Macy’s Net Income Plunges on Store Closures, Traffic Fall

Macy’s sales fell 4% to $8.51 billion in Q4 FY16 from $8.86 billion in the year-ago same period

Premier omni-channel retailer Macy’s Inc. (NYSE: M) announced its Q4 FY16 and full year FY16 financial results on February 21st, 2017.

The Cincinnati, Ohio-based company, together with its subsidiaries, operates stores, websites, and mobile applications to sell a range of merchandise, including apparel and accessories for men, women, and children, cosmetics, home furnishings, and other consumer goods.

The Company operates retail stores under the Macy’s, Bloomingdale’s, Bloomingdale’s Outlet, Macy’s Backstage, and Bluemercury brand names, as well as the macys.com, bloomingdales.com, and bluemercury.com websites.

With FY16 sales of $25.77 billion, Macy’s also operates as a beauty products and spa retailer. Bloomingdale’s in Dubai is operated by Al Tayer Group LLC under a license agreement. Read more about Macy’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Macy’s sales fell 4% to $8.51 billion from total sales of $8.86 billion in the year-ago same period. On an owned basis, Q4 FY16 comparable sales declined 2.7%. Comparable sales on an owned plus licensed basis for the quarter were down 2.1%. Gross margin dollars amounted to $3.26 billion; gross margin as a percentage of net sales was 38.3% during the reporting quarter.

Macy’s Q4 FY16 operating income fell to $815 million, or 9.6% of sales, compared to operating income of $936 million, or 10.6% of sales, in the year-ago comparable period. Operating income in Q4 FY16 included $230 million of impairments, store closing and other costs. The $230 million included $38 million of asset impairment charges primarily related to the store closings announced in January 2017, $166 million of severance and other costs primarily associated with organizational changes and store closings announced in January 2017 and $26 million of other related costs and expenses. Excluding these items, as well as non-cash settlement charges related to the company’s retirement plans of $17 million, operating income in Q4 FY16 was $1.06 billion, or 12.5% of sales.

In all, Q4 FY16 net income plunged to $475 million, or $1.54 per diluted share, from $544 million, or $1.73 per diluted share, in the year-ago period. Excluding impairments, store closing, settlement charges and other costs of $247 million ($147 million after tax or 48 cents per diluted share), adjusted diluted EPS was $2.02 in Q4 FY16.

FY16 financial highlights

For the full year FY16, Macy’s sales fell 4.8% to $25.77 billion from total sales of $27.07 billion in the prior year. During the year, comparable sales on an owned basis declined 3.5%. On an owned plus licensed basis, comparable sales declined 2.9% compared to the Company’s recent guidance for 2016 sales on an owned plus licensed basis to be down 2.5% to 3.0%.

For FY16, Macy’s operating income totaled $1.31 billion, or 5.1% of sales, compared to an operating income of $2.03 billion, or 7.5% of sales for FY15. Operating income in FY16 included $479 million of impairments, store closing and other costs. The $479 million included $265 million of asset impairment charges primarily related to the store closings announced in January 2017, $168 million of severance and other costs primarily associated with organizational changes and store closings announced in January 2017, and $46 million of other related costs and expenses. Excluding these items, as well as non-cash settlement charges related to the Company’s retirement plans of $98 million, operating income was $1.89 billion, or 7.3% of sales.

In all, Macy’s FY16 net income plunged to $619 million, or $1.99 per diluted share, from $1.07 billion, or $3.22 per diluted share, in the year ago corresponding period. Excluding impairments, store closing, settlement charges and other costs of $577 million ($349 million after tax or $1.12 per diluted share), adjusted diluted EPS was $3.11 for FY16. This exceeded the Company’s most recent guidance for FY16 earnings of $2.95 to $3.10 on the same basis.

In FY16, real estate transactions generated cash proceeds of approximately $675 million, which is helping to fund continued reinvestment in the business. During the year, the Company opened 27 stores and closed 66 stores, all as previously announced. Macy’s plans to close an additional approximately 34 stores over the next few years for a total of approximately 100 stores. New stores opened in FY16 included one Macy’s store in Kapolei, Hawaii, 24 Bluemercury freestanding stores, one Macy’s Backstage freestanding store in San Antonio, Texas, and one Bloomingdale’s Outlet in Orange, California.

Other highlights

Cash flow: In FY16, net cash provided by operating activities was $1.80 billion versus $1.98 billion in FY15. Net cash used by investing activities in FY16 was $187 million, while operating cash flows net of investing were $1.61 billion.

Closure of 100 stores: As part of its plans to drive profitable growth, Macy’s announced that it will close about 100 of its stores, or about 15%, by early 2017, while still maintaining a significant bricks-and-mortar presence in 49 of the top 50 US markets. Macy’s will also close a few stores where there is another location nearby, and use the savings from its store closings to focus on its highest-potential locations and invest more aggressively in digital and mobile channels.

The number of stores that Macy’s is planning to shut represents annual net sales volume of about $1 billion. The reduction in EBITDA is expected to be offset by expense savings beyond those associated with store closings. Macy’s also said that it would add new vendors to its existing stores, enter into more license agreements, and increase the size of its staff. The company also said it was in talks to sell its Men’s Store on Union Square in San Francisco for redevelopment. However, Macy’s said the upcoming store closings would not affect its Bloomingdale’s division.

Share repurchase: In FY16, the Company repurchased approximately 7.9 million shares of its common stock for approximately $316 million. As of January 28th, 2017, the Company had remaining authorization to repurchase up to approximately $1.71 billion of its common stock.

Real estate update: In FY16, Macy’s asset sales totaled $673 million in cash proceeds ($209 million in book gains). Macy’s continues to harvest real estate value opportunistically where the value of the real estate as a redevelopment exceeds that of non-strategic operating locations. In addition, the company is closing less productive stores and selling the associated real estate. As an example of these actions, Macy’s completed the previously announced sale of its Union Square Men’s building in San Francisco for $250 million in gross proceeds. Likewise, Macy’s, is exploring strategies that will help create value and further improve the customer experience at its Herald Square store in New York City. To further create value from its real estate portfolio, the company continues to work with its strategic partner, Brookfield Asset Management, on approximately 50 identified assets.

CEO transitioning: Macy’s announced that CEO Terry Lundgren, who has been at the Company’s helm since 2003, will step down in 2017. Jeff Gennette (shown alongside), who was elected president in March 2014, will assume the CEO position in Q1 FY17. Lundgren, 64, will continue as executive chairman and work alongside Gennette. Gennette, 55, was the chief merchandising officer for five years before being elected president. Before that, he was president and CEO of Macy’s West in San Francisco.

New store openings: In FY17, the Company expects to open Macy’s stores in Westfield Century City, Los Angeles, California, and Fashion Place, Murray, Utah, as well as approximately 30 additional Bluemercury locations and approximately 30 Macy’s Backstage locations inside Macy’s stores. Announced new stores in future years include Bloomingdale’s in San Jose, California (2019), and Norwalk, Connecticut (2019).

In addition, under license agreements with Al Tayer Group, a new Bloomingdale’s store is planned to open in 360 Mall in Al Zahra, Kuwait, in spring 2017 and new Macy’s and Bloomingdale’s stores are planned to open in Al Maryah Central in Abu Dhabi, in 2018.

Guidance for full year FY17

In FY17, Macy’s expects comparable sales on an owned basis to decline between 2.2% and 3.3%, with comparable sales on an owned plus licensed basis to decline between 2% and 3%. Total sales are expected to be down between 3.2% and 4.3%, reflecting the 66 stores closed in 2016. Adjusted diluted EPS is expected between $3.37 and $3.62 in FY17, excluding the impact of the anticipated settlement charges related to the company’s defined benefit plans. Excluding the impact of the anticipated gain on the sale of the Union Square Men’s building in San Francisco and the anticipated settlement charges related to the company’s defined benefit plans, adjusted diluted EPS of $2.90 to $3.15 is expected in FY17. Capital expenditures for FY17 are expected to be approximately $900 million.

Stock Performance

Macy’s stock ended the day at $33.17, gaining 2.25%, at the close on Friday, February 24th, 2017, having vacillated between an intraday high of $33.56 and a low of $32.27 during the session. The stock’s trading volume was at 8,146,380 for the day. The Company’s market cap was at $10.13 billion as of Friday’s close.

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