Edgar Filing: Macy's, Inc.

Document

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 April 30, 2016


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



Incorporated in Delaware		I.R.S. Employer Identification No.
		13-3324058

7 West Seventh Street

Cincinnati, Ohio 45202

(513) 579-7000

and

151 West 34th Street

New York, New York 10001

(212) 494-1602

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer ý	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company 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 May 28, 2016
Common Stock, $0.01 par value per share		308,395,235 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
	April 30, 2016			May 2, 2015
Net sales	$	5,771		$	6,232
Cost of sales	(3,516		)	(3,800		)
Gross margin	2,255			2,432
Selling, general and administrative expenses	(1,966		)	(2,023		)
Settlement charges	(13		)	—
Operating income	276			409
Interest expense	(99		)	(95		)
Interest income	1			—
Income before income taxes	178			314
Federal, state and local income tax expense	(63		)	(121		)
Net income	115			193
Net loss attributable to noncontrolling interest	1			—
Net income attributable to Macy's, Inc. shareholders	$	116		$	193
Basic earnings per share attributable to Macy's, Inc. shareholders	$	.37		$	.57
Diluted earnings per share attributable to Macy's, Inc. shareholders	$	.37		$	.56

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

MACY’S, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(millions)




	13 Weeks Ended
	April 30, 2016			May 2, 2015
Net income	$	115		$	193
Other comprehensive income (loss):
Actuarial loss on postretirement benefit plans, before tax	(36		)	—
Settlement charges, before tax	13			—
Amortization of net actuarial loss on post employment and postretirement benefit plans included in net income, before tax	9			13
Tax effect related to items of other comprehensive income (loss)	6			(5		)
Total other comprehensive income (loss), net of tax effect	(8		)	8
Comprehensive income	107			201
Comprehensive loss attributable to noncontrolling interest	1			—
Comprehensive income attributable to Macy's, Inc. shareholders	$	108		$	201

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

MACY’S, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(millions)




	April 30, 2016		January 30, 2016		May 2, 2015
ASSETS
Current Assets:
Cash and cash equivalents	$	734	$	1,109	$	1,509
Receivables	436		558		259
Merchandise inventories	5,738		5,506		5,929
Income tax receivable	19		—		—
Prepaid expenses and other current assets	490		479		471
Total Current Assets	7,417		7,652		8,168
Property and Equipment - net of accumulated depreciation and amortization of $5,500, $5,319 and $5,784	7,475		7,616		7,712
Goodwill	3,897		3,897		3,897
Other Intangible Assets – net	511		514		531
Other Assets	898		897		710
Total Assets	$	20,198	$	20,576	$	21,018
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Short-term debt	$	642	$	642	$	76
Merchandise accounts payable	2,052		1,526		2,386
Accounts payable and accrued liabilities	2,690		3,333		2,411
Income taxes	—		227		74
Total Current Liabilities	5,384		5,728		4,947
Long-Term Debt	6,990		6,995		7,229
Deferred Income Taxes	1,536		1,477		1,456
Other Liabilities	2,134		2,123		2,179
Shareholders' Equity:
Macy's, Inc.	4,148		4,250		5,207
Noncontrolling interest	6		3		—
Total Shareholders’ Equity	4,154		4,253		5,207
Total Liabilities and Shareholders’ Equity	$	20,198	$	20,576	$	21,018

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

MACY’S, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(millions)




	13 Weeks Ended
	April 30, 2016			May 2, 2015
Cash flows from operating activities:
Net income	$	115		$	193
Adjustments to reconcile net income to net cash provided by operating activities:
Settlement charges	13			—
Depreciation and amortization	260			259
Stock-based compensation expense	16			18
Amortization of financing costs and premium on acquired debt	(1		)	(1		)
Changes in assets and liabilities:
Decrease in receivables	122			167
Increase in merchandise inventories	(232		)	(483		)
Increase in prepaid expenses and other current assets	(22		)	(42		)
Increase in other assets not separately identified	—			—
Increase in merchandise accounts payable	461			691
Decrease in accounts payable, accrued liabilities and other items not separately identified	(513		)	(513		)
Decrease in current income taxes	(246		)	(222		)
Increase (decrease) in deferred income taxes	53			(6		)
Decrease in other liabilities not separately identified	(18		)	(8		)
Net cash provided by operating activities	8			53
Cash flows from investing activities:
Purchase of property and equipment	(153		)	(180		)
Capitalized software	(75		)	(63		)
Acquisition of Bluemercury, Inc., net of cash acquired	—			(212		)
Disposition of property and equipment	16			4
Other, net	1			70
Net cash used by investing activities	(211		)	(381		)
Cash flows from financing activities:
Debt repaid	(3		)	(3		)
Dividends paid	(112		)	(106		)
Increase (decrease) in outstanding checks	43			(41		)
Acquisition of treasury stock	(130		)	(359		)
Issuance of common stock	26			100
Proceeds from noncontrolling interest	4			—
Net cash used by financing activities	(172		)	(409		)

Net decrease in cash and cash equivalents	(375		)	(737		)
Cash and cash equivalents beginning of period	1,109			2,246
Cash and cash equivalents end of period	$	734		$	1,509
Supplemental cash flow information:
Interest paid	$	80		$	81
Interest received	1			—
Income taxes paid (net of refunds received)	257			314

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

MACY’S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. 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 children's), cosmetics, home furnishings and other consumer goods. The Company's operations include approximately 870 Macy's, Macy's Backstage, Bloomingdale's, Bloomingdales Outlet and Bluemercury stores in 45 states, the District of Columbia, Guam and Puerto Rico, as well as macys.com, bloomingdales.com and bluemercury.com. In addition, Bloomingdale's in Dubai, United Arab Emirates is operated under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC.

In August 2015, the Company established a joint venture, Macy's China Limited, of which the Company holds a sixty-five percent ownership interest and Hong Kong-based Fung Retailing Limited holds the remaining thirty-five percent ownership interest. Macy's China Limited sells merchandise in China through an e-commerce presence on Alibaba Group's Tmall Global. The Consolidated Financial Statements include the accounts of Macy's, Inc. and its 100%-owned subsidiaries and the newly established majority-owned subsidiary, Macy's China Limited. The noncontrolling interest represents the Fung Retailing Limited's thirty-five percent proportionate share of the results of Macy's China Limited. All intercompany transactions and balances have been eliminated in consolidation.

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 January 30, 2016 (the "2015 10-K"). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 2015 10-K.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions are subject to inherent uncertainties, which may result in actual amounts differing from reported amounts.

The Consolidated Financial Statements for the 13 weeks ended April 30, 2016 and May 2, 2015, 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 April 30, 2016 and May 2, 2015 (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 with the classifications of such amounts for the most recent fiscal period.

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 April 30, 2016 and May 2, 2015 relate to post employment and postretirement plan items. The settlement charges incurred are included as a separate component of operating expenses in the Consolidated Statements of Income. The amortization reclassifications out of accumulated other comprehensive loss are included in the computation of net periodic benefit cost (income) and are included in selling, general and administrative expenses on the Consolidated Statements of Income. See Note 4, "Benefit Plans," for further information.

MACY'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

2. Earnings Per Share Attributable to Macy's, Inc. Shareholders

The following table sets forth the computation of basic and diluted earnings per share attributable to Macy's, Inc. shareholders:



	13 Weeks Ended
	April 30, 2016					May 2, 2015
	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	$	116			309.7	$	193			339.8
Shares to be issued under deferred compensation and other plans					0.9					0.9
	$	116			310.6	$	193			340.7
Basic earnings per share attributable to Macy's, Inc. shareholders			$	.37				$	.57
Effect of dilutive securities:
Stock options, restricted stock and restricted stock units					2.9					5.8
	$	116			313.5	$	193			346.5
Diluted earnings per share attributable to Macy's, Inc. shareholders			$	.37				$	.56

In addition to the stock options, restricted stock and restricted stock units reflected in the foregoing tables, stock options to purchase 11.2 million shares of common stock and restricted stock units relating to 1.0 million shares of common stock were outstanding at April 30, 2016, but were not included in the computation of diluted earnings per share for the 13 weeks ended April 30, 2016 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, restricted stock and restricted stock units reflected in the foregoing tables, stock options to purchase 6.5 million shares of common stock and restricted stock units relating to 1.4 million shares of common stock were outstanding at May 2, 2015, but were not included in the computation of diluted earnings per share for the 13 weeks ended May 2, 2015 because their inclusion would have been antidilutive or they were subject to performance conditions that had not been met.

MACY'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

3. Financing Activities

The following table shows the detail of debt repayments:



	13 Weeks Ended
	April 30, 2016		May 2, 2015
	(millions)
9.5% amortizing debentures due 2021	$	2	$	2
9.75% amortizing debentures due 2021	1		1
	$	3	$	3

During the 13 weeks ended April 30, 2016, the Company repurchased approximately 3.0 million shares of its common stock pursuant to existing stock purchase authorizations for a total of approximately $129 million. On February 26, 2016, the Company's Board of Directors approved an additional $1,500 million in authorization to purchase its common stock. As of April 30, 2016, the Company had $1,903 million of authorization remaining under its share repurchase program. The Company may continue or, from time to time, suspend repurchases of shares under its share repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors.

The Company entered into a credit agreement with certain financial institutions on May 6, 2016 providing 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) outstanding at any particular time. This agreement is set to expire May 6, 2021 and replaces the prior agreement which was set to expire May 10, 2018.

4. 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.

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
	April 30, 2016			May 2, 2015
	(millions)
401(k) Defined Contribution Plan	$	24		$	23

Pension Plan
Service cost	$	1		$	2
Interest cost	28			34
Expected return on assets	(56		)	(59		)
Recognition of net actuarial loss	8			10
Amortization of prior service credit	—			—
	$	(19	)	$	(13	)
Supplementary Retirement Plan
Service cost	$	—		$	—
Interest cost	6			8
Recognition of net actuarial loss	2			3
Amortization of prior service cost	—			—
	$	8		$	11

Total Retirement Expense	$	13		$	21

Postretirement Obligations
Service cost	$	—		$	—
Interest cost	2			2
Recognition of net actuarial gain	(1		)	—
Amortization of prior service cost	—			—
	$	1		$	2

During the 13 weeks ended April 30, 2016, the Company also incurred $13 million of non-cash settlement charges relating to the Company's defined benefit retirement plans. These charges resulted from an increase in lump sum distributions associated with store closings, a voluntary separation program and organizational restructuring, in addition to periodic distribution activity.

5. 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:



	April 30, 2016								May 2, 2015
			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	$	125	$	—	$	125	$	—	$	104	$	—	$	104	$	—

MACY'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Other financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, receivables, short-term debt, merchandise accounts payable, accounts payable and accrued liabilities and long-term debt. With the exception of long-term debt, the carrying amount approximates fair value because of the short maturity of these instruments. The fair values of long-term debt, 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:



	April 30, 2016						May 2, 2015
	Notional Amount		Carrying Amount		Fair Value		Notional Amount		Carrying Amount		Fair Value
	(millions)
Long-term debt	$	6,870	$	6,962	$	7,113	$	7,088	$	7,200	$	8,020

6. 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 and its subsidiary 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 Balance Sheets as of April 30, 2016, May 2, 2015 and January 30, 2016, the related Condensed Consolidating Statements of Comprehensive Income for the 13 weeks ended April 30, 2016 and May 2, 2015, and the related Condensed Consolidating Statements of Cash Flows for the 13 weeks ended April 30, 2016 and May 2, 2015 are presented on the following pages.

MACY'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Condensed Consolidating Balance Sheet

As of April 30, 2016

(millions)



	Parent		Subsidiary Issuer		Other Subsidiaries		Consolidating Adjustments			Consolidated
ASSETS:
Current Assets:
Cash and cash equivalents	$	287	$	112	$	335	$	—		$	734
Receivables	—		158		278		—			436
Merchandise inventories	—		2,707		3,031		—			5,738
Income tax receivable	66		—		—		(47		)	19
Prepaid expenses and other current assets	—		121		369		—			490
Total Current Assets	353		3,098		4,013		(47		)	7,417
Property and Equipment – net	—		3,840		3,635		—			7,475
Goodwill	—		3,315		582		—			3,897
Other Intangible Assets – net	—		50		461		—			511
Other Assets	—		154		744		—			898
Deferred Income Taxes	23		—		—		(23		)	—
Intercompany Receivable	—		—		3,433		(3,433		)	—
Investment in Subsidiaries	4,651		3,810		—		(8,461		)	—
Total Assets	$	5,027	$	14,267	$	12,868	$	(11,964	)	$	20,198
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current Liabilities:
Short-term debt	$	—	$	641	$	1	$	—		$	642
Merchandise accounts payable	—		872		1,180		—			2,052
Accounts payable and accrued liabilities	34		1,192		1,464		—			2,690
Income taxes	—		9		38		(47		)	—
Total Current Liabilities	34		2,714		2,683		(47		)	5,384
Long-Term Debt	—		6,971		19		—			6,990
Intercompany Payable	787		2,646		—		(3,433		)	—
Deferred Income Taxes	—		726		833		(23		)	1,536
Other Liabilities	58		547		1,529		—			2,134
Shareholders' Equity:
Macy's, Inc.	4,148		663		7,798		(8,461		)	4,148
Noncontrolling Interest	—		—		6		—			6
Total Shareholders' Equity	4,148		663		7,804		(8,461		)	4,154
Total Liabilities and Shareholders' Equity	$	5,027	$	14,267	$	12,868	$	(11,964	)	$	20,198

MACY'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Condensed Consolidating Statement of Comprehensive Income

For the 13 Weeks Ended April 30, 2016

(millions)



	Parent			Subsidiary Issuer			Other Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	—		$	2,454		$	5,374		$	(2,057	)	$	5,771
Cost of sales	—			(1,604		)	(3,969		)	2,057			(3,516		)
Gross margin	—			850			1,405			—			2,255
Selling, general and administrative expenses	(1		)	(882		)	(1,083		)	—			(1,966		)
Settlement charges	—			(3		)	(10		)	—			(13		)
Operating income (loss)	(1		)	(35		)	312			—			276
Interest (expense) income, net:
External	1			(99		)	—			—			(98		)
Intercompany	—			(58		)	58			—			—
Equity in earnings of subsidiaries	116			10			—			(126		)	—
Income (loss) before income taxes	116			(182		)	370			(126		)	178
Federal, state and local income tax benefit (expense)	—			61			(124		)	—			(63		)
Net income (loss)	116			(121		)	246			(126		)	115
Net loss attributable to noncontrolling interest	—			—			1			—			1
Net income (loss) attributable to Macy's, Inc. shareholders	$	116		$	(121	)	$	247		$	(126	)	$	116
Comprehensive income (loss)	$	108		$	(129	)	$	241		$	(113	)	$	107
Comprehensive loss attributable to noncontrolling interest	—			—			1			—			1
Comprehensive income (loss) attributable to Macy's, Inc. shareholders	$	108		$	(129	)	$	242		$	(113	)	$	108

MACY'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Condensed Consolidating Statement of Cash Flows

For the 13 Weeks Ended April 30, 2016

(millions)



	Parent			Subsidiary Issuer			Other Subsidiaries			Consolidating Adjustments			Consolidated
Cash flows from operating activities:
Net income (loss)	$	116		$	(121	)	$	246		$	(126	)	$	115
Settlement charges	—			3			10			—			13
Equity in earnings of subsidiaries	(116		)	(10		)	—			126			—
Dividends received from subsidiaries	182			—			—			(182		)	—
Depreciation and amortization	—			102			158			—			260
(Increase) decrease in working capital	(34		)	55			(451		)	—			(430		)
Other, net	19			16			15			—			50
Net cash provided (used) by operating activities	167			45			(22		)	(182		)	8
Cash flows from investing activities:
Purchase of property and equipment and capitalized software, net	—			(54		)	(158		)	—			(212		)
Other, net	—			(2		)	3			—			1
Net cash used by investing activities	—			(56		)	(155		)	—			(211		)
Cash flows from financing activities:
Debt repaid	—			(3		)	—			—			(3		)
Dividends paid	(112		)	—			(182		)	182			(112		)
Common stock acquired, net of issuance of common stock	(104		)	—			—			—			(104		)
Proceeds from noncontrolling interest	—			—			4			—			4
Intercompany activity, net	(415		)	52			363			—			—
Other, net	10			(17		)	50			—			43
Net cash provided (used) by financing activities	(621		)	32			235			182			(172		)
Net increase (decrease) in cash and cash equivalents	(454		)	21			58			—			(375		)
Cash and cash equivalents at beginning of period	741			91			277			—			1,109
Cash and cash equivalents at end of period	$	287		$	112		$	335		$	—		$	734

MACY'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Condensed Consolidating Balance Sheet

As of May 2, 2015

(millions)



	Parent		Subsidiary Issuer		Other Subsidiaries		Consolidating Adjustments			Consolidated
ASSETS:
Current Assets:
Cash and cash equivalents	$	1,078	$	115	$	316	$	—		$	1,509
Receivables	—		48		211		—			259
Merchandise inventories	—		2,961		2,968		—			5,929
Income tax receivable	43		—		—		(43		)	—
Prepaid expenses and other current assets	—		101		370		—			471
Total Current Assets	1,121		3,225		3,865		(43		)	8,168
Property and Equipment – net	—		4,250		3,462		—			7,712
Goodwill	—		3,315		582		—			3,897
Other Intangible Assets – net	—		68		463		—			531
Other Assets	1		44		665		—			710
Deferred Income Taxes	22		—		—		(22		)	—
Intercompany Receivable	—		—		3,588		(3,588		)	—
Investment in Subsidiaries	4,701		3,549		—		(8,250		)	—
Total Assets	$	5,845	$	14,451	$	12,625	$	(11,903	)	$	21,018
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current Liabilities:
Short-term debt	$	—	$	75	$	1	$	—		$	76
Merchandise accounts payable	—		1,139		1,247		—			2,386
Accounts payable and accrued liabilities	13		1,043		1,355		—			2,411
Income taxes	—		10		107		(43		)	74
Total Current Liabilities	13		2,267		2,710		(43		)	4,947
Long-Term Debt	—		7,209		20		—			7,229
Intercompany Payable	564		3,024		—		(3,588		)	—
Deferred Income Taxes	—		744		734		(22		)	1,456
Other Liabilities	61		543		1,575		—			2,179
Shareholders' Equity:
Macy's, Inc.	5,207		664		7,586		(8,250		)	5,207
Noncontrolling Interest	—		—		—		—			—
Total Shareholders' Equity	5,207		664		7,586		(8,250		)	5,207
Total Liabilities and Shareholders' Equity	$	5,845	$	14,451	$	12,625	$	(11,903	)	$	21,018

MACY'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Condensed Consolidating Statement of Comprehensive Income

For the 13 Weeks Ended May 2, 2015

(millions)



	Parent			Subsidiary Issuer			Other Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	—		$	2,776		$	5,691		$	(2,235	)	$	6,232
Cost of sales	—			(1,809		)	(4,226		)	2,235			(3,800		)
Gross margin	—			967			1,465			—			2,432
Selling, general and administrative expenses	(1		)	(980		)	(1,042		)	—			(2,023		)
Operating income (loss)	(1		)	(13		)	423			—			409
Interest (expense) income, net:
External	—			(95		)	—			—			(95		)
Intercompany	—			(58		)	58			—			—
Equity in earnings of subsidiaries	194			60			—			(254		)	—
Income (loss) before income taxes	193			(106		)	481			(254		)	314
Federal, state and local income tax benefit (expense)	—			37			(158		)	—			(121		)
Net income (loss)	193			(69		)	323			(254		)	193
Net loss attributable to noncontrolling interest	—			—			—			—			—
Net income (loss) attributable to Macy's, Inc. shareholders	$	193		$	(69	)	$	323		$	(254	)	$	193
Comprehensive income (loss)	$	201		$	(61	)	$	327		$	(266	)	$	201
Comprehensive loss attributable to noncontrolling interest	—			—			—			—			—
Comprehensive income (loss) attributable to Macy's, Inc. shareholders	$	201		$	(61	)	$	327		$	(266	)	$	201

MACY'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Condensed Consolidating Statement of Cash Flows

For the 13 Weeks Ended May 2, 2015

(millions)



	Parent			Subsidiary Issuer			Other Subsidiaries			Consolidating Adjustments			Consolidated
Cash flows from operating activities:
Net income (loss)	$	193		$	(69	)	$	323		$	(254	)	$	193
Equity in earnings of subsidiaries	(194		)	(60		)	—			254			—
Dividends received from subsidiaries	191			—			—			(191		)	—
Depreciation and amortization	—			106			153			—			259
(Increase) decrease in working capital	43			16			(461		)	—			(402		)
Other, net	24			(6		)	(15		)	—			3
Net cash provided (used) by operating activities	257			(13		)	—			(191		)	53
Cash flows from investing activities:
Purchase of property and equipment and capitalized software, net	—			(69		)	(170		)	—			(239		)
Other, net	—			7			(149		)	—			(142		)
Net cash used by investing activities	—			(62		)	(319		)	—			(381		)
Cash flows from financing activities:
Debt repaid	—			(3		)	—			—			(3		)
Dividends paid	(106		)	—			(191		)	191			(106		)
Common stock acquired, net of issuance of common stock	(259		)	—			—			—			(259		)
Intercompany activity, net	(669		)	146			523			—			—
Other, net	(53		)	(47		)	59			—			(41		)
Net cash provided (used) by financing activities	(1,087		)	96			391			191			(409		)
Net increase (decrease) in cash and cash equivalents	(830		)	21			72			—			(737		)
Cash and cash equivalents at beginning of period	1,908			94			244			—			2,246
Cash and cash equivalents at end of period	$	1,078		$	115		$	316		$	—		$	1,509

MACY'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Condensed Consolidating Balance Sheet

As of January 30, 2016

(millions)



	Parent		Subsidiary Issuer		Other Subsidiaries		Consolidating Adjustments			Consolidated
ASSETS:
Current Assets:
Cash and cash equivalents	$	741	$	91	$	277	$	—		$	1,109
Receivables	—		217		341		—			558
Merchandise inventories	—		2,702		2,804		—			5,506
Income tax receivable	44		—		—		(44		)	—
Prepaid expenses and other current assets	—		135		344		—			479
Total Current Assets	785		3,145		3,766		(44		)	7,652
Property and Equipment – net	—		3,925		3,691		—			7,616
Goodwill	—		3,315		582		—			3,897
Other Intangible Assets – net	—		52		462		—			514
Other Assets	—		154		743		—			897
Deferred Income Taxes	14		—		—		(14		)	—
Intercompany Receivable	—		—		3,800		(3,800		)	—
Investment in Subsidiaries	4,725		3,804		—		(8,529		)	—
Total Assets	$	5,524	$	14,395	$	13,044	$	(12,387	)	$	20,576
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current Liabilities:
Short-term debt	$	—	$	641	$	1	$	—		$	642
Merchandise accounts payable	—		667		859		—			1,526
Accounts payable and accrued liabilities	35		1,439		1,859		—			3,333
Income taxes	—		41		230		(44		)	227
Total Current Liabilities	35		2,788		2,949		(44		)	5,728
Long-Term Debt	—		6,976		19		—			6,995
Intercompany Payable	1,218		2,582		—		(3,800		)	—
Deferred Income Taxes	—		693		798		(14		)	1,477
Other Liabilities	21		558		1,544		—			2,123
Shareholders' Equity:
Macy's, Inc.	4,250		798		7,731		(8,529		)	4,250
Noncontrolling Interest	—		—		3		—			3
Total Shareholders' Equity	4,250		798		7,734		(8,529		)	4,253
Total Liabilities and Shareholders' Equity	$	5,524	$	14,395	$	13,044	$	(12,387	)	$	20,576

MACY'S, INC.


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 2016" and "first quarter of 2015" are to the Company's 13-week fiscal periods ended April 30, 2016 and May 2, 2015, 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 2015 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 "Forward-Looking Statements") and in the 2015 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" on page 22.

Overview

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 children's), cosmetics, home furnishings and other consumer goods. The Company's operations include approximately 870 Macy's, Macy's Backstage, Bloomingdale's, Bloomingdales Outlet and Bluemercury stores in 45 states, the District of Columbia, Guam and Puerto Rico, as well as macys.com, bloomingdales.com and bluemercury.com. In addition, Bloomingdale's in Dubai, United Arab Emirates is operated under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC.

The Company continues to be focused on three key strategies for growth in sales, earnings and cash flow in the years ahead: (i) maximizing the My Macy's localization initiative; (ii) driving the omnichannel business; and (iii) embracing customer centricity, including engaging customers on the selling floor through the Magic Selling program. These strategies have evolved and the Company has developed specific initiatives to acquire new customers and strengthen loyalty, deliver distinctive merchandise, expand the digital frontier and new formats and to create signature customer experiences.

Through the My Macy's localization initiative, the Company has invested in talent, technology and marketing which ensures that core customers surrounding each Macy's store find merchandise assortments, size ranges, marketing programs and shopping experiences that are custom-tailored to their needs. My Macy's has provided for more local decision-making in every Macy's community, and involves tailoring merchandise assortments, space allocations, service levels, visual merchandising and special events on a store-by-store basis. The focus on localization is now evolving to one of personalization.

The Company's omnichannel strategy allows customers to shop seamlessly in stores and online, via desktops, laptops or mobile devices. A pivotal part of the omnichannel strategy is the Company's ability to allow associates in any store to sell a product that may be unavailable locally by shipping merchandise from other stores or customer fulfillment centers to the customer's door. Likewise, the Company's customer fulfillment centers can draw on store inventories nationwide to fill orders that originate online. Nearly all Macy's and Bloomingdale's stores are fulfilling orders from other stores and/or online for shipment and fulfilling orders for store pick-up related to online purchases, and the Company operates same-day delivery in 17 markets.

Macy's Magic Selling program is an approach to customer engagement that helps Macy's to better understand the needs of customers, as well as to provide options and advice. This comprehensive ongoing training and coaching program is designed to improve the in-store shopping experience and all other customer interactions. Magic Selling is shifting focus in 2016 to new technologies for building Magic connections with customers.

In January 2016, the Company announced a series of cost-efficiency and process improvement measures to be implemented beginning in early 2016 that will reduce selling, general and administrative ("SG&A") expenses by approximately $400 million to help fund investment in growth strategies, particularly in omnichannel capabilities at Macy's and Bloomingdale's.

MACY'S, INC.

The Company is focused on improving the recent business trend through a series of organic and new business initiatives. The initiatives include a focus on fine jewelry and watches, expansion of Macy's Backstage (including freestanding locations and inside existing Macy's stores), "Last Act" - a simplified pricing approach to clearance merchandise in Macy's stores, a focus on the "Top 150" store locations (including product presentation, customer service and special events), a focus on the beauty business including the expansion of Bluemercury freestanding locations and inside existing Macy's stores and a focus on enhancements to mobile technology. The Company is planning to offer customers greater newness and more exclusive merchandise through an array of new and exclusive product launches. The Company is also pursuing additional opportunities to moderate spending through intensified expense reduction efforts, while still investing in key areas of customer service including front-line support and technology at Macy's and Bloomingdale's.

In March 2015, the Company completed its acquisition of Bluemercury, Inc., a luxury beauty products and spa retailer. The Company is focused on accelerating the growth of sales in freestanding Bluemercury stores in urban and suburban markets, enhancing its online capabilities and adding Bluemercury products and boutiques to Macy's stores.

In May 2015, in conjunction with American Express, the Company helped launch Plenti, the coalition loyalty program that brings powerful brands together to give customers the chance to earn and redeem points where they choose. The loyalty program is free to join and members earn points on virtually all purchases at Macy's and other businesses that have joined as Plenti partners.

Additionally, in 2015, the Company opened the first six pilot stores in Macy's new off-price business, Macy's Backstage, in the New York City metro area. The Macy's Backstage locations average about 30,000 square feet and sell an assortment of women's, men's and children's apparel, shoes, fashion accessories, housewares, home textiles, intimate apparel and jewelry.

In August 2015, the Company established a joint venture, Macy's China Limited, of which the Company holds a sixty-five percent ownership interest and Hong Kong-based Fung Retailing Limited holds the remaining thirty-five percent ownership interest. Macy's China Limited began selling merchandise in China in the fourth quarter of 2015 through an e-commerce presence on Alibaba Group's Tmall Global. The Company's periodic reporting now includes the consolidated results of operations of Macy's China Limited, with the thirty-five percent ownership reported as a noncontrolling interest.

In January 2016, the Company completed a $270 million real estate transaction that will enable a re-creation of Macy's Brooklyn store. The Company will continue to own and operate the first four floors and lower level of its existing nine-story retail store, which will be configured and remodeled. Tishman Speyer purchased the remaining portion of the site, which it will develop into approximately ten floors of office space. In addition, Tishman Speyer purchased a nearby parking facility, which could be used for a mixed-use development. As a result of this transaction, the Company will recognize a gain of approximately $250 million of which, under the percentage of completion method of accounting, $84 was recognized in fiscal 2015 and $4 million was recognized in the first quarter of 2016. The remaining gain is anticipated to be recognized over the next two years.

Also in 2015, the Company launched the marketing of potential partnership and joint venture transactions for certain of its real estate. This includes the owned mall-based properties, as well as Macy's flagship real estate assets in Manhattan (Herald Square), San Francisco (Union Square), Chicago (State Street) and Minneapolis (downtown Nicollet Mall). In addition, the Company will also continue to pursue selected real estate dispositions and monetize assets in instances where the business is simultaneously enhanced or where the value of real estate significantly outweighs the value of the retail business.

During the first quarter of 2016, the Company opened seven new freestanding Bluemercury stores. In fiscal 2016, the Company intends to open one new Macy's store, 42 additional Bluemercury locations (24 freestanding and 18 inside Macy's), 16 Macy's Backstage locations (one freestanding and 15 inside Macy's) and one new Bloomingdale's Outlet.

The Company's operations are impacted by competitive pressures from department stores, specialty stores, mass merchandisers, online retailers and all other retail channels. The Company's operations are also impacted by general consumer spending levels, including the impact of general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, the costs of basic necessities and other goods and the effects of weather or natural disasters and other factors over which the Company has little or no control.

In recent years, consumer spending levels have been affected to varying degrees by a number of factors, including modest economic growth, uncertainty regarding governmental spending and tax policies, unemployment levels, tightened consumer credit, an improving housing market and a fluctuating stock market. In addition, consumer spending levels of international customers are impacted by the strength of the U.S. dollar relative to foreign currencies. These factors have affected to varying degrees the amount of funds that consumers are willing and able to spend for discretionary purchases, including purchases of some of the merchandise offered by the Company.

MACY'S, INC.

All economic conditions ultimately affect the Company's overall operations. However, the effects of economic conditions can be experienced differently and at different times, in the various geographic regions in which the Company operates, in relation to the different types of merchandise that the Company offers for sale, or in relation to each of the Company's branded operations.

Based on its assessment of current and anticipated market conditions and its recent performance, the Company now expects comparable sales on an owned plus licensed basis for fiscal 2016 to decrease in the range of 3% to 4% from 2015 levels, with comparable sales on an owned basis approximately 50 basis points lower. The Company currently expects that its earnings per share attributable to Macy's, Inc. in fiscal 2016 will be in the range of $3.15 to $3.40, excluding the impact of non-cash settlement charges of approximately $135 million relating to the Company's defined benefit retirement plans.

Results of Operations

Comparison of the First Quarter of 2016 and the First Quarter of 2015



	First Quarter of 2016							First Quarter of 2015
	Amount				% to Sales			Amount				% to Sales
	(dollars in millions, except per share figures)
Net sales	$	5,771						$	6,232
Decrease in sales	(7.4		)	%				(0.7		)	%
Decrease in comparable sales	(6.1		)	%				(0.7		)	%
Cost of sales	(3,516		)		(60.9	)	%	(3,800		)		(61.0	)	%
Gross margin	2,255				39.1		%	2,432				39.0		%
Selling, general and administrative expenses	(1,966		)		(34.1	)	%	(2,023		)		(32.4	)	%
Settlement charges	(13		)		(0.2	)	%	—				—		%
Operating income	276				4.8		%	409				6.6		%
Interest expense - net	(98		)					(95		)
Income before income taxes	178							314
Federal, state and local income tax expense	(63		)					(121		)
Net income	115							193
Net loss attributable to noncontrolling interest	1							—
Net income attributable to Macy's, Inc. shareholders	$	116			2.0		%	$	193<