Macy's, Inc.: Form 10-Q for the period ended May 4, 2024

For purposes of the following discussion, all references to "first quarter of 2024" and "first quarter of 2023" are to the Company's 13-week fiscal periods ended May 4, 2024 and April 29, 2023, respectively.

The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes included elsewhere in this report, as well as the financial and other information included in the 2023 10-K. The following discussion contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed below and elsewhere in this report (particularly in "Risk Factors" and in "Forward-Looking Statements") and in the 2023 10-K (particularly in "Risk Factors" and in "Forward-Looking Statements"). This discussion includes Non-GAAP financial measures. For information about these measures, see the disclosure under the caption "Important Information Regarding Non-GAAP Financial Measures".

Quarterly Overview

The Company continues to view fiscal 2024 as a transition and investment year as it implements its new strategy, A Bold New Chapter, which is designed to return the Company to enterprise growth, unlock shareholder value, improve the omni-channel experience and better serve its customers. During the first quarter of 2024, the Company was encouraged by customer response to A Bold New Chapter through progress of its initiatives, as follows:

• .Strengthen the Macy's nameplate
• Rationalize store base: At the end of fiscal 2024, the Company announced it had identified approximately 150 underproductive Macy's locations for closure over the next three years (collectively, the "non-go-forward" locations), which will allow for monetization of assets at the non-go-forward locations and prioritization of investments in the approximately 350 remaining Macy's locations (collectively, the "go-forward" locations) where the Company believes it has the most opportunity to improve square footage productivity. For the non-go-forward Macy's locations and distribution centers, the Company is able to be thoughtful and strategic with its approach to monetization and is encouraged by the pace of deal activity.
• Launch of First 50 Stores: The First 50 locations are a key component of the Macy's Bold New Chapter growth strategy as they are an early leading indicator for the go-forward Macy's locations and ultimately the entire Macy's, Inc. go-forward business' ability to return to growth. They serve as pilots to test ideas with new product, visual merchandising and staffing initiatives. Along with positive comparable sales growth, the First 50 locations Net Promoter Scores increased approximately 500 basis points from the prior year and were over 250 basis points above all other Macy's locations.
• Revitalize assortment: The Company is focused on offering newness across categories. In the first quarter of 2024, Macy's introduced and expanded distribution in several market brands within apparel to address areas of opportunity where it has experienced softness in both women's and men's assortments. Beauty remained a standout category and key traffic driver, driven by fragrances. Macy's believes it has the opportunity to offset softness in the big ticket and home categories and is actively working on the market brand matrix with plans to begin a complete refresh of its home private brands in fiscal 2025. Macy's private brand apparel initiative is progressing as planned. The Company has completed the majority of its planned brand exits and reimagined and launched several new brands. In the first quarter of 2024, I.N.C. and Style & Co., which have led the initiative, continued to outperform the Macy's women's apparel segment and Macy's introduced its newest private brand, State of Day. The Company plans to refresh its kid's private brands in the summer of 2024 and introduce a new men's contemporary apparel brand later in the year.
• Rollout of additional Macy's small format stores: The Company opened one Macy's small format during the first quarter and plans to open 11 more this year, bringing the total number of Macy's small format locations to an expected 24 by the end of fiscal 2024.
• Grow digital: Digital continues to serve as both a gateway to the Macy's brand and is a source of commerce and omni engagement. Under new leadership, the team is making progress on optimizing the customer journey, including addressing places of greatest friction, and enhancing the shopping experience across platforms. In the first quarter of 2024, Macy's launched a baby registry, including over 150 new brands across all baby categories. Macy's digital visits increased 2.3% while the conversion rate decreased 14 basis points compared to the first quarter of 2023.
• .Accelerate luxury growth
• Accelerate Bloomingdale's growth:The Company continues to expect to open approximately 15 small format (Bloomie's and Bloomingdale's the Outlet) locations through fiscal 2026, including three later in fiscal 2024. Comparable sales at the small format locations outperformed the broader Bloomingdale's fleet. Contemporary apparel, private brands and beauty continue to be well-received and serve as growth engines for the brand.
• Accelerate Bluemercury growth: The first quarter of 2024 marked the 13th consecutive quarter of comparable sales growth for Bluemercury, driven by continued strength in skincare and the expansion of key brand partners. The Company's plans to open at least 30 new locations and remodel approximately 30 existing locations through fiscal 2026 is underway, with one new location and three remodels slated for the second quarter of 2024. These stores will look to incorporate learnings from recent remodels, including an elevated aesthetic, expanded assortment, and an enhanced selling model.
• .Simplify and modernize end-to-end operations
• The Company is actively advancing on solutions to consolidate capacity, increase automation and reduce costs across the network. While still in its early stages, during the first quarter of 2024, the Company benefited from the flow through of the consolidation of technology vendors and savings from offshoring efforts.

Certain financial highlights for the first quarter of 2024 as compared to the first quarter of 2023 are as follows:

• Macy's, Inc. comparable sales declined 1.2% on an owned basis and declined 0.3% on an owned-plus-licensed-plus-marketplace basis.
• Macy's, Inc. go-forward business comparable sales, inclusive of go-forward locations and digital, declined 0.9% on an owned basis and increased 0.1% on an owned-plus-licensed-plus-marketplace basis.
• Company's nameplate highlights include:
• Macy's comparable sales declined 1.6% on an owned basis and declined 0.4% on an owned-plus-licensed-plus-marketplace basis.
• Go-forward locations comparable sales increased 0.1% on both an owned and owned-plus-licensed basis.
• First 50 locations comparable sales, included within go-forward locations comparable sales, increased 3.3% on an owned basis and increased 3.4% on an owned-plus-licensed basis.
• Non-First 50 go-forward locations comparable sales, included within go-forward locations comparable sales, decreased 1.2% on an owned basis and decreased 1.3% on an owned-plus-licensed basis.
• Macy’s non-go-forward locations comparable sales decreased 4.5% on both an owned and owned-plus-licensed basis.
• Bloomingdale's comparable sales increased 0.8% on an owned basis and increased 0.3% on an owned-plus-licensed-plus-marketplace basis1.
• Bluemercury comparable sales increased 4.3% on an owned basis.
• Other revenues were $154 million, down $37 million.
• Gross margin rate was 39.2%, down 80 basis points.
• Selling, general and administrative ("SG&A") expense was $1,911 million, down $39 million. SG&A expense as a percent of total revenue was 38.2%, up 50 basis points.
• Net income was $62 million, down $93 million.
• Earnings before interest, taxes, depreciation and amortization ("EBITDA") was $345 million compared to EBITDA of $466 million. On an adjusted basis, EBITDA was $364 million compared to $468 million.
• Diluted earnings per share was $0.22 compared to $0.56, and adjusted diluted earnings per share was $0.27 compared to $0.56.
• Merchandise inventories were up 1.7%.

1 Bloomingdale's excludes one non-go-forward location.

Results of Operations

(dollars in millions, except per share figures)

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

See pages 21 to 23 for reconciliations of the supplemental non-GAAP financial measures to their most comparable GAAP financial measure and for other important information.

Comparison of the First Quarter of 2024 and the First Quarter of 2023

Net sales for the first quarter of 2024 decreased for Macy’s but grew for Bloomingdale's and Bluemercury. During the quarter, net sales were impacted by ongoing macroeconomic conditions as consumers benefited from strong wage and job growth, offset by continued inflationary pressures. Macy's experienced strong performance in the First 50 locations, which benefited from enhanced merchandising through elevated product rollouts across top markets and new brands. Beyond apparel, performance was strong in beauty, particularly fragrances. The big ticket, home and handbag categories continued to underperform.

MACY'S, INC.

The decrease in other revenues was primarily driven by a $45 million decrease in credit card revenues. This decrease was primarily driven by expected higher delinquency rates and net credit losses within the portfolio. Macy's Media Network grew $8 million, or 28% from the first quarter of 2023, due to increased vendor engagement.

Gross margin rate and merchandise margin rate decreased 80 basis points and 100 basis points, respectively, in the first quarter of 2024 compared to the first quarter of 2023. The decline primarily reflected additional discounting for slower-moving warm weather products. Delivery expense as a percent of net sales improved 20 basis points from the first quarter of 2023 reflecting ongoing efforts to improve supply chain efficiency. Inventory increased 1.7% year-over-year.

SG&A expenses decreased 2.0% in the first quarter of 2024 compared to the first quarter of 2023 due to continued cost discipline. The increase in SG&A expenses as a percent to total revenue in the first quarter of 2024 was due to a decline in total revenue compared to the first quarter of 2023.

The decrease in net interest expense in the first quarter of 2024 compared to the first quarter of 2023 was primarily driven by an increase in interest income on liquid investments.

Income tax expense decreased $20 million in the first quarter of 2024 compared to the first quarter of 2023 due to lower income before income taxes. The income tax expense of $36 million and $56 million, or 36.7% and 26.5% of pretax income, for the 13 weeks ended May 4, 2024 and April 29, 2023, respectively, reflect a different effective tax rate as compared to the Company’s federal income tax statutory rate of 21%. The income tax effective rates for the 13 weeks ended May 4, 2024 and April 29, 2023 were impacted primarily by the effect of state and local taxes and the vesting and cancellation of certain stock-based compensation awards.

Liquidity and Capital Resources

The Company's principal sources of liquidity are cash from operations, cash on hand and the ABL Credit Facility (as defined 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. The Company believes that, assuming no change in its current business plan, its available cash, together with expected future cash generated from operations, the amount available under the ABL Credit Facility, and credit available in the market, will be sufficient to satisfy its anticipated needs for working capital, capital expenditures, and cash dividends for at least the next twelve months and the foreseeable future thereafter.

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.

Capital Allocation

The Company's capital allocation goals include maintaining a healthy balance sheet and investment-grade credit metrics, followed by investing in growth initiatives and returning capital to shareholders through predictable dividends and share repurchases with excess cash.

The Company ended the first quarter of 2024 with a cash and cash equivalents balance of $876 million, an increase of $273 million from $603 million at the end of the first quarter of 2023. The Company is party to the ABL Credit Facility with certain financial institutions providing for a $3,000 million asset-based credit facility.

Operating Activities

The increase in net cash provided by operating activities was primarily driven by a decrease in payments of accounts payable and accrued liabilities, partially offset by lower net income.

Investing Activities

The Company's capital expenditures were $229 million in the first quarter of 2024 compared to $296 million in the first quarter of 2023. Capital expenditures in the current year are primarily focused on digital and technology investments as well as omni-channel capabilities.

Financing Activities

Dividends

The Company paid dividends totaling $48 million and $45 million in the first quarters of 2024 and 2023, respectively.

On May 16, 2024, the Company announced that its Board of Directors declared a regular quarterly dividend of 17.37 cents per share on its common stock, which will be paid on July 1, 2024, to Macy's shareholders of record at the close of business on June 14, 2024. Subsequent dividends will be subject to approval of the Board of Directors, which will depend on market and other conditions.

Stock Repurchases

On February 22, 2022, the Board of Directors authorized a new $2,000 million share repurchase program, which does not have an expiration date. During the first quarter of 2023, the Company repurchased approximately 1.4 million shares of its common stock at an average cost of $17.57 per share on the open market under its share repurchase program. The Company did not repurchase any shares of its common stock during the first quarter of 2024. As of May 4, 2024, $1,375 million remained 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. During the first quarter of 2023, the Company also withheld approximately $12 million of shares for tax purposes associated with the issuance of certain stock awards.

Debt Transactions

As of May 4, 2024 and April 29, 2023, the Company had $144 million and $138 million of standby letters of credit outstanding under its ABL Credit Facility, respectively, which reduced the available borrowing capacity to $2,856 million and $2,862 million, respectively. The Company had no outstanding borrowings under the ABL Credit Facility as of May 4, 2024 and April 29, 2023.

Contractual Obligations

As of May 4, 2024, other than the financing transactions discussed in Note 4 to the accompanying Consolidated Financial Statements, there were no material changes to the Company's contractual obligations and commitments outside the ordinary course of business since February 3, 2024, as reported in the Company's 2023 Form 10-K.

Guarantor Summarized Financial Information

The Company had $3,007 million aggregate principal amount of senior unsecured notes and senior unsecured debentures (collectively the "Unsecured Notes") outstanding as of both May 4, 2024 and February 3, 2024 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" and together with the "Subsidiary Issuer," the "Obligor Group"), and are fully and unconditionally guaranteed on a senior unsecured basis by Parent. The Unsecured Notes rank equally in right of payment with all of the Company's existing and future senior unsecured obligations, senior to any of the Company's future subordinated indebtedness, and are structurally subordinated to all existing and future obligations of each of the Company's subsidiaries that do not guarantee the Unsecured Notes. Holders of the Company's secured indebtedness, including 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 guarantees 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 $9,331 million and $9,423 million as of May 4, 2024 and February 3, 2024, respectively, have been excluded from the Summarized Balance Sheets. Equity in earnings of non-Guarantor subsidiaries of $355 million for the 13 weeks ended May 4, 2024, 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 Sheets

(in millions)

ASSETS

(a) Includes net amounts due to non-Guarantor subsidiaries of $4,301 million and $6,784 million as of May 4, 2024 and February 3, 2024, respectively.

Summarized Statement of Operations

(in millions)

(a) Income pertains to transactions with ABL Borrower, a non-Guarantor subsidiary.

(b) Includes $95 million of dividend income from non-Guarantor subsidiaries for the 13 weeks ended May 4, 2024, respectively.

Important Information Regarding Non-GAAP Financial Measures

The Company reports its financial results in accordance with U.S. generally accepted accounting principles (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-plus-marketplace basis, which includes the impact of growth in comparable sales of departments licensed to third parties and marketplace sales, assists in evaluating the Company's ability to generate sales growth, whether through owned businesses, departments licensed to third parties or marketplace sales, on a comparable basis, and in evaluating the impact of changes in the manner in which certain departments are operated. Earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP financial measure which 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 from period-to-period from net income, diluted earnings 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.

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 and marketplace sales 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-plus-marketplace basis, to GAAP comparable sales (i.e., on an owned basis), which the Company believes to be the most directly comparable GAAP financial measure.

(a) Bloomingdale's excludes one non-go-forward location.

MACY'S, INC.

Notes:

(1) Represents the period-to-period percentage change in net sales from stores in operation for one full fiscal year for the 13 weeks ended May 4, 2024 and April 29, 2023. Such calculation includes all digital sales and excludes commissions from departments licensed to third parties and marketplace. Stores impacted by a natural disaster or undergoing significant expansion or shrinkage remain in the comparable sales calculation unless the store, or material portion of the store, is closed for a significant period of time. Definitions and calculations of comparable sales may 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, including marketplace sales, in the calculation of comparable sales. Macy’s and Bloomingdale’s license third parties to operate certain departments in their stores and online, including Macy’s and Bloomingdale’s digital Marketplace, and receive commissions from these third parties based on a percentage of their net sales, while Bluemercury does not participate in licensed or marketplace businesses. In its financial statements prepared in conformity with GAAP, the Company includes these commissions (rather than sales of the departments licensed to third parties and marketplace) in its net sales. The Company does not, however, include any amounts in respect of licensed department or marketplace 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 and from the digital marketplace are not material to its net sales for the periods presented.

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 directly comparable GAAP measure.

22

Adjusted Net Income and Adjusted Diluted Earnings Per Share

The following is a tabular reconciliation of the non-GAAP financial measures adjusted net income to GAAP net income and adjusted diluted earnings per share to GAAP diluted earnings per share, which the Company believes to be the most directly comparable GAAP measures.

(millions, except per share figures)

Critical Accounting Estimates

Commencing in fiscal 2024, the Company no longer considers merchandise inventories be a critical accounting estimate due to the change in inventory valuation method from LIFO RIM to LIFO cost. Certain operational management judgments and estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, do not impact inventory valuation under LIFO cost to the same extent as they previously did under LIFO RIM.

There have been no material changes to the Company's market risk as described in the Company's 2023 10-K. For a discussion of the Company's exposure to market risk, refer to the Company's market risk disclosures set forth in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of the 2023 10-K.

The Company's Chief Executive Officer and Chief Financial Officer have carried out, as of May 4, 2024, with the participation of the Company's management, an evaluation of the effectiveness of the Company's disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of May 4, 2024, the Company's disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in reports the Company files under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission (the "SEC") rules and forms, and that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

From time to time adoption of new accounting pronouncements, major organizational restructuring and realignment occurs for which the Company reviews its internal control over financial reporting. As a result of this review, there were no changes in the Company's internal control over financial reporting that occurred during the Company's most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

There have been no material changes to the Risk Factors described in Part I, Item 1A."Risk Factors" in the Company's 2023 Form 10-K.