted through Macy's, Market by Macy's, Macy's Backstage, Bloomingdale's, Bloomingdale's The Outlet, Bloomies, and bluemercury, which are aggregated into one reporting segment. The metrics used by management to assess the performance of the Company's operating divisions include sales trends, gross margin rates, expense rates, and rates of earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation and amortization (EBITDA). The Company's operating divisions have historically had similar economic characteristics and are expected to have similar economic characteristics and long-term financial performance in future periods.
Bloomingdale's in Dubai, United Arab Emirates and Al Zahra, Kuwait are operated under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years 2022, 2021 and 2020 ended on January 28, 2023, January 29, 2022 and January 30, 2021, respectively, and included 52 weeks. References to years in the Consolidated Financial Statements relate to fiscal years rather than calendar years.
Basis of Presentation
The Consolidated Financial Statements include the accounts of Macy's, Inc. and its 100%-owned subsidiaries.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions are subject to inherent uncertainties that may result in actual amounts differing from reported amounts.
Reclassifications
Certain reclassifications were made to prior years' amounts to conform with the classifications of such amounts in the most recent years.
Net Sales
Revenue is recognized when customers obtain control of goods and services promised by the Company. The amount of revenue recognized is based on the amount that reflects the consideration that is expected to be received in exchange for those respective goods and services. See Note 2, Revenue, for further discussion of the Company's accounting policies for revenue from contracts with customers.
Cost of Sales
Cost of sales consists of the cost of merchandise, including inbound freight, shipping and handling costs, and depreciation. An estimated allowance for future sales returns is recorded and cost of sales is adjusted accordingly.
Cash and Cash Equivalents
Cash and cash equivalents include cash and liquid investments with original maturities of three months or less. Cash and cash equivalents includes amounts due in respect of credit card sales transactions that are settled early in the following period in the amount of $112 million at January 28, 2023 and $102 million at January 29, 2022.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Investments
The Company from time to time invests in debt and equity securities, including companies engaged in complementary businesses. Debt and equity securities held by the Company are accounted for at fair value if classified as trading or available-for-sale. Unrealized holding gains and losses on trading securities and equity securities with a readily determinable fair value are recognized in the Consolidated Statements of Operations. Equity securities without a readily determinable fair value are generally recorded at cost and subsequently adjusted, in net income, for observable price changes (i.e., prices in orderly transactions for the identical investment or similar investment of the same issuer).
Receivables
Receivables were $300 million at January 28, 2023, compared to $297 million at January 29, 2022.
The Company and Citibank, the owner of most of the Company's credit assets, are party to a long-term marketing and servicing alliance pursuant to the terms of the Program Agreement. Income earned under the Program Agreement is treated as credit card revenues, net on the Consolidated Statements of Operations. Under the Program Agreement, Citibank offers proprietary and non-proprietary credit cards to the Company’s customers.
Merchandise Inventories
Merchandise inventories are valued at lower of cost or market using the last-in, first-out (LIFO) retail inventory method. Under the retail inventory method, inventory is segregated into departments of merchandise having similar characteristics, and its cost value is derived from the current retail selling value. Inventory retail values are converted to a cost basis by applying specific average cost factors for each merchandise department. Cost factors represent the average cost-to-retail ratio for each merchandise department based on beginning inventory and the annual purchase activity. At January 28, 2023 and January 29, 2022, merchandise inventories valued at LIFO, including adjustments as necessary to record inventory at the lower of cost or market, approximated the cost of such inventories using the first-in, first-out (FIFO) retail inventory method. The application of the LIFO retail inventory method did not result in the recognition of any LIFO charges or credits affecting cost of sales for 2022, 2021 or 2020. The retail inventory method inherently requires management judgments and estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation as well as gross margins.
Permanent markdowns designated for clearance activity are recorded when the utility of the inventory has diminished. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise and fashion trends. When a decision is made to permanently markdown merchandise, the resulting gross margin reduction is recognized in the period the markdown is recorded.
Physical inventories are generally taken within each merchandise department annually, and inventory records are adjusted accordingly, resulting in the recording of actual shrinkage. Physical inventories are taken at all store locations for substantially all merchandise categories approximately three weeks before the end of the year. Shrinkage is estimated as a percentage of sales at interim periods and for this approximate three-week period, based on historical shrinkage rates. While it is not possible to quantify the impact from each cause of shrinkage, the Company has loss prevention programs and policies that are intended to minimize shrinkage, including the use of radio frequency identification cycle counts and interim inventories to keep the Company's merchandise files accurate.
Vendor Allowances
The Company receives certain allowances as reimbursement for markdowns taken and/or to support the gross margins earned in connection with the sales of merchandise. These allowances are recognized when earned. The Company also receives advertising allowances from approximately 282 of its merchandise vendors pursuant to cooperative advertising programs, with some vendors participating in multiple programs. These allowances represent reimbursements by vendors of costs incurred by the Company to promote the vendors' merchandise and are netted against advertising and promotional costs when the related costs are incurred. Advertising allowances in excess of costs incurred are recorded as a reduction of merchandise costs and, ultimately, through cost of sales when the merchandise is sold.
The arrangements pursuant to which the Company's vendors provide allowances, while binding, are generally informal in nature and one year or less in duration. The terms and conditions of these arrangements vary significantly from vendor to vendor and are influenced by, among other things, the type of merchandise to be supported.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Advertising
Advertising and promotional costs are generally expensed at first showing. Advertising and promotional costs and cooperative advertising allowances were as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (millions) |
Gross advertising and promotional costs | $ | 1,265 | | | $ | 1,267 | | | $ | 907 | |
Cooperative advertising allowances | 102 | | | 90 | | | 89 | |
Advertising and promotional costs, net of cooperative advertising allowances | $ | 1,163 | | | $ | 1,177 | | | $ | 818 | |
Net sales | $ | 24,442 | | | $ | 24,460 | | | $ | 17,346 | |
Advertising and promotional costs, net of cooperative advertising allowances, as a percent to net sales | 4.8 | % | | 4.8 | % | | 4.7 | % |
Property and Equipment
Depreciation of owned properties is provided primarily on a straight-line basis over the estimated asset lives, which range from fifteen to fifty years for buildings and building equipment and three to fifteen years for fixtures and equipment. Real estate taxes and interest on construction in progress and land under development are capitalized. Amounts capitalized are amortized over the estimated lives of the related depreciable assets. The Company receives contributions from developers and merchandise vendors to fund building improvements and the construction of vendor shops. Such contributions are generally netted against the capital expenditures.
Buildings on leased land and leasehold improvements are amortized over the shorter of their economic lives or the lease term, beginning on the date the asset is put into use.
The carrying value of long-lived assets, inclusive of ROU assets, is periodically reviewed by the Company whenever events or changes in circumstances indicate that a potential impairment has occurred. For long-lived assets held for use, a potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management's assumptions of cash inflows and outflows directly resulting from the use of those assets in operations. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long-lived asset exceeds its fair value. The Company believes its estimated cash flows are sufficient to support the carrying value of its long-lived assets. If estimated cash flows significantly differ in the future, the Company may be required to record asset impairment write-downs.
If the Company commits to a plan to dispose of a long-lived asset before the end of its previously estimated useful life, estimated cash flows are revised accordingly, and the Company may be required to record an asset impairment write- down. Additionally, related liabilities arise such as severance, contractual obligations and other accruals associated with store closings from decisions to dispose of assets. The Company estimates these liabilities based on the facts and circumstances in existence for each restructuring decision. The amounts the Company will ultimately realize or disburse could differ from the amounts assumed in arriving at the asset impairment and restructuring charge recorded.
The Company classifies certain long-lived assets as held for disposal by sale and ceases depreciation when the particular criteria for such classification are met, including the probable sale within one year. For long-lived assets to be disposed of by sale, an impairment charge is recorded if the carrying amount of the asset exceeds its fair value less costs to sell. Such valuations include estimations of fair values and incremental direct costs to transact a sale.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Leases
Operating lease liabilities are recognized at the lease commencement date based on the present value of the fixed lease payments using the Company's incremental borrowing rates for its population of leases. Related operating ROU assets are recognized based on the initial present value of the fixed lease payments, reduced by contributions from landlords, plus any prepaid rent and direct costs from executing the leases. ROU assets are tested for impairment in the same manner as long-lived assets. Certain of the Company’s real estate leases have terms that extend for a significant number of years and provide for rental rates that increase or decrease over time. Lease terms include the noncancellable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods, termination options and purchase options. Lease agreements with lease and non-lease components are combined as a single lease component for all classes of underlying assets.
Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Variable lease payments are recognized as lease expense as they are incurred.
Goodwill and Other Intangible Assets
The carrying value of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment. Goodwill and other intangible assets with indefinite lives have been assigned to reporting units for purposes of impairment testing. The reporting units are the Company's retail operating divisions. Goodwill and other intangible assets with indefinite lives are tested for impairment annually at the end of the fiscal month of May.
The Company evaluates qualitative factors to determine if it is more likely than not that the fair value of a reporting unit or other intangible assets with indefinite lives is less than its carrying value and whether it is necessary to perform the quantitative impairment test. If required, the Company performs a quantitative impairment test which involves a comparison of each reporting unit's or other intangible assets with indefinite lives' fair values to its carrying value. Estimating the fair values of the reporting units or other intangible assets with indefinite lives involves the use of significant assumptions, estimates and judgments with respect to a variety of factors, including sales, gross margin and SG&A expense 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. The 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 estimates of fair value of reporting units or other intangible assets with indefinite lives are based on the best information available as of the date of the assessment. 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.
Capitalized Software
The Company capitalizes purchased and internally-developed software as well as implementation costs associated with cloud computing arrangements and amortizes such costs to expense on a straight-line basis generally over four to five years. Capitalized software is included in other assets on the Consolidated Balance Sheets.
Gift Cards
The Company only offers no-fee, non-expiring gift cards to its customers. At the time gift cards are sold or issued, no revenue is recognized; rather, the Company records an accrued liability to customers. The liability is relieved and revenue is recognized equal to the amount redeemed for merchandise. The Company records revenue from unredeemed gift cards (breakage) in net sales on a pro-rata basis over the time period gift cards are actually redeemed. At least three years of historical data, updated annually, is used to determine actual redemption patterns. The Company records breakage income within net sales on the Consolidated Statements of Operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Loyalty Programs
The Company maintains customer loyalty programs in which customers earn points based on their purchases. Under the Macy's Star Rewards loyalty program, points are earned based on customers' spending on Macy's private label and co-branded credit cards as well as non-proprietary cards and other forms of tender. The Company's Bloomingdale's Loyallist and bluemercury BlueRewards programs provide tender neutral points-based programs to their customers. The Company recognizes the estimated net amount of the rewards that will be earned and redeemed as a reduction to net sales at the time of the initial transaction and as tender when the points are subsequently redeemed by a customer.
Self-Insurance Reserves
The Company, through its insurance subsidiary, is self-insured for workers compensation and general liability claims up to certain maximum liability amounts. Although the amounts accrued are actuarially determined based on analysis of historical trends of losses, settlements, litigation costs and other factors, the amounts the Company will ultimately disburse could differ from such accrued amounts.
Post Employment Obligations
The Company, through its actuaries, utilizes assumptions when estimating the liabilities for pension and other employee benefit plans. These assumptions, where applicable, include the discount rates used to determine the actuarial present value of projected benefit obligations, the rate of increase in future compensation levels, mortality rates and the long-term rate of return on assets. The Company measures post employment assets and obligations using the month-end that is closest to the Company's fiscal year-end or an interim period quarter-end if a plan is determined to qualify for a remeasurement. The benefit expense is generally recognized in the Consolidated Financial Statements on an accrual basis over the average remaining lifetime of participants, and the accrued benefits are reported in other assets, accounts payable and accrued liabilities and other liabilities on the Consolidated Balance Sheets, as appropriate.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the Consolidated Statements of Operations in the period that includes the enactment date. Deferred income tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred income tax assets will not be realized.
Stock Based Compensation
The Company records stock-based compensation expense for awards that include share-based payments to employees, including grants of employee stock options, in accordance with their fair values. The Company determines the appropriate fair value model to be used for valuing share-based payments and the amortization method for compensation cost based on nature of the award.
Comprehensive Income (Loss)
Total comprehensive income (loss) represents the change in equity during a period from sources other than transactions with shareholders and, as such, includes net income (loss). For the Company, the only other components of total comprehensive income (loss) for 2022, 2021 and 2020 relate to post employment and postretirement plan items. Settlement charges incurred are included as a separate component of income before income taxes in the Consolidated Statements of Operations. Amortization reclassifications out of accumulated other comprehensive loss are included in the computation of net periodic benefit cost (income) and are included in benefit plan income, net on the Consolidated Statements of Operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recent Accounting Pronouncements
In September 2022, the FASB issued ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations (ASU 2022-04), which requires entities to disclose the key terms of supplier finance programs they use in connection with the purchase of goods and services, along with the amount of obligations outstanding at the end of each period and an annual rollforward of such obligations. ASU 2022-04 is effective for the Company beginning in the fiscal year ending February 3, 2024. The effect of the adoption of ASU 2022-04 is not expected to be material to the Company’s consolidated financial statements.
2. Revenue
Net sales
Macy's accounted for approximately 87%, 88%, and 89% of the Company's net sales for 2022, 2021 and 2020, respectively. In addition, digital sales accounted for approximately 33%, 35% and 44% of net sales in 2022, 2021 and 2020, respectively. Disaggregation of the Company's net sales by family of business for 2022, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | |
Net sales by family of business | 2022 | | 2021 | | 2020 |
| (millions) |
Women’s Accessories, Shoes, Cosmetics and Fragrances | $ | 9,597 | | | $ | 9,385 | | | $ | 6,667 | |
Women’s Apparel | 5,349 | | | 5,174 | | | 3,454 | |
Men’s and Kids’ | 5,297 | | | 5,247 | | | 3,477 | |
Home/Other (a) | 4,199 | | | 4,654 | | | 3,748 | |
Total | $ | 24,442 | | | $ | 24,460 | | | $ | 17,346 | |
(a)Other primarily includes restaurant sales, allowance for merchandise returns adjustments and breakage income from unredeemed gift cards.
Retail Sales
Retail sales include merchandise sales, inclusive of delivery income, licensed department income, sales of private brand goods directly to third party retailers and sales of excess inventory to third parties. Sales of merchandise are recorded at point of sale for in-store purchases or at the time of shipment to the customer for digital purchases and are reported net of estimated merchandise returns and certain customer incentives. Commissions earned on sales generated by licensed departments are included as a component of total net sales and are recognized as revenue at the time merchandise is sold to customers. Service revenues (e.g., alteration and cosmetic services) are recorded at the time the customer receives the benefit of the service. The Company has elected to present sales taxes on a net basis and, as such, sales taxes are included in accounts payable and accrued liabilities until remitted to the taxing authorities.
Merchandise Returns
The Company estimates merchandise returns using historical data and recognizes an allowance that reduces net sales and cost of sales. The liability for merchandise returns is included in accounts payable and accrued liabilities on the Company's Consolidated Balance Sheets and was $236 million as of January 28, 2023 and $198 million as of January 29, 2022. Included in prepaid expenses and other current assets is an asset totaling $152 million as of January 28, 2023 and $120 million as of January 29, 2022, for the recoverable cost of merchandise estimated to be returned by customers.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Gift Cards and Customer Loyalty Programs
The liability for unredeemed gift cards and customer loyalty programs is included in accounts payable and accrued liabilities on the Company's Consolidated Balance Sheets and was $399 million as of January 28, 2023, and $481 million as of January 29, 2022. During 2022 and 2021, the Company recognized approximately $15 million and $26 million, respectively, in breakage income related to changes in breakage rate estimates. Changes in the liability for unredeemed gift cards and customer loyalty programs are as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (millions) |
Balance, beginning of year | $ | 481 | | | $ | 616 | | | $ | 839 | |
Liabilities issued but not redeemed (a) | 324 | | | 394 | | | 262 | |
Revenue recognized from beginning liability | (406) | | | (529) | | | (485) | |
Balance, end of year | $ | 399 | | | $ | 481 | | | $ | 616 | |
(a)Net of estimated breakage income.
Credit Card Revenues, net
In 2005, in connection with the sale of most of the Company's credit card accounts and related receivable balances to Citibank, the Company and Citibank entered into a long-term marketing and servicing alliance pursuant to the terms of a Credit Card Program Agreement (Credit Card Program). Subsequent to this initial arrangement and associated amendments, on December 13, 2021, the Company entered into the sixth amendment to the amended and restated Credit Card Program with Citibank (the Program Agreement). The changes to the Credit Card Program's financial structure are not materially different from its previous terms. As part of the Program Agreement, the Company receives payments for providing a combination of interrelated services and intellectual property to Citibank in support of the underlying Credit Card Program. Revenue based on the spending activity of the underlying accounts is recognized as the respective card purchases occur and the Company's profit share is recognized based on the performance of the underlying portfolio. Revenue associated with the establishment of new credit accounts and assisting in the receipt of payments for existing accounts is recognized as such activities occur. Credit card revenues include finance charges, late fees and other revenue generated by the Company’s Credit Card Program, net of fraud losses and expenses associated with establishing new accounts, credit card funding costs and bad debt reserves.
The Program Agreement expires March 31, 2030, subject to an additional renewal term of three years. The Program Agreement provides for, among other things, (i) the ownership by Citibank of the accounts purchased by Citibank, (ii) the ownership by Citibank of new accounts opened by the Company's customers, (iii) the provision of credit by Citibank to the holders of the credit cards associated with the foregoing accounts, (iv) the servicing of the foregoing accounts, and (v) the allocation between Citibank and the Company of the economic benefits and burdens associated with the foregoing and other aspects of the alliance. Pursuant to the Program Agreement, the Company continues to provide certain servicing functions related to the accounts and related receivables owned by Citibank and receives compensation from Citibank for these services. The amounts earned under the Program Agreement related to the servicing functions are deemed adequate compensation and, accordingly, no servicing asset or liability has been recorded on the Consolidated Balance Sheets.
The Company's credit card revenues, net were $863 million, $832 million, and $751 million for 2022, 2021 and 2020, respectively. Amounts received under the Program Agreement were $978 million, $950 million, and $882 million for 2022, 2021 and 2020, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. Impairment, Restructuring and Other Costs
Impairment, restructuring and other costs consist of the following:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
(millions) |
Asset Impairments | $ | 15 | | | $ | 6 | | | $ | 3,280 | |
Restructuring | 5 | | | 3 | | | 224 | |
Other | 21 | | | 21 | | | 75 | |
| $ | 41 | | | $ | 30 | | | $ | 3,579 | |
During 2020, primarily as a result of the COVID-19 pandemic, the Company incurred non-cash impairment charges totaling $3,280 million, the majority of which was recognized during the first quarter of 2020 and 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. 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.
•$200 million of impairments primarily related to long-lived tangible and right of use assets to adjust the carrying value of certain store locations to their estimated fair value.
In June 2020, the Company announced a restructuring to align its cost base with anticipated near-term sales as the business recovered 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 store portfolio, supply chain and customer support network, which it has since adjusted as sales recovered in early 2021. During the second quarter of 2020, the Company recognized $154 million of expense for severance related to this reduction in force, of which all of this severance was paid as of January 28, 2023.
On February 4, 2020, the Company announced its Polaris strategy, a multi-year plan designed to stabilize profitability and position the Company for sustainable, profitable growth. The strategy, developed in 2019 and refined in 2020, includes initiatives focused on growing the Company’s digital channels, expanding the Company’s off-mall store presence and modernizing the Company’s technology and supply chain infrastructures.
A summary of the restructuring and other cash activity for 2022, 2021, and 2020 related to the Polaris strategy, which are included within accounts payable and accrued liabilities, is as follows:
| | | | | | | | | | | | | | | | | |
| Severance and other benefits | | Professional fees and other related charges | | Total |
| | (millions) | | |
Balance at February 1, 2020 | $ | 115 | | | $ | 9 | | | $ | 124 | |
Additions charged to expense | 55 | | | 17 | | | 72 | |
Cash payments | (156) | | | (24) | | | (180) | |
Balance at January 30, 2021 | 14 | | | 2 | | | 16 | |
Additions charged to expense | 5 | | | — | | | 5 | |
Cash payments | (18) | | | (2) | | | (20) | |
Balance at January 29, 2022 | 1 | | | — | | | 1 | |
Additions charged to expense | — | | | — | | | — | |
Cash payments | (1) | | | — | | | (1) | |
Balance at January 28, 2023 | $ | — | | | $ | — | | | $ | — | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. Properties and Leases
Property and Equipment, net
The major classes of property and equipment, net as of January 28, 2023 and January 29, 2022 are as follows:
| | | | | | | | | | | |
| January 28, 2023 | | January 29, 2022 |
(millions) |
Land | $ | 1,334 | | | $ | 1,353 | |
Buildings on owned land | 3,691 | | | 3,635 | |
Buildings on leased land and leasehold improvements | 1,368 | | | 1,303 | |
Fixtures and equipment | 4,153 | | | 3,922 | |
| 10,546 | | | 10,213 | |
Less accumulated depreciation and amortization | 4,633 | | | 4,548 | |
| $ | 5,913 | | | $ | 5,665 | |
In connection with various shopping center agreements, the Company is obligated to operate certain stores within the centers for periods of up to fifteen years. Some of these agreements require that the stores be operated under a particular name.
Leases
The Company leases a portion of the real estate and personal property used in its operations. Most leases require the Company to pay real estate taxes, maintenance, insurance, and other similar costs; some also require additional payments based on percentages of sales and some contain purchase options. Certain of the Company's leases contain covenants that restrict the ability of the tenant (typically a subsidiary of the Company) to take specified actions (including the payment of dividends or other amounts on account of its capital stock) unless the tenant satisfies certain financial tests.
ROU assets and lease liabilities consist of:
| | | | | | | | | | | | | | | | | | | | |
| | Classification | | January 28, 2023 | | January 29, 2022 |
| | (millions) |
Assets | | | | | | |
Finance lease assets (a) | | Right of Use Assets | | $ | 9 | | | $ | 10 | |
Operating lease assets (b) | | Right of Use Assets | | 2,674 | | | 2,798 | |
Total lease assets | | | | $ | 2,683 | | | $ | 2,808 | |
Liabilities | | | | | | |
Current | | | | | | |
Finance (a) | | Accounts payable and accrued liabilities | | $ | 2 | | | $ | 2 | |
Operating (b) | | Accounts payable and accrued liabilities | | 333 | | | 328 | |
Noncurrent | | | | | | |
Finance (a) | | Long-Term Lease Liabilities | | 15 | | | 17 | |
Operating (b) | | Long-Term Lease Liabilities | | 2,948 | | | 3,081 | |
Total lease liabilities | | | | $ | 3,298 | | | $ | 3,428 | |
| | | | | |
(a) | Finance lease assets are recorded net of accumulated amortization of $13 million as of January 28, 2023 and January 29, 2022. As of both January 28, 2023 and January 29, 2022, finance lease assets included $1 million, and noncurrent lease liabilities included $2 million of non-lease components. |
| | | | | |
(b) | As of January 28, 2023, operating lease assets included $370 million of non-lease components and current and noncurrent lease liabilities included $36 million and $384 million, respectively, of non-lease components. As of January 29, 2022, operating lease assets included $377 million of non-lease components and current and noncurrent lease liabilities included $36 million and $386 million, respectively, of non-lease components. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of net lease expense, recognized primarily within selling, general and administrative expenses are disclosed below. For 2022, 2021 and 2020, lease expense included $79 million, $80 million and $87 million, respectively, related to non-lease components.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
(millions) |
Real estate | | | | | |
Operating leases (c) – | | | | | |
Minimum rents | $ | 361 | | | $ | 359 | | | $ | 376 | |
Variable rents | 54 | | | 48 | | | 45 | |
| 415 | | | 407 | | | 421 | |
Less income from subleases – | | | | | |
Operating leases (d) | (39) | | | (1) | | | (1) | |
| $ | 376 | | | $ | 406 | | | $ | 420 | |
| | | | | |
Personal property – Operating leases | $ | 7 | | | $ | 7 | | | $ | 7 | |
| | | | | |
(c) | Certain supply chain operating lease expense amounts are included in cost of sales. |
| |
(d) | Represents sublease income from certain corporate office locations. |
As of January 28, 2023, the maturity of lease liabilities is as follows:
| | | | | | | | | | | | | | | | | |
| Finance Leases | | Operating Leases (e and f) | | Total |
(millions) |
Fiscal year | | | | | |
2023 | $ | 3 | | | $ | 340 | | | $ | 343 | |
2024 | 3 | | | 375 | | | 378 | |
2025 | 3 | | | 371 | | | 374 | |
2026 | 2 | | | 355 | | | 357 | |
2027 | 2 | | | 340 | | | 342 | |
After 2027 | 11 | | | 5,051 | | | 5,062 | |
Total undiscounted lease payments | 24 | | | 6,832 | | | 6,856 | |
Less amount representing interest | 7 | | | 3,551 | | | 3,558 | |
Total lease liabilities | $ | 17 | | | $ | 3,281 | | | $ | 3,298 | |
| | | | | |
(e) | Operating lease payments include $2,872 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $292 million of legally binding minimum lease payments for leases signed but not yet commenced. |
| | | | | |
(f) | Operating lease payments include $1,090 million related to non-lease component payments, with $827 million of such payments related to options to extend lease terms that are reasonably certain of being exercised. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additional supplemental information regarding assumptions and cash flows for operating and finance leases is as follows:
| | | | | | | | | | | | | | |
Lease Term and Discount Rate | | January 28, 2023 | | January 29, 2022 |
Weighted-average remaining lease term (years) | | | | |
Finance leases | | 11.5 | | 11.9 |
Operating leases | | 21.3 | | 21.7 |
Weighted-average discount rate | | | | |
Finance leases | | 6.74 | % | | 6.73 | % |
Operating leases | | 6.58 | % | | 6.54 | % |
| | | | | | | | | | | | | | |
Other Information | | 52 Weeks Ended January 28, 2023 | | 52 Weeks Ended January 29, 2022 |
| | (millions) |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows used from operating leases | | $ | 364 | | | $ | 322 | |
Financing cash flows used from financing leases | | 3 | | | 3 | |
Leased assets obtained in exchange for new operating lease liabilities | | 79 | | | 15 | |
The Company is a guarantor with respect to certain lease obligations associated with The May Department Stores Company and previously disposed subsidiaries or businesses. The leases have future minimum lease payments aggregating approximately $181 million and are offset by payments from existing tenants and subtenants. In addition, the Company is contingently liable for other expenses related to the above leases, such as property taxes and common area maintenance, which are also payable by existing tenants and subtenants. Potential liabilities related to these guarantees are subject to certain defenses by the Company. The Company believes that the risk of significant loss from the guarantees of these lease obligations is remote.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. Goodwill and Other Intangible Assets
The following summarizes the Company’s goodwill and other intangible assets:
| | | | | | | | | | | |
| January 28, 2023 | | January 29, 2022 |
| (millions) |
Non-amortizing intangible assets | | | |
Goodwill | $ | 9,290 | | | $ | 9,290 | |
Accumulated impairment losses | (8,462) | | | (8,462) | |
| 828 | | | 828 | |
Tradenames | 403 | | | 403 | |
| $ | 1,231 | | | $ | 1,231 | |
Amortizing intangible assets | | | |
Favorable leases and other contractual assets | $ | 5 | | | $ | 5 | |
Tradenames | 43 | | | 43 | |
| 48 | | | 48 | |
Accumulated amortization | | | |
Favorable leases and other contractual assets | (1) | | | (1) | |
Tradenames | (18) | | | (15) | |
| (19) | | | (16) | |
| $ | 29 | | | $ | 32 | |
Capitalized software | | | |
Gross balance | $ | 1,095 | | | $ | 1,010 | |
Accumulated amortization | (429) | | | (499) | |
| $ | 666 | | | $ | 511 | |
For the Company's annual impairment assessment as of the end of fiscal May 2022 and 2021, 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.
At the end of 2022, the Company was in the early stages of reimagining its private brand portfolio and as such the intended future use of certain private brands may evolve. The Company will continue to monitor the evolution of its private brands and the related impact to its intangible assets.
Finite lived tradenames are being amortized over their respective useful lives of 20 years. Favorable lease intangible assets are being amortized over their respective lease terms.
Other contractual assets and tradenames amortization expense amounted to $2 million for each of 2022, 2021, and 2020. Capitalized software amortization expense amounted to $235 million for 2022, $238 million for 2021 and $268 million for 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Future estimated amortization expense for assets, excluding in-process capitalized software of $72 million not yet placed in service as of January 28, 2023, is shown below:
| | | | | | | | | | | |
| Amortizing intangible assets | | Capitalized Software |
(millions) |
Fiscal year | | | |
2023 | $ | 2 | | | $ | 223 | |
2024 | 2 | | | 177 | |
2025 | 2 | | | 137 | |
2026 | 2 | | | 57 | |
2027 | 2 | | | — | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Financing
The Company’s debt is as follows:
| | | | | | | | | | | |
| January 28, 2023 | | January 29, 2022 |
(millions) |
| | | |
| | | |
| | | |
Long-term debt: | | | |
5.875% Senior notes due 2029 | $ | 500 | | | $ | 500 | |
5.875% Senior notes due 2030 | 425 | | | — | |
6.125% Senior notes due 2032 | 425 | | | — | |
4.5% Senior notes due 2034 | 367 | | | 367 | |
5.125% Senior notes due 2042 | 250 | | | 250 | |
4.3% Senior notes due 2043 | 250 | | | 250 | |
6.375% Senior notes due 2037 | 192 | | | 192 | |
6.7% Senior exchanged debentures due 2034 | 181 | | | 183 | |
7.0% Senior debentures due 2028 | 105 | | | 105 | |
6.9% Senior debentures due 2029 | 79 | | | 79 | |
6.7% Senior exchanged debentures due 2028 | 73 | | | 74 | |
6.79% Senior debentures due 2027 | 71 | | | 71 | |
6.7% Senior debentures due 2028 | 29 | | | 29 | |
6.7% Senior debentures due 2034 | 18 | | | 18 | |
8.75% Senior exchanged debentures due 2029 | 13 | | | 13 | |
6.9% Senior debentures due 2032 | 12 | | | 12 | |
7.6% Senior debentures due 2025 | 6 | | | 6 | |
7.875% Senior exchanged debentures due 2030 | 5 | | | 5 | |
7.875% Senior debentures due 2030 | 5 | | | 5 | |
6.9% Senior exchanged debentures due 2032 | 1 | | | 5 | |
2.875% Senior notes due 2023 | — | | | 504 |
3.625% Senior notes due 2024 | — | | | 350 |
4.375% Senior notes due 2023 | — | | | 161 |
6.65% Senior exchanged debentures due 2024 | — | | | 81 |
6.65% Senior debentures due 2024 | — | | | 36 |
Unamortized debt issue costs and discount | (28) | | | (22) | |
Premium on acquired debt, using an effective interest yield of 5.76% to 6.021% | 17 | | 21 |
| $ | 2,996 | | | $ | 3,295 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest expense and losses on early retirement of debt are as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | (millions) | | |
Interest on debt | $ | 185 | | | $ | 246 | | | $ | 273 | |
Amortization of debt premium | (2) | | | (3) | | | (4) | |
Amortization of financing costs and debt discount | 13 | | | 26 | | | 23 | |
Interest on finance leases | 1 | | | 1 | | | 1 | |
| 197 | | | 270 | | | 293 | |
Less interest capitalized on construction | 22 | | | 14 | | | 9 | |
Interest expense | $ | 175 | | | $ | 256 | | | $ | 284 | |
Losses on early retirement of debt | $ | 31 | | | $ | 199 | | | $ | — | |
2022 Financing Activities
ABL Credit Facility
On March 3, 2022, the Company entered into a third amendment to the ABL Credit Facility which provides for a new Revolving Credit Facility of $3.0 billion (the New ABL Credit Facility). Amounts borrowed under the New ABL Credit Facility are subject to interest at a rate per annum equal to, at the ABL Borrower’s option, either (i) adjusted SOFR (calculated to include a 0.10% credit adjustment spread) plus a margin of 1.25% to 1.50% or (ii) a base rate plus a margin of 0.25% to 0.50%, in each case depending on revolving line utilization. The New ABL Credit Facility matures in March 2027. As of January 28, 2023 and January 29, 2022, there were no borrowings under the agreement and there were $65 million and $116 million, respectively, of other standby letters of credit outstanding.
Senior Secured and Unsecured Notes
On March 8, 2022, the Company completed a tender offer in which $8 million of certain senior secured notes were tendered for early settlement and the collateral that secured the remaining $352 million of the Company’s senior secured notes was automatically released.
On March 10, 2022, the Company issued $425 million of 5.875% senior notes due 2030 (the 2030 Notes) and $425 million of 6.125% senior notes due 2032 (the 2032 Notes) in a private offering. Proceeds from the issuance, together with cash on hand, were used to redeem $1.1 billion of certain of its outstanding senior notes and pay fees and expenses in connection with the offering. The Company recognized $31 million of losses related to the early retirement of debt on the Consolidated Statement of Income. Each of the 2030 Notes and 2032 Notes are senior unsecured obligations of MRH and are unconditionally guaranteed on an unsecured basis by Macy’s, Inc.
2021 Financing Activities
Senior Secured and Unsecured Notes
On March 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. The total cash cost for the tender offer was $17 million with the remainder funded through the net proceeds from the Notes Offering discussed below. The Company recognized $11 million of losses on early retirement of debt on the Consolidated Statement of Income during 2021.
On March 17, 2021, the Company issued $500 million of 5.875% senior notes due 2029 in a private offering, which are senior unsecured obligations of MRH and are unconditionally guaranteed on a senior unsecured basis by Macy’s, Inc. MRH used the net proceeds from the Notes Offering, together with cash on hand, to fund the tender offer discussed above.
On August 17, 2021, the Company redeemed the entire outstanding $1.3 billion amount of its 8.375% senior secured notes due 2025. The redemption price was equal to 100% of the outstanding principal amount of the notes ($1.3 billion), plus accrued and unpaid interest of $19 million, plus the applicable premium due to holders in connection with the early redemption of $138 million, plus unamortized deferred debt costs of $47 million. The Company recognized the redemption premium and unamortized deferred debt costs of $185 million as losses on early retirement of debt on the Consolidated Statement of Income during 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On October 15, 2021, the Company redeemed the entire outstanding $294 million amount of its 3.875% senior notes due 2022. The redemption price was equal to 100% of the outstanding principal amount of $294 million, plus accrued and unpaid interest of $3 million.
Other Debt Obligations
Bank Credit Agreement
On June 8, 2020, the Company amended its existing credit agreement, which reduced the credit commitments of its existing $1,500 million unsecured credit agreement. The new agreement provided for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1 million. The new credit agreement is scheduled to expire on May 9, 2024, subject to up to two one-year extensions that could be requested by the Company and agreed to by the lenders. 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. As of January 28, 2023 and January 29, 2022, there were no revolving credit loans outstanding under the credit agreement.
Senior Notes and Debentures
The senior notes and the senior debentures are unsecured obligations of a 100%-owned subsidiary of Macy’s, Inc. and Macy's Inc. has fully and unconditionally guaranteed these obligations.
Other Financing Arrangements
There were $65 million and $116 million, respectively, of other standby letters of credit outstanding at January 28, 2023 and January 29, 2022.
Long-Term Debt Maturities
Future maturities of long-term debt are shown below:
| | | | | |
| (millions) |
Fiscal year | |
2024 | $ | — | |
2025 | 6 | |
2026 | — | |
2027 | 71 | |
2028 | 207 | |
After 2028 | 2,723 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Debt Repayments
The following table shows the detail of debt repayments:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | (millions) | | |
Revolving credit facility | $ | 1,959 | | | $ | 585 | | | $ | 1,500 | |
2.875% Senior notes due 2023 | 504 | | | 136 | | | — | |
3.625% Senior notes due 2024 | 350 | | | 150 | | | — | |
4.375% Senior notes due 2023 | 161 | | | 49 | | | — | |
6.65% Senior debentures due 2024 | 81 | | | 5 | | | — | |
6.65% Debentures due 2024 | 36 | | | — | | | — | |
6.9% Senior debentures due 2032 | 4 | | | — | | | — | |
6.7% Senior debentures due 2034 | 2 | | | — | | | — | |
6.7% Senior debentures due 2028 | 1 | | | — | | | — | |
8.375% Senior secured notes due 2025 | — | | | 1,300 | | | — | |
3.875% Senior notes due 2022 | — | | | 450 | | | — | |
7.6% Senior debentures due 2025 | — | | | 18 | | | — | |
3.45% Senior notes due 2021 | — | | | — | | | 500 | |
10.25% Senior debentures due 2021 | — | | | — | | | 33 | |
9.5% amortizing debentures due 2021 | — | | | 2 | | | 4 | |
9.75% amortizing debentures due 2021 | — | | | 1 | | | 2 | |
| $ | 3,098 | | | $ | 2,696 | | | $ | 2,039 | |
7. Accounts Payable and Accrued Liabilities
| | | | | | | | | | | |
| January 28, 2023 | | January 29, 2022 |
| (millions) |
Accounts payable | $ | 821 | | | $ | 1,058 | |
Gift cards and customer rewards | 399 | | | 481 | |
Lease related liabilities | 438 | | | 433 | |
Accrued wages and vacation | 199 | | | 290 | |
Allowance for future sales returns | 236 | | | 198 | |
Current portion of post employment and postretirement benefits | 159 | | | 148 | |
Taxes other than income taxes | 121 | | | 141 | |
Current portion of workers' compensation and general liability reserves | 86 | | | 92 | |
Accrued interest | 51 | | | 44 | |
Other | 240 | | | 201 | |
| $ | 2,750 | | | $ | 3,086 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in workers' compensation and general liability reserves, including the non-current portion, are as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (millions) |
Balance, beginning of year | $ | 387 | | | $ | 416 | | | $ | 462 | |
Charged to costs and expenses | 123 | | | 108 | | | 88 | |
Payments, net of recoveries | (132) | | | (137) | | | (134) | |
Balance, end of year | $ | 378 | | | $ | 387 | | | $ | 416 | |
The non-current portion of workers' compensation and general liability reserves is included in other liabilities on the Consolidated Balance Sheets. At both January 28, 2023 and January 29, 2022, workers' compensation and general liability reserves of $102 million are covered by deposits and receivables included in current assets on the Consolidated Balance Sheets.
8. Taxes
Income tax expense (benefit) is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Current | | Deferred | | Total | | Current | | Deferred | | Total | | Current | | Deferred | | Total |
| (millions) |
Federal | $ | 361 | | | $ | (56) | | | $ | 305 | | | $ | 369 | | | $ | (21) | | | $ | 348 | | | $ | (520) | | | $ | (179) | | | $ | (699) | |
State and local | 18 | | | 18 | | | 36 | | | 48 | | | 40 | | | 88 | | | 1 | | | (148) | | | (147) | |
| $ | 379 | | | $ | (38) | | | $ | 341 | | | $ | 417 | | | $ | 19 | | | $ | 436 | | | $ | (519) | | | $ | (327) | | | $ | (846) | |
The income tax expense (benefit) reported differs from the expected tax computed by applying the federal income tax statutory rate of 21% to income before income taxes. The reasons for this difference and their tax effects are as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (millions) |
Expected tax | $ | 319 | | | $ | 392 | | | $ | (1,006) | |
State and local income taxes, net of federal income taxes (a) | 23 | | | 84 | | | (140) | |
CARES Act carryback benefit | — | | | (29) | | | (205) | |
Goodwill impact | — | | | — | | | 492 | |
Tax impact of equity awards | — | | | — | | | 8 | |
Federal tax credits | (4) | | | (3) | | | (5) | |
Change in valuation allowance | 5 | | | (15) | | | 24 | |
Other | (2) | | | 7 | | | (14) | |
| $ | 341 | | | $ | 436 | | | $ | (846) | |
| | | | | |
(a) | 2022 includes an income tax benefit from the favorable resolution of state income tax litigation. |
The Company participates in the Internal Revenue Service (IRS) Compliance Assurance Program (CAP). As part of the CAP, tax years are audited on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. The IRS has completed examinations of 2021 and all prior tax years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
| | | | | | | | | | | |
| January 28, 2023 | | January 29, 2022 |
| (millions) |
Deferred tax assets | | | |
Post employment and postretirement benefits | $ | 50 | | | $ | 48 | |
Accrued liabilities accounted for on a cash basis for tax purposes | 112 | | | 100 | |
Lease liabilities | 881 | | | 917 | |
Unrecognized state tax benefits and accrued interest | 22 | | | 38 | |
State operating loss and credit carryforwards | 132 | | | 152 | |
Other | 112 | | | 95 | |
Valuation allowance | (94) | | | (89) | |
Total deferred tax assets | 1,215 | | | 1,261 | |
Deferred tax liabilities | | | |
Excess of book basis over tax basis of property and equipment | (872) | | | (914) | |
Right of use assets | (717) | | | (751) | |
Merchandise inventories | (351) | | | (300) | |
Intangible assets | (116) | | | (116) | |
Other | (106) | | | (163) | |
Total deferred tax liabilities | (2,162) | | | (2,244) | |
Net deferred tax liability | $ | (947) | | | $ | (983) | |
The valuation allowance at January 28, 2023 and January 29, 2022 relates to net deferred tax assets for state net operating loss and credit carryforwards. The net change in the valuation allowance amounted to an increase of $5 million for 2022. In 2021, the net change in the valuation allowance amounted to a decrease of $15 million.
As of January 28, 2023, the Company had no federal net operating loss carryforwards, state net operating loss carryforwards, net of valuation allowances, of $696 million, which will expire between 2023 and 2042, and no state credit carryforwards, net of valuation allowances.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | |
| January 28, 2023 | | January 29, 2022 | | January 30, 2021 |
| (millions) |
Balance, beginning of year | $ | 102 | | | $ | 113 | | | $ | 133 | |
Additions based on tax positions related to the current year | 13 | | | 12 | | | 9 | |
| | | | | |
Reductions for tax positions of prior years | (20) | | | (11) | | | (13) | |
Settlements | (4) | | | (2) | | | (4) | |
Statute expirations | (11) | | | (10) | | | (12) | |
Balance, end of year | $ | 80 | | | $ | 102 | | | $ | 113 | |
Amounts recognized in the Consolidated Balance Sheets | | | | | |
Current income taxes | $ | 4 | | | $ | 14 | | | $ | 6 | |
Deferred income taxes | 1 | | | 3 | | | 3 | |
Other liabilities (b) | 75 | | | 85 | | | 104 | |
| $ | 80 | | | $ | 102 | | | $ | 113 | |
| | | | | |
(b) | Unrecognized tax benefits not expected to be settled within one year are included within other liabilities on the Consolidated Balance Sheets. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additional information regarding unrecognized benefits and related interest and penalties is as follow:
| | | | | | | | | | | |
| January 28, 2023 | | January 29, 2022 |
| (millions) |
Amount of unrecognized tax benefits, net of deferred tax assets, that if recognized would affect the effective tax rate | $ | 63 | | | $ | 81 | |
Accrued federal, state and local interest and penalties | 23 | | | 65 | |
Amounts recognized in the Consolidated Balance Sheets | | | |
Current income taxes | 4 | | | 32 | |
Other liabilities | 19 | | | 33 | |
The Company classifies federal, state and local interest and penalties not expected to be settled within one year as other liabilities on the Consolidated Balance Sheets and follows a policy of recognizing all interest and penalties related to unrecognized tax benefits in income tax expense. The accrued federal, state and local interest and penalties primarily relate to state tax issues and the amount of penalties paid in prior periods, and the amounts of penalties accrued at January 28, 2023 and January 29, 2022, are insignificant. Federal, state and local interest and penalties amounted to income of $38 million for 2022, and expense of $5 million, and $1 million for 2021 and 2020, respectively.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2019. With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for years before 2013. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been accrued for any adjustments that are expected to result from the years still subject to examination.
9. Retirement Plans
The Company has defined contribution plans that cover substantially all employees who work 1,000 hours or more in a year. In addition, the Company has a funded defined benefit plan (Pension Plan) and an unfunded defined benefit supplementary retirement plan (SERP), which provides benefits, for certain employees, in excess of qualified plan limitations. Effective January 1, 2012, the Pension Plan was closed to new participants, with limited exceptions, and effective January 2, 2012, the SERP was closed to new participants.
In February 2013, the Company announced changes to the Pension Plan and SERP whereby eligible employees no longer earn future pension service credits after December 31, 2013, with limited exceptions. All retirement benefits attributable to service in subsequent periods are provided through defined contribution plans.
Retirement expenses, excluding settlement charges, included the following components:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| | | (millions) | | |
401(k) Qualified Defined Contribution Plan | $ | 86 | | | $ | 76 | | | $ | 68 | |
Non-Qualified Defined Contribution Plan | 1 | | | 1 | | | 1 | |
Pension Plan | (42) | | | (85) | | | (73) | |
Supplementary Retirement Plan | 26 | | | 24 | | | 26 | |
Postretirement Obligations | (4) | | | (4) | | | (3) | |
| $ | 67 | | | $ | 12 | | | $ | 19 | |
The Company estimates the service and interest cost components of net periodic benefit costs for the Pension Plan and SERP. This method uses a full yield curve approach in the estimation of these components of net periodic benefit costs. Under this approach, the Company applies discounting using individual spot rates from the yield curve composed of the rates of return from a portfolio of high quality corporate debt securities available at the measurement date. These spot rates align to each of the projected benefit obligation and service cost cash flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Defined Contribution Plans
The Company has a qualified plan that permits participating associates to defer eligible compensation up to the maximum limits allowable under the Internal Revenue Code. Beginning January 1, 2014, the Company has a non-qualified plan that permits participating associates to defer eligible compensation above the limits of the qualified plan. The Company contributes a matching percentage of employee contributions under both the qualified and non-qualified plans. Effective January 1, 2014, the Company's matching contribution to the qualified plan was enhanced for all participating employees, with limited exceptions. Prior to January 1, 2014, the matching contribution rate under the qualified plan was higher for those employees not eligible for the Pension Plan than for employees eligible for the Pension Plan.
The liability related to the qualified plan matching contribution, which is reflected in accounts payable and accrued liabilities on the Consolidated Balance Sheets, was $94 million at January 28, 2023 and $83 million at January 29, 2022. Expense related to matching contributions for the qualified plan amounted to $86 million for 2022, $76 million for 2021 and $68 million for 2020.
At January 28, 2023 and January 29, 2022, the liability under the non-qualified plan, which is reflected in other liabilities on the Consolidated Balance Sheets, was $35 million and $39 million, respectively. The liability related to the non-qualified plan matching contribution, which is reflected in accounts payable and accrued liabilities on the Consolidated Balance Sheets, was $1 million at January 28, 2023 and January 29, 2022. Expense related to matching contributions for the non-qualified plan amounted to $1 million for 2022, 2021 and 2020. In connection with the non-qualified plan, the Company had mutual fund investments at January 28, 2023 and January 29, 2022 of $35 million and $39 million, respectively, which are included in prepaid expenses and other current assets on the Consolidated Balance Sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following provides a reconciliation of benefit obligations, plan assets, and funded status of the Pension Plan and SERP as of January 28, 2023 and January 29, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plan | | SERP |
| 2022 | | 2021 | | 2022 | | 2021 |
| (millions) |
Change in projected benefit obligation | | | | | | | |
Projected benefit obligation, beginning of year | $ | 2,406 | | | $ | 3,030 | | | $ | 606 | | | $ | 673 | |
Service cost | — | | | 1 | | | — | | | — | |
Interest cost | 68 | | | 49 | | | 15 | | | 11 | |
Actuarial gain | (301) | | | (172) | | | (71) | | | (32) | |
Benefits paid | (194) | | | (502) | | | (42) | | | (46) | |
Projected benefit obligation, end of year | 1,979 | | | 2,406 | | | 508 | | | 606 | |
Changes in plan assets | | | | | | | |
Fair value of plan assets, beginning of year | 2,900 | | | 3,359 | | | — | | | — | |
Actual return (loss) on plan assets | (317) | | | 43 | | | — | | | — | |
Company contributions | — | | | — | | | 42 | | | 46 | |
Benefits paid | (194) | | | (502) | | | (42) | | | (46) | |
Fair value of plan assets, end of year | 2,389 | | | 2,900 | | | — | | | — | |
Funded status at end of year | $ | 410 | | | $ | 494 | | | $ | (508) | | | $ | (606) | |
Amounts recognized in the Consolidated Balance Sheets at January 28, 2023 and January 29, 2022 | | | | | | | |
Other assets | $ | 410 | | | $ | 494 | | | $ | — | | | $ | — | |
Accounts payable and accrued liabilities | — | | | — | | | (48) | | | (47) | |
Other liabilities | — | | | — | | | (460) | | | (559) | |
| $ | 410 | | | $ | 494 | | | $ | (508) | | | $ | (606) | |
Amounts recognized in accumulated other comprehensive loss at January 28, 2023 and January 29, 2022 | | | | | | | |
Net actuarial loss | $ | 704 | | | $ | 617 | | | $ | 175 | | | $ | 257 | |
Prior service cost | — | | | — | | | 5 | | | 5 | |
| $ | 704 | | | $ | 617 | | | $ | 180 | | | $ | 262 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net pension costs, settlement charges and other amounts recognized in other comprehensive loss for the Pension Plan and SERP included the following actuarially determined components:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plan | | SERP |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| (millions) |
Net Periodic Pension Cost | | | | | | | | | | | |
Service cost | $ | — | | | $ | 1 | | | $ | 4 | | | $ | — | | | $ | — | | | $ | — | |
Interest cost | 68 | | | 49 | | | 66 | | | 15 | | | 11 | | | 14 | |
Expected return on assets | (122) | | | (161) | | | (183) | | | — | | | — | | | — | |
Amortization of net actuarial loss | 12 | | | 26 | | | 40 | | | 11 | | | 13 | | | 12 | |
| (42) | | | (85) | | | (73) | | | 26 | | | 24 | | | 26 | |
| | | | | | | | | | | |
Settlement charges | 39 | | | 96 | | | 74 | | | — | | | — | | | 10 | |
Other Changes in Plan Assets and Projected Benefit Obligation Recognized in Other Comprehensive Loss | | | | | | | | | | | |
Net actuarial (gain) loss | 138 | | | (55) | | | (178) | | | (71) | | | (32) | | | 40 | |
Amortization of net actuarial loss | (12) | | | (26) | | | (40) | | | (11) | | | (13) | | | (12) | |
Settlement charges | (39) | | | (96) | | | (74) | | | — | | | — | | | (10) | |
| 87 | | | (177) | | | (292) | | | (82) | | | (45) | | | 18 | |
Total recognized | $ | 84 | | | $ | (166) | | | $ | (291) | | | $ | (56) | | | $ | (21) | | | $ | 54 | |
In 2022 and 2021, the Company incurred non-cash settlement charges of $39 million and $96 million, respectively. For 2022, these charges relate to the pro-rata recognition of net actuarial losses associated with the Company's Pension Plan and is the result of the lump sum distributions associated with retiree distribution elections. For 2021, these charges related to the pro-rata recognition of net actuarial losses associated with the Company's Pension Plan and were the result of the transfer of pension obligations for certain retirees and beneficiaries under the Pension Plan through the purchase of a group annuity contract with an insurance company. The Company transferred $256 million of Pension Plan assets to the insurance company in the second quarter of 2021, thereby reducing its Pension Plan benefit obligations.
The following weighted average assumptions were used to determine the projected benefit obligations for the Pension Plan and SERP at January 28, 2023 and January 29, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plan | | SERP |
| 2022 | | 2021 | | 2022 | | 2021 |
Discount rate | 4.73 | % | | 3.06 | % | | 4.74 | % | | 3.10 | % |
Rate of compensation increases | 3.50 | % | | 3.50 | % | | — | | | — | |
Cash balance plan interest crediting rate | 5.00 | % | | 5.00 | % | | — | | | — | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following weighted average assumptions were used to determine the net periodic pension cost for the Pension Plan and SERP:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plan | | SERP |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Discount rate used to measure service cost | 3.35% - 5.76% | | 2.69% - 3.07% | | 2.35% - 2.96% | | — | | | — | | | — | |
Discount rate used to measure interest cost | 2.55% - 5.49% | | 1.76% - 2.07% | | 1.65% - 2.46% | | 2.53 | % | | 1.74 | % | | 1.65% - 2.44% |
Expected long-term return on plan assets | 4.60 | % | | 5.75 | % | | 6.25 | % | | — | | | — | | | — | |
Rate of compensation increases | 3.50 | % | | 3.45 | % | | 3.25 | % | | — | | | — | | | — | |
Cash balance plan interest crediting rate | 5.00 | % | | 5.00 | % | | 5.00 | % | | — | | | — | | | — | |
The Pension Plan and SERP’s assumptions are evaluated annually, and at interim re-measurements if required, and updated as necessary. Due to settlement accounting and re-measurements during 2022, 2021 and 2020, for the Pension Plan, and during 2020 for the SERP, the discount rate used to measure service cost and the discount rate used to measure interest cost varied between periods. The table above shows the range of rates used to determine net periodic expense for the plans.
The discount rates used to determine the present value of the projected benefit obligation for the Pension Plan and SERP are based on a yield curve constructed from a portfolio of high quality corporate debt securities with various maturities. Each year's expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate for the projected benefit obligation.
The Company develops its expected long-term rate of return on plan asset assumption by evaluating input from several professional advisors taking into account the asset allocation of the portfolio and long-term asset class return expectations, as well as long-term inflation assumptions. Expected returns for each major asset class are considered along with their volatility and the expected correlations among them. These expectations are based upon historical relationships as well as forecasts of how future returns may vary from historical returns. Returns by asset class and correlations among asset classes are combined using the target asset allocation to derive an expected return for the portfolio as a whole. Long- term historical returns of the portfolio are also considered. Portfolio returns are calculated net of all expenses, therefore, the Company also analyzes expected costs and expenses, including investment management fees, administrative expenses, Pension Benefit Guaranty Corporation premiums and other costs and expenses. As of January 28, 2023, the Company increased the assumed annual long-term rate of return for the Pension Plan's assets from 4.60% to 5.30% based on expected future returns on the portfolio of assets.
The assets of the Pension Plan are managed by investment specialists with the primary objectives of payment of benefit obligations to Plan participants and an ultimate realization of investment returns over longer periods in excess of inflation. The Company employs a total return investment approach whereby a mix of domestic and foreign equity securities, fixed income securities and other investments is used to maximize the long-term return on the assets of the Pension Plan for a prudent level of risk. Risks are mitigated through asset diversification and the use of multiple investment managers. The target allocation for plan assets is currently 5% equity securities, 87% debt securities, 1% real estate and 7% private equities.
The Company generally employs investment managers to specialize in a specific asset class. These managers are chosen and monitored with the assistance of professional advisors, using criteria that include organizational structure, investment philosophy, investment process, performance compared to market benchmarks and peer groups.
The Company periodically conducts an analysis of the behavior of the Pension Plan's assets and liabilities under various economic and interest rate scenarios to ensure that the long-term target asset allocation is appropriate given the liabilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values of the Pension Plan assets as of January 28, 2023 and January 29, 2022, excluding interest and dividend receivables and pending investment purchases and sales, by asset category are as follows:
| | | | | | | | | | | | | | | | | |
| Fair Value Category | | 2022 | | 2021 |
| | | (millions) |
Short term investments | Level 2 | | $ | — | | | $ | 10 | |
Money market funds | Level 1 | | 78 | | | 206 | |
Equity securities: | | | | | |
U.S. pooled funds | Level 1 | | 69 | | | 77 | |
International pooled funds | Level 1 | | 26 | | | 31 | |
Fixed income securities: | | | | | |
U.S. Treasury bonds | Level 2 | | 41 | | | 121 | |
Other Government bonds | Level 2 | | 60 | | | 74 | |
Corporate bonds | Level 2 | | 1,592 | | | 1,877 | |
Mortgage-backed securities | Level 2 | | 14 | | | 10 | |
Asset-backed securities | Level 2 | | — | | | 1 | |
Pooled funds | Level 1 | | 48 | | | 72 | |
Other types of investments: | | | | | |
Derivatives in a positive position | Level 2 | | 11 | | | 12 | |
| | | | | |
Derivatives in a negative position | Level 2 | | (3) | | | (1) | |
Pooled funds (a) | | | 271 | | | 164 | |
Real estate (a) | | | 19 | | | 32 | |
Private equity (a) | | | 133 | | | 186 | |
Total | | | $ | 2,359 | | | $ | 2,872 | |
(a)Certain investments that are measured at fair value using the net asset value per share as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the fair value of plan assets.
Corporate bonds consist primarily of investment grade bonds of U.S. issuers from diverse industries.
The fair value of certain pooled funds including equity securities, real estate and private equity investments represents the reported net asset value of shares or underlying assets of the investment as a practical expedient to estimate fair value. International equity pooled funds seek to provide long-term capital growth and income by investing in equity securities of non-U.S. companies located both in developed and emerging markets. There are generally no redemption restrictions or unfunded commitments related to these equity securities.
Real estate investments include several funds that seek risk-adjusted return by providing a stable, income-driven rate of return over the long term with high potential for growth of net investment income and appreciation of value. The real estate investments are diversified across property types and geographical areas primarily in the United States of America. Private equity investments have an objective of realizing aggregate long-term returns in excess of those available from investments in the public equity markets. Private equity investments generally consist of limited partnerships in the United States of America, Europe and Asia. Private equity and real estate investments are valued using fair values per the most recent financial reports provided by the investment sponsor, adjusted as appropriate for any lag between the date of the financial reports and the Company’s reporting date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Due to the nature of the underlying assets of the real estate and private equity investments, changes in market conditions and the economic environment may significantly impact the net asset value of these investments and, consequently, the fair value of the Pension Plan's investments. These investments are redeemable at net asset value to the extent provided in the documentation governing the investments. However, these redemption rights may be restricted in accordance with the governing documents. Redemption of these investments is subject to restrictions including lock-up periods where no redemptions are allowed, restrictions on redemption frequency and advance notice periods for redemptions.
The Company does not anticipate making funding contributions to the Pension Plan in 2023.
The following benefit payments are estimated to be paid from the Pension Plan and from the SERP:
| | | | | | | | | | | |
| Pension Plan | | SERP |
| (millions) |
Fiscal year | | | |
2023 | $ | 215 | | | $ | 48 | |
2024 | 192 | | | 46 | |
2025 | 187 | | | 44 | |
2026 | 180 | | | 49 | |
2027 | 171 | | | 42 | |
2028-2032 | 725 | | | 185 | |
10. Stock-Based Compensation
The following disclosures present the Company’s equity plans on a combined basis. The equity plans are administered by the Compensation and Management Development Committee of the Board of Directors (the CMD Committee). The CMD Committee is authorized to grant options, stock appreciation rights, restricted stock and restricted stock units to officers and key employees of the Company and its subsidiaries and to non-employee directors. The equity plans are intended to help the Company attract and retain directors, officers, other key executives and employees and is also intended to provide incentives and rewards relating to the Company’s business plans to encourage such persons to devote themselves to the business of the Company. There have been no grants of stock appreciation rights under the equity plans.
Stock option grants have an exercise price at least equal to the market value of the underlying common stock on the date of grant, have ten-year terms and typically vest ratably over four years of continued employment. Restricted stock and time-based restricted stock unit awards generally vest one to four years from the date of grant. Performance-based restricted stock units generally are earned based on the attainment of specified goals achieved over the performance period.
As of January 28, 2023, approximately 21.2 million shares of common stock were available for additional grants pursuant to the Company’s equity plans. Shares awarded are generally issued from the Company's treasury stock.
Stock-based compensation expense included the following components:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (millions) |
Stock options | $ | 3 | | | $ | 4 | | | $ | 8 | |
Restricted stock units | 51 | | | 51 | | | 23 | |
| $ | 54 | | | $ | 55 | | | $ | 31 | |
All stock-based compensation expense is recorded in SG&A expense in the Consolidated Statements of Operations. There were no grants of stock options during 2022, 2021 or 2020 and as of January 28, 2023.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Stock Units
The weighted average grant date fair values of performance-based and time-based restricted stock units granted during 2022, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Restricted stock units (performance-based) | $ | 25.32 | | | $ | 15.80 | | | $ | 6.24 | |
Restricted stock units (time-based) | 24.01 | | | 17.88 | | | 6.96 | |
During 2022, 2021 and 2020, the CMD Committee approved awards of performance-based restricted stock units to certain senior executives of the Company. Each award reflects a target number of shares (Target Shares) that may be issued to the award recipient. These awards may be earned upon the completion of approximate three-year performance periods ending February 1, 2025, February 3, 2024 and January 28, 2023, respectively. Whether units are earned at the end of the performance period will be determined based on the achievement of certain performance objectives over the performance period. The performance objectives for the 2022, 2021 and 2020 awards include achieving a relative total shareholder return (TSR) external metric. The 2022 awards and 2021 awards also include internal metrics of digital sales and comparable store sales, and digital sales, respectively. Relative TSR reflects the change in the value of the Company’s common stock over the performance period in relation to the change in the value of the common stock of a peer group index over the performance period, assuming the reinvestment of dividends. Depending on the results achieved during the approximate three-year performance periods, the actual number of shares that a grant recipient receives at the end of the period may range from 0% to 200% of the Target Shares granted for the 2022 performance-based restricted stock units, 0% to 170% of the Target Shares granted for 2021 performance-based restricted stock units, and 0% to 150% of the Target Shares granted for the 2020 performance-based restricted stock units.
The fair value of the Target Shares and restricted stock awards are based on the fair value of the underlying shares on the date of grant. The fair value of the portion of the Target Shares that relate to a relative TSR performance objective was determined using a Monte Carlo simulation analysis to estimate the total shareholder return ranking of the Company among a peer group over the remaining performance periods. The expected volatility of the Company’s common stock at the date of grant was estimated based on a historical average volatility rate for the approximate three-year performance period. The dividend yield assumption was based on historical and anticipated dividend payouts. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate three-year performance measurement period.
The fair value of a restricted stock unit award at the grant date is equal to the market price of the Company's common stock on the grant date. Compensation expense is recorded for all restricted stock unit awards based on the amortization of the fair market value at the date of grant over the period the restrictions lapse or over the performance period of the performance-based restricted stock units. As of January 28, 2023, the Company had $87.7 million of unrecognized compensation costs related to nonvested restricted stock units, which is expected to be recognized over a weighted average period of approximately 1.4 years.
Activity related to restricted stock units for 2022 is as follows:
| | | | | | | | | | | |
| Shares | | Weighted Average Grant Date Fair Value |
| (thousands) |
Nonvested, beginning of period | 9,100 | | $ | 10.87 | |
Granted – performance-based | 627 | | 25.32 | |
Performance adjustment | 336 | | (7.30) | |
Granted – time-based | 2,484 | | 24.01 | |
Forfeited | (496) | | 15.13 | |
Vested | (4,445) | | 8.79 | |
Nonvested, end of period | 7,606 | | $ | 16.49 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. Shareholders’ Equity
The authorized shares of the Company consist of 125 million shares of Preferred Stock, par value of $0.01 per share, with no shares issued, and 1,000 million shares of common stock, par value of $0.01 per share, with 333.6 million shares of common stock issued and 271.3 million shares of common stock outstanding at January 28, 2023, and with 333.6 million shares of common stock issued and 292.4 million shares of common stock outstanding at January 29, 2022 (with shares held in the Company’s treasury being treated as issued, but not outstanding).
Common Stock
The holders of the common stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Subject to preferential rights that may be applicable to any Preferred Stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the Board of Directors in its discretion, out of funds legally available. No shares of common stock were retired during 2022, 2021 and 2020.
Treasury Stock
Treasury stock contains shares repurchased under the share repurchase program, shares repurchased to cover employee tax liabilities related to stock plan activity and shares maintained in a trust related to deferred compensation plans. Under the deferred compensation plans, shares are maintained in a trust to cover the number estimated to be needed for distribution on account of stock credits currently outstanding.
On August 19, 2021, the Company announced that its Board of Directors authorized a $500 million share repurchase program, and as of January 29, 2022, the Company completed the share repurchase under this authorization with the purchase of 20.5 million shares. On February 22, 2022, the Company announced that its Board of Directors authorized a new $2 billion share repurchase program, which does not have an expiration date. During 2022, the Company repurchased approximately 24.0 million shares of its common stock at an average cost of $24.98 per share for $600 million.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (millions, except per share data) |
Total number of shares purchased | 24.0 | | | 20.5 | | | — | |
Average price paid per share | $ | 24.98 | | | $ | 24.40 | | | $ | — | |
Total investment | $ | 600 | | | $ | 500 | | | $ | — | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in the Company’s common stock issued and outstanding, including shares held by the Company’s treasury, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Treasury Stock | | |
| Common Stock Issued | | Deferred Compensation Plans | | Other | | Total | | Common Stock Outstanding |
| (thousands) |
Balance at February 1, 2020 | 333,606 | | (902) | | (23,673) | | (24,575) | | 309,031 |
Stock issued under stock plans | | | (127) | | 1,577 | | 1,450 | | 1,450 |
Stock repurchases | | | | | (79) | | (79) | | (79) |
Deferred compensation plan distributions | | | 98 | | | | 98 | | 98 |
Balance at January 30, 2021 | 333,606 | | (931) | | (22,175) | | (23,106) | | 310,500 |
Stock issued under stock plans | | | (277) | | 2,454 | | 2,177 | | 2,177 |
Stock repurchases | | | | | (20,511) | | (20,511) | | (20,511) |
Deferred compensation plan distributions | | | 193 | | | | 193 | | 193 |
Balance at January 29, 2022 | 333,606 | | (1,015) | | (40,232) | | (41,247) | | 292,359 |
Stock issued under stock plans | | | (117) | | 3,001 | | 2,884 | | 2,884 |
Stock repurchases | | | | | (24,058) | | (24,058) | | (24,058) |
Deferred compensation plan distributions | | | 165 | | | | 165 | | 165 |
Balance at January 28, 2023 | 333,606 | | (967) | | (61,289) | | (62,256) | | 271,350 |
Accumulated Other Comprehensive Loss
For the Company, the only component of accumulated other comprehensive loss for 2022, 2021 and 2020 relates to post employment and postretirement plan items. The net actuarial gains and losses and prior service costs and credits related to post employment and postretirement benefit plans are reclassified out of accumulated other comprehensive loss and included in the computation of net periodic benefit cost (income) and are included in benefit plan income, net in the Consolidated Statements of Operations. In addition, the Company incurred the pro-rata recognition of net actuarial losses associated with an increase in lump sum distributions associated with store closings, organizational restructuring, and periodic distribution activity as settlement charges in the Consolidated Statements of Operations. See Note 9, Retirement Plans, for further information.
12. Fair Value Measurements and Concentrations of Credit Risk
The following table shows the Company’s financial assets that are required to be measured at fair value on a recurring basis, by level within the hierarchy as defined by applicable accounting standards:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 28, 2023 | | January 29, 2022 |
| | | Fair Value Measurements | | | | Fair Value Measurements |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (millions) |
Marketable equity and debt securities | $ | 35 | | | $ | 35 | | | $ | — | | | $ | — | | | $ | 39 | | | $ | 39 | | | $ | — | | | $ | — | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, receivables, certain-short term investments and other assets, short-term debt, merchandise accounts payable, accounts payable and accrued liabilities and long-term debt. With the exception of long-term debt, the carrying amount approximates fair value because of the short maturity of these instruments. The fair values of long-term debt are generally estimated based on quoted market prices for identical or similar instruments, and are classified as Level 2 measurements within the hierarchy as defined by applicable accounting standards.
The following table shows the estimated fair value of the Company’s long-term debt, excluding other obligations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 28, 2023 | | January 29, 2022 |
| Notional Amount | | Carrying Amount | | Fair Value | | Notional Amount | | Carrying Amount | | Fair Value |
| (millions) |
Long-term debt | $ | 3,007 | | | $ | 2,996 | | | $ | 2,555 | | | $ | 3,295 | | | $ | 3,295 | | | $ | 3,254 | |
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments. The Company places its temporary cash investments in what it believes to be high credit quality financial instruments.
13. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Net Income | | | | Shares | | Net Income | | | | Shares | | Net Loss | | | | Shares |
| (millions, except per share data) |
Net income (loss) and average number of shares outstanding | $ | 1,177 | | | | | 273.7 | | $ | 1,430 | | | | | 305.8 | | $ | (3,944) | | | | | 310.2 |
Shares to be issued under deferred compensation and other plans | | | | | 1.0 | | | | | | 1.0 | | | | | | 1.0 |
| $ | 1,177 | | | | | 274.7 | | $ | 1,430 | | | | | 306.8 | | $ | (3,944) | | | | | 311.1 |
Basic earnings (loss) per share | | | $ | 4.28 | | | | | | | $ | 4.66 | | | | | | | $ | (12.68) | | | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | | |
Stock options and restricted stock units | | | | | 6.4 | | | | | | 7.2 | | | | | | — |
| $ | 1,177 | | | | | 281.1 | | $ | 1,430 | | | | | 314.0 | | $ | (3,944) | | | | | 311.1 |
Diluted earnings (loss) per share | | | $ | 4.19 | | | | | | | $ | 4.55 | | | | | | | $ | (12.68) | | | |
In addition to the stock options and restricted stock units in the foregoing table, stock options to purchase 12.1 million shares of common stock and restricted stock units relating to 0.7 million shares of common stock were outstanding at January 28, 2023, and stock options to purchase 12.4 million of shares of common stock and restricted stock units relating to 1.0 million shares of common stock were outstanding at January 29, 2022, but were not included in the computation of diluted earnings per share for 2022 or 2021, respectively, because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.
For 2020, as a result of the net loss, all options and restricted stock units have been excluded from the calculation of diluted earnings per share and, therefore, there was no difference in the weighted average number of common shares for basic and diluted loss per share as the effect of all potentially dilutive shares outstanding was anti-dilutive. Stock options to purchase 16.3 million shares of common stock and restricted stock units relating to 10.3 million shares of common stock outstanding at January 30, 2021 were excluded from the computation of diluted loss per share.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. Commitments
Our estimated total purchase obligations, which primarily consist of merchandise purchase obligations and obligations under outsourcing arrangements, software license and other service commitments, energy and other supply agreements identified by the Company, and construction contracts, were approximately $2,600 million and $3,200 million as of January 28, 2023 and January 29, 2022, respectively. These purchase obligations are primarily due within 1 year and recorded as liabilities when goods are received or services rendered. The Company's merchandise purchase obligations fluctuate on a seasonal basis, typically being higher in the summer and early fall and being lower in the late winter and early spring. The Company purchases a substantial portion of its merchandise inventories and other goods and services in ways other than through binding contracts.