July 2, 2020, 4:01 p.m. EDT

10-Q: MACY'S, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

For purposes of the following discussion, all references to "first quarter of 2020" and "first quarter of 2019" are to the Company's 13-week fiscal periods ended May 2, 2020 and May 4, 2019, respectively. References to "2020" and "2019" are to the Company's 52-week periods ended January 30, 2021 and February 1, 2020, respectively.

Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States. The COVID-19 pandemic has had a negative impact on the Company's fiscal 2020 operations and financial results to date, and the full financial impact of the pandemic cannot be reasonably estimated at this time due to uncertainty as to the severity and duration of the pandemic. The following summarizes the actions taken and impacts from the COVID-19 pandemic during and subsequent to the 13 weeks ended May 2, 2020.

The Company temporarily closed all stores on March 18, 2020, which included all Macy's, Bloomingdale's, Bluemercury, Macy's Backstage, Bloomingdales the Outlet and Market by Macy's stores. The first tranche of stores began reopening on May 4, 2020 and as of July 1, 2020, nearly all the Company's stores have been reopened.

As a result of store closures, the Company recognized an approximate $300 million inventory write-down, primarily on fashion merchandise, during the 13 weeks ended May 2, 2020.

In an effort to increase liquidity, the Company fully drew on its $1,500 million credit facility, announced the suspension of quarterly cash dividends beginning in the second quarter of 2020 and took additional steps to reduce discretionary spending. The Company's Board of Directors rescinded its authorization of any unused amounts under the Company's share repurchase program. In June 2020, the Company completed financing activities of nearly $4.5 billion. See Note 7, "Financing Activities," for further discussion on these activities.

To improve the Company's current cash position and reduce its cash expenditures during this uncertain time, the Company's Board of Directors and Chief Executive Officer did not receive compensation from the beginning of the COVID-19 crisis through June 30, 2020. In addition, the Company deferred cash expenditures where possible and temporarily implemented a furlough for the majority of its employee population that will end at the beginning of July 2020. Certain executives not impacted by the furlough took a temporary reduction of their pay through June 30, 2020.

In the first quarter of 2020, the Company deferred rent payments for a significant number of its stores. The Company has elected to treat the COVID-19 pandemic-related rent deferrals as accrued liabilities. The Company will continue to recognize expense during the deferral periods.

In June 2020, the Company announced a restructuring that will align its cost base with anticipated near-term sales as the business recovers from the impact of the COVID-19 pandemic. The Company will reduce corporate and management headcount by approximately 3,900. Additionally, the Company has reduced staffing across its stores portfolio, supply chain and customer support network, which it will adjust as sales recover. The Company expects the actions announced to generate expense savings of approximately $365 million in fiscal 2020 and approximately $630 million on an annualized basis. These savings will be on top of the anticipated $1.5 billion in annual expense savings announced in February, which the Company expects to fully realize by year-end 2022. For fiscal 2020, the Company expects pre-tax costs of approximately $180 million for these restructuring activities, the majority of which will be recorded in the second quarter of 2020 and all of which will be in cash.

MACY'S, INC.

During the 13 weeks ended May 2, 2020, the Company incurred non-cash impairment charges on long-lived tangible and right of use assets to adjust the carrying value of certain store locations to their estimated fair value. The Company also incurred a non-cash impairment charge on goodwill as a result of the sustained decline in the Company's market capitalization and decline in projected cash flows primarily as a result of the COVID-19 pandemic. See Note 3, "Impairment, Restructuring and Other Costs" and Note 4, "Goodwill and Indefinite Lived Intangible Assets", respectively, for further discussion of these charges.

On March 27, 2020, the CARES Act was signed into law, providing payroll tax credits for employee retention, deferral of payroll taxes, and several income tax provisions including modifications to the net interest deduction limitation, changes to certain property depreciation and allows for carryback of certain operating losses.

The COVID-19 pandemic continues to have a material adverse impact on the Company's operational performance, financial results and cash flows, although the full impact will depend on future developments, including the continued spread and duration of the outbreak and any related restrictions, all of which are highly uncertain and cannot be predicted. The Company continues to monitor the situation closely.

Polaris Strategy

On February 4, 2020, Macy's, Inc. announced its Polaris strategy, a three-year plan designed to stabilize profitability and position the Company for sustainable, profitable growth. The five major components of the Polaris strategy are:

Strengthen Customer Relationships: The Company is focusing on building customer lifetime value and expanding the Macy's Star Rewards loyalty program with the launch of Loyalty 3.0 in early February 2020. Loyalty 3.0 allows every Star Rewards member to earn loyalty rewards on their purchases regardless of tender.

Curate Quality Fashion: The Company is repositioning its merchandise category focus to drive sales and improve gross margin.

Accelerate Digital Growth: The Company will continue to invest in its websites and mobile apps to deliver a superior fashion experience and accelerate growth. The Company will grow its customer franchise with a strong focus on personalization and continued innovation to deliver the best digital fashion experience to its customers.

Optimize the Store Portfolio: The Company completed a rigorous evaluation of the Macy's store portfolio. This included a store-level assessment of each store's overall value to the fleet, including predicted profitability based on consumer trends and demographics. As a result, the Company plans to close approximately 125 of its least productive stores over the next three years, including approximately 30 stores that were announced for closure in the spring of 2020.

Reset Cost Base: The Company is streamlining and right-sizing the organization and expense base to drive improvement in working capital and operating results. This includes reductions in corporate and support functions, campus consolidations and the consolidation of the Company's sole headquarters to New York City, New York. Additionally, the Company is further reshaping its supply chain to support omnichannel customer behavior and the Company's new retail ecosystem.

The impact of the COVID-19 pandemic has caused the Company to examine every aspect of the Polaris strategy to determine where the Company should accelerate, where the Company will continue but with an adjusted focus and where the Company will pause initiatives. The Company may incur significant additional charges in future periods as it more fully defines incremental Polaris strategy initiatives and moves into the execution phases of these projects. Since the scope of such efforts are not fully known at this time, the benefits of such initiatives, and any related charges or capital expenditures, are not currently quantifiable. Actions associated with the Polaris strategy are currently expected to continue through 2022.







                                          MACY'S, INC.
        Results of Operations
        Comparison of the First Quarter of 2020 and the First Quarter of 2019
                                                       First Quarter of 2020           First Quarter of 2019
                                                                                                        % to
                                                                      % to Net                           Net
                                                        Amount          Sales            Amount         Sales
                                                           (dollars in millions, except per share figures)
        Net sales                                   $     3,017                      $     5,504
        Credit card revenues, net                           131          4.3    %            172         3.1   %
        Cost of sales                                    (2,501 )      (82.9 )  %         (3,403 )     (61.8 ) %
        Selling, general and administrative
        expenses                                         (1,598 )      (52.9 )  %         (2,112 )     (38.4 ) %
        Gains on sale of real estate                         16          0.5    %             43         0.8   %
        Impairment, restructuring and other costs        (3,184 )     (105.5 )  %             (1 )         -   %
        Operating income (loss)                          (4,119 )     (136.5 )  %            203         3.7   %
        Benefit plan income, net                              9                                7
        Interest expense, net                               (47 )                            (47 )
        Income (loss) before income taxes                (4,157 )                            163
        Federal, state and local income tax
        benefit (expense)                                   576                              (27 )
        Net income (loss)                           $    (3,581 )                    $       136
        Diluted earnings (loss) per share           $    (11.53 )                    $      0.44
        Supplemental Financial Measure
        Gross margin (a)                            $       516         17.1    %    $     2,101        38.2   %
        Supplemental Non-GAAP Financial Measure
        Diluted earnings (loss) per share,
        excluding the impact of certain items       $     (2.03 )                    $      0.44
        


(a) Gross margin is defined as net sales less cost of sales. Net Sales

MACY'S, INC.

Impairment, Restructuring and Other Costs

During the 13 weeks ended May 2, 2020, primarily as a result of the COVID-19 pandemic, the Company incurred non-cash impairment charges totaling $3,150 million consisting of:

$3,070 million of goodwill impairments, with $2,972 million attributable to the Macy's reporting unit and $98 million attributable to the Bluemercury reporting unit. See discussion at Note 4, "Goodwill and Indefinite Lived Intangible Assets."

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

The first quarter of 2020 also included $34 million of restructuring and other costs related to severance activity and other costs associated with organizational restructuring, primarily associated with the Polaris strategy. See discussion at Note 3, "Impairment, Restructuring and Other Costs." Effective Tax Rate

Cash Flow, Liquidity and Capital Resources The Company's principal sources of liquidity are cash from operations, cash on hand and the credit facility described below.

MACY'S, INC.

The Company is party to a $1,500 million unsecured commercial paper program. The Company may issue and sell commercial paper in an aggregate amount outstanding at any particular time not to exceed its then-current combined borrowing availability under its bank credit agreement. As of May 2, 2020, the Company did not have any borrowings outstanding under its commercial paper program. As of May 2, 2020, the Company was required under its credit agreement to maintain a specified interest coverage ratio for the latest four quarters of no less than 3.25 and a specified leverage ratio as of and for the latest four quarters of no more than 3.75. The Company's interest coverage ratio for the first quarter of 2020 was 6.55 and its leverage ratio at May 2, 2020 was 4.69, in each case as calculated in accordance with the credit agreement. On June 8, 2020, the Company amended the credit agreement in conjunction with the additional financing as discussed further below. The amendment of the credit agreement, discussed further below, removed the interest coverage and leverage ratio requirements.

Secured Debt Issuance

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

Entry into Asset-Based Credit Facility

On June 8, 2020, Macy's Inventory Funding LLC (the "ABL Borrower"), an indirect wholly owned subsidiary of the Company, and its parent, Macy's Inventory Holdings LLC (the "ABL Parent"), entered into an asset-based credit agreement (the "ABL Credit Facility") with Bank of America, N.A., as administrative agent and collateral agent, and the lenders party thereto. The ABL Credit Facility provides the ABL Borrower with (i) a $2,851 million revolving credit facility (the "Revolving ABL Facility"), including a swingline sub-facility and a letter of credit sub-facility, and (ii) a bridge revolving credit facility of up to $300 million (the "Bridge Facility"). The ABL Borrower may request increases in the size of the Revolving ABL Facility up to an additional aggregate principal amount of $750 million.

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

The ABL Credit Facility contains customary borrowing conditions including a borrowing base equal to the sum of (a) 80% (which shall automatically increase to 90% upon the satisfaction of certain conditions, including the delivery of an initial appraisal of the inventory) of the net orderly liquidation percentage of eligible inventory, minus (b) customary reserves. Amounts borrowed under the ABL Credit Facility are subject to interest at a rate per annum equal to (i) prior to the Step Down Date (as defined in the ABL Credit Facility), at the ABL Borrower's option, either (a) adjusted LIBOR plus a margin of 2.75% to 3.00% or

MACY'S, INC.

The ABL Credit Facility also requires (1) the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the end of any fiscal quarter on or after April 30, 2021 if (a) certain events of default have occurred and are continuing or (b) Availability plus Suppressed Availability (each as defined in the ABL Credit Facility) is less than the greater of (x) 10% of the Loan Cap (as defined in the ABL Credit Facility) and (y) $250 million, in each case, as of the end of such fiscal quarter and (2) prior to April 30, 2021, that the ABL Borrower not permit Availability plus Suppressed Availability to be lower than the greater of (x) 10% of the Loan Cap and (y) $250 million.

Amendment to Existing Credit Agreement

The Company substantially reduced the credit commitments of its existing $1,500 million unsecured credit agreement which now provides the Company with unsecured revolving credit of up to $75 million. The unsecured revolving credit facility contains covenants that provide for, among other things, limitations on fundamental changes, use of proceeds, and maintenance of property, as well as customary representations and warranties and events of default. In conjunction with this amendment the interest coverage ratio and leverage ratio, as previously discussed, were eliminated as covenant requirements.

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

In June 2020, MRH commenced offers to eligible holders to exchange (each, an "Exchange Offer" and, collectively, the "Exchange Offers") (i) new 6.65% Senior Secured Debentures due 2024 ("New 2024 Notes") to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.65% Senior Debentures due 2024 issued by MRH ("Old 2024 Notes"), (ii) new 6.7% Senior Secured Debentures due 2028 ("New 2028 Notes") to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.7% Senior Debentures due 2028 issued by MRH ("Old 2028 Notes"), (iii) new 8.75% Senior Secured Debentures due 2029 ("New 2029 Notes") to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 8.75% Senior Debentures due 2029 issued by MRH ("Old 2029 Notes"), (iv) new 7.875% Senior Secured Debentures due 2030 ("New 2030 Notes") to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 7.875% Senior Debentures due 2030 issued by MRH ("Old 2030 Notes"), (v) new 6.9% Senior Secured Debentures due 2032 ("New 2032 Notes") to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.9% Senior Debentures due 2032 issued by MRH ("Old 2032 Notes"), and (vi) new 6.7% Senior Secured Debentures due 2034 ("New 2034 Notes" and, together with the New 2024 Notes, New 2028 Notes, New 2029 Notes, New 2030 Notes and New 2032 Notes, the "New Notes" and each series, a "series of New Notes") to be issued by MRH for validly tendered (and not validly withdrawn) outstanding 6.7% Senior Debentures due 2034 issued by MRH ("Old 2034 Notes" and, together with the Old 2024 Notes, Old 2028 Notes, Old 2029 Notes, Old 2030 Notes and Old 2032 Notes, the "Old Notes" and each series, a "series of Old Notes"). Each New Note issued in the Exchange Offers for a validly tendered Old Note will have an interest rate and maturity date that is identical to the interest rate and maturity date of the tendered Old Note, as well as identical interest payment dates and optional redemption prices. The New Notes will be MRH's and Macy's general, senior obligations and will be secured by a second-priority lien on the same collateral securing the Notes.

In addition, MRH is soliciting consents from holders of each series of Old Notes

The Exchange Offers are scheduled to expire on July 24, 2020, with an early tender date of July 10, 2020. The Consent Solicitations also expire on July 10, 2020.

MACY'S, INC.

. . .

Jul 02, 2020

COMTEX_367641118/2041/2020-07-02T16:01:21

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