UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 

ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended May 4, 2019

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from    to

Commission file number: 1-13536
 
macysinclogohighresa03.jpg
 
Incorporated in Delaware
 
I.R.S. Employer Identification No.
 
 
13-3324058

7 West Seventh Street Cincinnati, Ohio 45202

and
151 West 34th Street New York, New York 10001

(513) 579-7000

 
(212) 494-1602


Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value per share
M
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company  o

 
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at June 1, 2019
Common Stock, $.01 par value per share
 
308,871,513 shares
 



PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MACY’S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

(millions, except per share figures)
 
 
 
 
 
 
13 Weeks Ended
 
May 4, 2019
 
May 5, 2018
Net sales
$
5,504

 
$
5,541

Credit card revenues, net
172

 
157

 
 
 
 
Cost of sales
(3,403
)
 
(3,382
)
Selling, general and administrative expenses
(2,112
)
 
(2,083
)
Gains on sale of real estate
43

 
24

Impairment and other costs
(1
)
 
(19
)
Operating income
203

 
238

Benefit plan income, net
7

 
11

Interest expense
(54
)
 
(71
)
Interest income
7

 
5

Income before income taxes
163

 
183

Federal, state and local income tax expense
(27
)
 
(52
)
Net income
136

 
131

Net loss attributable to noncontrolling interest

 
8

Net income attributable to Macy's, Inc. shareholders
$
136

 
$
139

Basic earnings per share attributable to Macy's, Inc. shareholders
$
0.44

 
$
0.45

Diluted earnings per share attributable to Macy's, Inc. shareholders
$
0.44

 
$
0.45


The accompanying notes are an integral part of these Consolidated Financial Statements.

2


MACY’S, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

(millions)

 
 
 
 
 
13 Weeks Ended
 
May 4, 2019
 
May 5, 2018
Net income
$
136

 
$
131

Reclassifications to net income:
 
 
 
Amortization of net actuarial loss and prior service credit on post employment and postretirement benefit plans included in net income, before tax
8

 
9

Tax effect related to items of other comprehensive income
(2
)
 
(2
)
Total other comprehensive income, net of tax effect
6

 
7

Comprehensive income
142

 
138

Comprehensive loss attributable to noncontrolling interest

 
8

Comprehensive income attributable to Macy's, Inc. shareholders
$
142

 
$
146


The accompanying notes are an integral part of these Consolidated Financial Statements.


3


MACY’S, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(millions)
 
 
 
 
 
 
 
 
May 4, 2019
 
February 2, 2019
 
May 5, 2018
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and cash equivalents
$
737

 
$
1,162

 
$
1,531

Receivables
237

 
400

 
250

Merchandise inventories
5,498

 
5,263

 
5,291

Prepaid expenses and other current assets
633

 
620

 
638

Total Current Assets
7,105

 
7,445

 
7,710

Property and Equipment - net of accumulated depreciation and
amortization of $4,621, $4,495 and $4,765
6,499

 
6,637

 
6,575

Right of Use Assets
2,631

 

 

Goodwill
3,908

 
3,908

 
3,908

Other Intangible Assets – net
441

 
478

 
486

Other Assets
712

 
726

 
889

Total Assets
$
21,296

 
$
19,194

 
$
19,568

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
Short-term debt
$
41

 
$
43

 
$
25

Merchandise accounts payable
1,950

 
1,655

 
2,045

Accounts payable and accrued liabilities
2,846

 
3,366

 
2,695

Income taxes
182

 
168

 
312

Total Current Liabilities
5,019

 
5,232

 
5,077

Long-Term Debt
4,680

 
4,708

 
5,857

Long-Term Lease Liabilities
2,823

 

 

Deferred Income Taxes
1,193

 
1,238

 
1,169

Other Liabilities
1,258

 
1,580

 
1,664

Shareholders' Equity:
 
 
 
 
 
Macy's, Inc.
6,323

 
6,436

 
5,821

Noncontrolling interest

 

 
(20
)
Total Shareholders’ Equity
6,323

 
6,436

 
5,801

Total Liabilities and Shareholders’ Equity
$
21,296

 
$
19,194

 
$
19,568


The accompanying notes are an integral part of these Consolidated Financial Statements.


4


MACY’S, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)

(millions)

 
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Equity
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Shareholders' Equity
Balance at February 2, 2019
$
3

 
$
652

 
$
8,050

 
$
(1,318
)
 
$
(951
)
 
$
6,436

Cumulative-effect adjustment (a)
 
 
 
 
(158
)
 
 
 
 
 
(158
)
Net income
 
 
 
 
136

 
 
 
 
 
136

Other comprehensive income
 
 
 
 
 
 
 
 
6

 
6

Common stock dividends
  ($0.3775 per share)
 
 
 
 
(117
)
 
 
 
 
 
(117
)
Stock-based compensation expense
 
 
14

 
 
 
 
 
 
 
14

Stock issued under stock plans
 
 
(60
)
 
 
 
66

 
 
 
6

Balance at May 4, 2019
$
3

 
$
606

 
$
7,911

 
$
(1,252
)
 
$
(945
)
 
$
6,323

(a) Represents the cumulative-effect adjustment to retained earnings for the adoption of Accounting Standards Update 2016-02 (ASU-2016-02), Leases (Topic 842), on February 3, 2019.


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Equity
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Macy's, Inc.
Shareholders’
Equity
 
Non-controlling
Interest
 
Total Shareholders' Equity
Balance at February 3, 2018
$
3

 
$
676

 
$
7,246

 
$
(1,456
)
 
$
(724
)
 
$
5,745

 
$
(12
)
 
$
5,733

Net income (loss)
 
 
 
 
139

 
 
 
 
 
139

 
(8
)
 
131

Other comprehensive income
 
 
 
 
 
 
 
 
7

 
7

 
 
 
7

Common stock dividends ($0.3775 per share)
 
 
 
 
(116
)
 
 
 
 
 
(116
)
 
 
 
(116
)
Stock-based compensation
  expense
 
 
17

 
 
 
 
 
 
 
17

 
 
 
17

Stock issued under stock plans
 
 
(51
)
 
 
 
80

 
 
 
29

 
 
 
29

Stranded tax costs (b)
 
 
 
 
164

 
 
 
(164
)
 

 
 
 

Balance at May 5, 2018
$
3

 
$
642

 
$
7,433

 
$
(1,376
)
 
$
(881
)
 
$
5,821

 
$
(20
)
 
$
5,801

(b) Represents the reclassification of stranded tax effects to retained earnings as a result of U.S. federal tax reform.

The accompanying notes are an integral part of these Consolidated Financial Statements.


5


MACY’S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(millions)
 
 
 
 
 
13 Weeks Ended
 
May 4, 2019
 
May 5, 2018
Cash flows from operating activities:
 
 
 
Net income
$
136

 
$
131

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Impairment and other costs
1

 
19

Depreciation and amortization
236

 
235

Stock-based compensation expense
14

 
17

Gains on sale of real estate
(43
)
 
(24
)
Deferred income taxes
7

 
19

Benefit plans
8

 
9

Changes in assets and liabilities:
 
 
 
Decrease in receivables
163

 
105

Increase in merchandise inventories
(235
)
 
(115
)
Increase in prepaid expenses and other current assets
(6
)
 
(20
)
Increase in merchandise accounts payable
247

 
415

Decrease in accounts payable and accrued liabilities
(516
)
 
(453
)
Increase in current income taxes
8

 
25

Change in other assets and liabilities not separately identified
(58
)
 
(41
)
Net cash provided (used) by operating activities
(38
)
 
322

Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(204
)
 
(132
)
Capitalized software
(60
)
 
(58
)
Disposition of property and equipment
34

 
23

Other, net
(7
)
 
11

Net cash used by investing activities
(237
)
 
(156
)
Cash flows from financing activities:
 
 
 
Debt repaid
(3
)
 
(3
)
Dividends paid
(116
)
 
(116
)
Decrease in outstanding checks
(45
)
 
(10
)
Issuance of common stock
6

 
28

Proceeds from noncontrolling interest

 
2

Net cash used by financing activities
(158
)
 
(99
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(433
)
 
67

Cash, cash equivalents and restricted cash beginning of period
1,248

 
1,513

Cash, cash equivalents and restricted cash end of period
$
815

 
$
1,580

Supplemental cash flow information:
 
 
 
Interest paid
$
46

 
$
65

Interest received
7

 
5

Income taxes paid (net of refunds received)
12

 
8

Note: Restricted cash of $78 million and $49 million have been included with cash and cash equivalents for the 13 weeks ended May 4, 2019 and May 5, 2018, respectively.

The accompanying notes are an integral part of these Consolidated Financial Statements.

6


MACY’S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

1.    Organization and Summary of Significant Accounting Policies
Nature of Operations
Macy's, Inc. and subsidiaries (the "Company") is an omnichannel 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, Guam and Puerto Rico. As of May 4, 2019, the Company's operations were conducted through Macy's, Bloomingdale's, Bloomingdale's The Outlet, Macy's Backstage and bluemercury.
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.
A description of the Company's significant accounting policies is included in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2019 (the "2018 10-K"). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 2018 10-K.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles ("GAAP") 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, which may result in actual amounts differing from reported amounts.
The Consolidated Financial Statements for the 13 weeks ended May 4, 2019 and May 5, 2018, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly, in all material respects, the consolidated financial position and results of operations of the Company.
Seasonality
Because of the seasonal nature of the retail business, the results of operations for the 13 weeks ended May 4, 2019 and May 5, 2018 (which do not include the Christmas season) are not necessarily indicative of such results for the full fiscal year.
Reclassifications
Certain reclassifications were made to prior years’ amounts to conform to the classifications of such amounts in the most recent years.
Comprehensive Income
Total comprehensive income represents the change in equity during a period from sources other than transactions with shareholders and, as such, includes net income. For the Company, the only other components of total comprehensive income for the 13 weeks ended May 4, 2019 and May 5, 2018 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 Income. 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 Income. See Note 6, "Benefit Plans," for further information.
Newly Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), as amended, which requires lessees to recognize substantially all leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right of use ("ROU") model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The new standard was adopted by the Company on February 3, 2019 utilizing a modified retrospective approach that allowed for transition in the period of adoption. The Company adopted the package of practical expedients available at transition that

7

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. Contracts entered into prior to adoption were not reassessed for leases or embedded leases. Upon adoption, the Company used hindsight in determining lease term and impairment. For lease and non-lease components, the Company has elected to account for both as a single lease component.
  
Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of $2,516 million and $2,728 million, respectively, as of February 3, 2019. The difference of $212 million between the additional net lease assets and lease liabilities, net of the deferred tax impact of $54 million, was recorded as an adjustment to retained earnings. Prepaid rent, intangible lease assets, finance lease assets, and accrued and deferred rent as of February 3, 2019 were recorded as part of the ROU asset. Finance lease obligations as of February 3, 2019 were recorded as part of the lease liabilities. The standard did not materially impact the Company's consolidated net income and had no impact on cash flows.

2.    Earnings Per Share Attributable to Macy's, Inc. Shareholders
The following tables set forth the computation of basic and diluted earnings per share attributable to Macy's, Inc. shareholders:


 
13 Weeks Ended
 
May 4, 2019
 
May 5, 2018
 
Net
Income
 
 
 
Shares
 
Net
Income
 
 
 
Shares
 
(millions, except per share data)
Net income attributable to Macy's, Inc. shareholders and
average number of shares outstanding
$
136

 
 
 
308.2

 
$
139

 
 
 
305.7

Shares to be issued under deferred
compensation and other plans
 
 
 
 
0.9

 
 
 
 
 
0.9

 
$
136

 
 
 
309.1

 
$
139

 
 
 
306.6

Basic earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
0.44

 
 
 
 
 
$
0.45

 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Stock options, restricted stock and restricted stock units
 
 
 
 
2.3

 
 
 
 
 
2.8

 
$
136

 
 
 
311.4

 
$
139

 
 
 
309.4

Diluted earnings per share attributable to
Macy's, Inc. shareholders
 
 
$
0.44

 
 
 
 
 
$
0.45

 
 

In addition to the stock options and restricted stock units reflected in the foregoing tables, stock options to purchase 16.9 million shares of common stock and restricted stock units relating to 2.2 million shares of common stock were outstanding at May 4, 2019, but were not included in the computation of diluted earnings per share because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.

In addition to the stock options and restricted stock units reflected in the foregoing tables, stock options to purchase 15.7 million shares of common stock and restricted stock units relating to 2.5 million shares of common stock were outstanding at May 5, 2018, but were not included in the computation of diluted earnings per share because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.


8

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


3. Revenue
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. The Company's revenue generating activities include the following:
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 the time of shipment to the customer 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.
For the 13 weeks ended May 4, 2019 and May 5, 2018, Macy's accounted for 88% of the Company's net sales. Disaggregation of the Company's net sales by family of business for the 13 weeks ended May 4, 2019 and May 5, 2018 were as follows:
 
13 Weeks Ended
Net sales by family of business
May 4, 2019
 
May 5, 2018
 
(millions)
Women's Accessories, Intimate Apparel, Shoes, Cosmetics and Fragrances
$
2,152

 
$
2,159

Women's Apparel
1,313

 
1,351

Men's and Kids'
1,202

 
1,174

Home/Other (a)
837

 
857

Total
$
5,504

 
$
5,541

(a) Other primarily includes restaurant sales, allowance for merchandise returns adjustments and breakage income from unredeemed gift cards.
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 $294 million, $269 million and $298 million as of May 4, 2019, February 2, 2019 and May 5, 2018, respectively. Included in prepaid expenses and other current assets is an asset totaling $200 million, $188 million and $204 million as of May 4, 2019, February 2, 2019 and May 5, 2018, respectively, for the recoverable cost of merchandise estimated to be returned by customers.
Gift Cards and Customer Loyalty Programs
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 at the time gift cards are 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 maintains customer loyalty programs in which customers earn points based on their purchases. Under the Macy’s brand, points are earned based on customers’ spending on Macy’s private label and co-branded credit cards as well as non-proprietary cards during certain tender-neutral promotional events. Under the Bloomingdale’s brand, the Company offers a tender neutral points-based program. 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.
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 $696 million, $856 million and $736 million as of May 4, 2019, February 2, 2019 and May 5, 2018, respectively.


9

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


Credit Card Revenues, net
In 2005, the Company entered into an arrangement with Citibank to sell the Company's private label and co-branded credit cards ("Credit Card Program"). Subsequent to this initial arrangement and associated amendments, in 2014, the Company entered into an amended and restated Credit Card Program Agreement (the "Program Agreement") with Citibank. 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.

4. 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 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.   
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.

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. 
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:
 
 
May 4, 2019
 
Classification
(millions)
Assets
 
 
Finance lease assets (a)
Right of Use Assets
$
11

Operating lease assets
Right of Use Assets
2,620

Total leased assets
 
$
2,631

 
 
 
Liabilities
 
 
Current
 
 
Finance
Accounts payable and accrued liabilities
$
1

Operating
Accounts payable and accrued liabilities
362

 
 
 
Noncurrent
 
 
Finance
Long-Term Lease Liabilities
25

Operating
Long-Term Lease Liabilities
2,798

Total lease liabilities
 
$
3,186

(a) Finance lease assets are recorded net of accumulated amortization of $12 million as of May 4, 2019.

10

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


The components of net lease expense are disclosed below. Operating lease expense includes variable lease expense of $28 million.
 
 
13 Weeks Ended
 
 
May 4, 2019
 
Classification
(millions)
Operating lease expense (b)
Selling, general and administrative expenses
$
122

Sublease income
Selling, general and administrative expenses
(1
)
Net lease expense
 
$
121

(b) Certain supply chain operating lease expense amounts are included in cost of sales.
As of May 4, 2019, the maturity of lease liabilities is as follows:
 
 
Finance
Leases (c)
 
Operating
Leases (d)
 
Total
 
(millions)
Fiscal year
 
 
 
 
 
2019
$
2

 
$
271

 
$
273

2020
3

 
331

 
334

2021
3

 
330

 
333

2022
3

 
312

 
315

2023
3

 
307

 
310

After 2023
32

 
5,231

 
5,263

Total undiscounted lease payments
46

 
6,782

 
6,828

Less amount representing interest
20

 
3,622

 
3,642

Total lease liabilities
$
26

 
$
3,160

 
$
3,186

(c) Finance lease payments include $12 million related to options to extend lease terms that are reasonably certain of being exercised.
(d) Operating lease payments include $3,163 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $942 million of legally binding minimum lease payments for leases signed but not yet commenced.

Additional supplemental information regarding assumptions and cash flows for operating and finance leases are as follows:
 
May 4, 2019
Lease Term and Discount Rate
(millions)
Weighted-average remaining lease term (years)
 
Finance leases
18.2

Operating leases
23.3

Weighted-average discount rate
 
Finance leases
6.65
%
Operating leases
6.71
%

 
13 Weeks Ended
 
May 4, 2019
Other Information
(millions)
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows used from operating leases
$
94

Leased assets obtained in exchange for new operating lease liabilities
19




11

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


As of February 2, 2019, as disclosed in the 2018 10-K, minimum rental commitments for noncancellable leases, including executed leases not yet commenced, were as follows:
 
Capitalized
Leases (e)
 
Operating
Leases
 
Total
 
(millions)
Fiscal year
 
 
 
 
 
2019
$
3

 
$
325

 
$
328

2020
3

 
315

 
318

2021
3

 
309

 
312

2022
3

 
283

 
286

2023
3

 
264

 
267

After 2023
31

 
2,758

 
2,789

Total minimum lease payments
46

 
$
4,254

 
$
4,300

Less amount representing interest
20

 
 
 
 
Present value of net minimum capitalized lease payments
$
26

 
 
 
 
(e) For purposes of the disclosure, capitalized lease is used interchangeably with finance lease.

5.    Financing Activities
The following table shows the detail of debt repayments:
 
 
13 Weeks Ended
 
May 4, 2019
 
May 5, 2018
 
(millions)
9.5% Amortizing debentures due 2021
$
2

 
$
2

9.75% Amortizing debentures due 2021
1

 
1

 
$
3

 
$
3


On May 9, 2019, the Company entered into a new credit agreement with certain financial institutions that replaces the previous credit agreement which was set to expire on May 6, 2021. Similar to the previous agreement, the new credit agreement provides for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which may be increased to $1,750 million at the option of the Company, subject to the willingness of existing or new lenders to provide commitments for such additional financing). The new credit agreement is scheduled to expire on May 9, 2024, subject to up to two one-year extensions that may be requested by the Company and agreed to by the lenders.

6.    Benefit Plans
The Company has defined contribution plans which 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.
In addition, certain retired employees currently are provided with specified health care and life insurance benefits ("Postretirement Obligations"). Eligibility requirements for such benefits vary, but generally state that benefits are available to eligible employees who were hired prior to a certain date and retire after a certain age with specified years of service. Certain employees are subject to having such benefits modified or terminated.

12

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


The defined contribution plan expense and actuarially determined components of the net periodic benefit cost (income) associated with the defined benefit plans are as follows:
 
13 Weeks Ended
 
May 4, 2019
 
May 5, 2018
 
(millions)
401(k) Qualified Defined Contribution Plan
$
25

 
$
23

 
 
 
 
Non-Qualified Defined Contribution Plan
$
1

 
$

 
 
 
 
Pension Plan
 
 
 
Service cost
$
1

 
$
2

Interest cost
26

 
26

Expected return on assets
(48
)
 
(53
)
Recognition of net actuarial loss
7

 
8

Amortization of prior service credit

 

 
$
(14
)
 
$
(17
)
Supplementary Retirement Plan
 
 
 
Service cost
$

 
$

Interest cost
6

 
6

Recognition of net actuarial loss
2

 
2

Amortization of prior service cost

 

 
$
8

 
$
8

 
 
 
 
Total Retirement Expense
$
20

 
$
14

 
 
 
 
Postretirement Obligations
 
 
 
Service cost
$

 
$

Interest cost
1

 
1

Recognition of net actuarial gain
(1
)
 
(1
)
Amortization of prior service credit

 

 
$

 
$


7.    Fair Value Measurements
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:
 
 
May 4, 2019
 
May 5, 2018
 
 
 
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
$
110

 
$
31

 
$
79

 
$

 
$
96

 
$
25

 
$
71

 
$


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

13

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


liabilities and long-term debt. With the exception of long-term debt, the carrying amount of these financial instruments approximates fair value because of the short maturity of these instruments. The fair values of long-term debt, excluding capitalized leases, 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 capital leases and other obligations:
 
 
May 4, 2019
 
May 5, 2018
 
Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
Notional
Amount
 
Carrying
Amount
 
Fair
Value
 
(millions)
Long-term debt
$
4,667

 
$
4,680

 
$
4,614

 
$
5,803

 
$
5,832

 
$
5,621


8.    Condensed Consolidating Financial Information
Certain debt obligations of the Company, which constitute debt obligations of Macy's Retail Holdings, Inc. ("Subsidiary Issuer"), a 100%-owned subsidiary of Macy's, Inc. ("Parent"), are fully and unconditionally guaranteed by Parent. In the following condensed consolidating financial statements, "Other Subsidiaries" includes all other direct subsidiaries of Parent, including Bluemercury, Inc., FDS Bank, West 34th Street Insurance Company New York, Macy's Merchandising Corporation, Macy's Merchandising Group, Inc. and its subsidiaries Macy's Merchandising Group (Hong Kong) Limited, Macy's Merchandising Group Procurement, LLC, Macy's Merchandising Group International, LLC, Macy's Merchandising Group International (Hong Kong) Limited, and its majority-owned subsidiary Macy's China Limited. "Subsidiary Issuer" includes operating divisions and non-guarantor subsidiaries of the Subsidiary Issuer on an equity basis. The assets and liabilities and results of operations of the non-guarantor subsidiaries of the Subsidiary Issuer are also reflected in "Other Subsidiaries."
Condensed Consolidating Statements of Comprehensive Income for the 13 weeks ended May 4, 2019 and May 5, 2018, Condensed Consolidating Balance Sheets as of May 4, 2019, May 5, 2018 and February 2, 2019, and the related Condensed Consolidating Statements of Cash Flows for the 13 weeks ended May 4, 2019 and May 5, 2018 are presented on the following pages.







14

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


Condensed Consolidating Statement of Comprehensive Income
For the 13 Weeks Ended May 4, 2019
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
2,154

 
$
4,768

 
$
(1,418
)
 
$
5,504

Credit card revenues (expense), net

 
(2
)
 
174

 

 
172

 
 
 
 
 
 
 
 
 
 
Cost of sales

 
(1,341
)
 
(3,480
)
 
1,418

 
(3,403
)
Selling, general and administrative expenses

 
(803
)
 
(1,309
)
 

 
(2,112
)
Gains on sale of real estate

 
24

 
19

 

 
43

Impairment and other costs

 

 
(1
)
 

 
(1
)
Operating income

 
32

 
171

 

 
203

Benefit plan income, net

 
3

 
4

 

 
7

Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External
5

 
(53
)
 
1

 

 
(47
)
Intercompany

 
(19
)
 
19

 

 

Equity in earnings (loss) of subsidiaries
132

 
(30
)
 

 
(102
)
 

Income (loss) before income taxes
137

 
(67
)
 
195

 
(102
)
 
163

Federal, state and local income
tax benefit (expense)
(1
)
 
24

 
(50
)
 

 
(27
)
Net income (loss)
136

 
(43
)
 
145

 
(102
)
 
136

Net loss attributable to noncontrolling interest

 

 

 

 

Net income (loss) attributable to
Macy's, Inc. shareholders
$
136

 
$
(43
)
 
$
145

 
$
(102
)
 
$
136

Comprehensive income (loss)
$
142

 
$
(38
)
 
$
149

 
$
(111
)
 
$
142

Comprehensive loss attributable to
noncontrolling interest

 

 

 

 

Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$
142

 
$
(38
)
 
$
149

 
$
(111
)
 
$
142













15

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


Condensed Consolidating Statement of Comprehensive Income
For the 13 Weeks Ended May 5, 2018
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
2,008

 
$
5,363

 
$
(1,830
)
 
$
5,541

Credit card revenues (expense), net

 
(6
)
 
163

 

 
157

 
 
 
 
 
 
 
 
 
 
Cost of sales

 
(1,320
)
 
(3,892
)
 
1,830

 
(3,382
)
Selling, general and administrative expenses

 
(828
)
 
(1,255
)
 

 
(2,083
)
Gains on sale of real estate

 
23

 
1

 

 
24

Impairment and other costs

 

 
(19
)
 

 
(19
)
Operating income (loss)

 
(123
)
 
361

 

 
238

Benefit plan income, net

 
4

 
7

 

 
11

Interest (expense) income, net:
 
 
 
 
 
 
 
 
 
External
4

 
(71
)
 
1

 

 
(66
)
Intercompany

 
(18
)
 
18

 

 

Equity in earnings of subsidiaries
136

 
102

 

 
(238
)
 

Income (loss) before income taxes
140

 
(106
)
 
387

 
(238
)
 
183

Federal, state and local income
tax benefit (expense)
(1
)
 
37

 
(88
)
 

 
(52
)
Net income (loss)
139

 
(69
)
 
299

 
(238
)
 
131

Net loss attributable to noncontrolling interest

 

 
8

 

 
8

Net income (loss) attributable to
Macy's, Inc. shareholders
$
139

 
$
(69
)
 
$
307

 
$
(238
)
 
$
139

Comprehensive income (loss)
$
146

 
$
(63
)
 
$
303

 
$
(248
)
 
$
138

Comprehensive loss attributable to
noncontrolling interest

 

 
8

 

 
8

Comprehensive income (loss) attributable to
Macy's, Inc. shareholders
$
146

 
$
(63
)
 
$
311

 
$
(248
)
 
$
146



16

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Balance Sheet
As of May 4, 2019
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
293

 
$
151

 
$
293

 
$

 
$
737

Receivables

 
40

 
197

 

 
237

Merchandise inventories

 
2,369

 
3,129

 

 
5,498

Prepaid expenses and other current assets

 
163

 
470

 

 
633

Total Current Assets
293

 
2,723

 
4,089

 

 
7,105

Property and Equipment – net

 
3,202

 
3,297

 

 
6,499

Right of Use Assets

 
677

 
1,954

 

 
2,631

Goodwill

 
3,326

 
582

 

 
3,908

Other Intangible Assets – net

 
5

 
436

 

 
441

Other Assets

 
28

 
684

 

 
712

Deferred Income Taxes
6

 

 

 
(6
)
 

Intercompany Receivable
2,436

 

 
886

 
(3,322
)
 

Investment in Subsidiaries
3,776

 
3,061

 

 
(6,837
)
 

Total Assets
$
6,511

 
$
13,022

 
$
11,928

 
$
(10,165
)
 
$
21,296

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Short-term debt
$

 
$
41

 
$

 
$

 
$
41

Merchandise accounts payable

 
845

 
1,105

 

 
1,950

Accounts payable and accrued liabilities
73

 
786

 
1,987

 

 
2,846

Income taxes
87

 
61

 
34

 

 
182

Total Current Liabilities
160

 
1,733

 
3,126

 

 
5,019

Long-Term Debt

 
4,680

 

 

 
4,680

Long-Term Lease Liabilities

 
607

 
2,216

 

 
2,823

Intercompany Payable

 
3,322

 

 
(3,322
)
 

Deferred Income Taxes

 
626

 
573

 
(6
)
 
1,193

Other Liabilities
28

 
341

 
889

 

 
1,258

Shareholders' Equity:
 
 
 
 
 
 
 
 
 
Macy's, Inc.
6,323

 
1,713

 
5,124

 
(6,837
)
 
6,323

Noncontrolling Interest

 

 

 

 

Total Shareholders' Equity
6,323

 
1,713

 
5,124

 
(6,837
)
 
6,323

Total Liabilities and Shareholders' Equity
$
6,511

 
$
13,022

 
$
11,928

 
$
(10,165
)
 
$
21,296






17

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 


Condensed Consolidating Balance Sheet
As of May 5, 2018
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,070

 
$
79

 
$
382

 
$

 
$
1,531

Receivables

 
48

 
202

 

 
250

Merchandise inventories

 
2,283

 
3,008

 

 
5,291

Prepaid expenses and other current assets

 
150

 
488

 

 
638

Total Current Assets
1,070

 
2,560

 
4,080

 

 
7,710

Property and Equipment – net

 
3,298

 
3,277

 

 
6,575

Goodwill

 
3,326

 
582

 

 
3,908

Other Intangible Assets – net

 
43

 
443

 

 
486

Other Assets
1

 
96

 
792

 

 
889

Deferred Income Taxes
5

 

 

 
(5
)
 

Intercompany Receivable
1,156

 

 
2,113

 
(3,269
)
 

Investment in Subsidiaries
3,975

 
4,232

 

 
(8,207
)
 

Total Assets
$
6,207

 
$
13,555

 
$
11,287

 
$
(11,481
)
 
$
19,568

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Short-term debt
$

 
$
6

 
$
19

 
$

 
$
25

Merchandise accounts payable

 
896

 
1,149

 

 
2,045

Accounts payable and accrued liabilities
109

 
784

 
1,802

 

 
2,695

Income taxes
253

 
35

 
24

 

 
312

Total Current Liabilities
362

 
1,721

 
2,994

 

 
5,077

Long-Term Debt

 
5,841

 
16

 

 
5,857

Intercompany Payable

 
3,269

 

 
(3,269
)
 

Deferred Income Taxes

 
570

 
604

 
(5
)
 
1,169

Other Liabilities
24

 
416

 
1,224

 

 
1,664

Shareholders' Equity:
 
 
 
 
 
 
 
 
 
Macy's, Inc.
5,821

 
1,738

 
6,469

 
(8,207
)
 
5,821

Noncontrolling Interest

 

 
(20
)
 

 
(20
)
Total Shareholders' Equity
5,821

 
1,738

 
6,449

 
(8,207
)
 
5,801

Total Liabilities and Shareholders' Equity
$
6,207

 
$
13,555

 
$
11,287

 
$
(11,481
)
 
$
19,568







18

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Balance Sheet
As of February 2, 2019
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS:
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
889

 
$
59

 
$
214

 
$

 
$
1,162

Receivables

 
68

 
332

 

 
400

Merchandise inventories

 
2,342

 
2,921

 

 
5,263

Prepaid expenses and other current assets

 
143

 
477

 

 
620

Total Current Assets
889

 
2,612

 
3,944

 

 
7,445

Property and Equipment – net

 
3,287

 
3,350

 

 
6,637

Goodwill

 
3,326

 
582

 

 
3,908

Other Intangible Assets – net

 
38

 
440

 

 
478

Other Assets

 
41

 
685

 

 
726

Deferred Income Taxes
12

 

 

 
(12
)
 

Intercompany Receivable
1,713

 

 
1,390

 
(3,103
)
 

Investment in Subsidiaries
4,030

 
3,119

 

 
(7,149
)
 

Total Assets
$
6,644

 
$
12,423

 
$
10,391

 
$
(10,264
)
 
$
19,194

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Short-term debt
$

 
$
42

 
$
1

 
$

 
$
43

Merchandise accounts payable

 
713

 
942

 

 
1,655

Accounts payable and accrued liabilities
170

 
950

 
2,246

 

 
3,366

Income taxes
14

 
52

 
102

 

 
168

Total Current Liabilities
184

 
1,757

 
3,291

 

 
5,232

Long-Term Debt

 
4,692

 
16

 

 
4,708

Intercompany Payable

 
3,103

 

 
(3,103
)
 

Deferred Income Taxes

 
679

 
571

 
(12
)
 
1,238

Other Liabilities
24

 
406

 
1,150

 

 
1,580

Shareholders' Equity:
 
 
 
 
 
 
 
 
 
Macy's, Inc.
6,436

 
1,786

 
5,363

 
(7,149
)
 
6,436

Noncontrolling Interest

 

 

 

 

Total Shareholders' Equity
6,436

 
1,786

 
5,363

 
(7,149
)
 
6,436

Total Liabilities and Shareholders' Equity
$
6,644

 
$
12,423

 
$
10,391

 
$
(10,264
)
 
$
19,194



19

MACY'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 



Condensed Consolidating Statement of Cash Flows
For the 13 Weeks Ended May 4, 2019
(millions)
 
 
Parent
 
Subsidiary
Issuer
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Cash flows from operating activities: