Edgar Filing: Macy's, Inc.

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Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934



For the Fiscal Year Ended January 28, 2017		Commission File Number: 1-13536

7 West Seventh Street

Cincinnati, Ohio 45202

(513) 579-7000

and

151 West 34th Street

New York, New York 10001

(212) 494-1602



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

Securities Registered Pursuant to Section 12(b) of the Act:



Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No ý

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter (July 30, 2016) was approximately $11,052,402,000.

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 February 24, 2017
Common Stock, $0.01 par value per share		304,258,647 shares

DOCUMENTS INCORPORATED BY REFERENCE



Document	Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Stockholders to be held May 19, 2017 (Proxy Statement)	Part III

Unless the context requires otherwise, references to “Macy’s” or the “Company” are references to Macy’s and its subsidiaries and references to “2016,” “2015,” “2014,” “2013” and “2012” are references to the Company’s fiscal years ended January 28, 2017, January 30, 2016, January 31, 2015, February 1, 2014 and February 2, 2013, respectively. Fiscal years 2016, 2015, 2014 and 2013 included 52 weeks; fiscal year 2012 included 53 weeks.

Forward-Looking Statements

This report and other reports, statements and information previously or subsequently filed by the Company with the Securities and Exchange Commission (the “SEC”) contain or may contain forward-looking statements. Such statements are based upon the beliefs and assumptions of, and on information available to, the management of the Company at the time such statements are made. The following are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (i) statements preceded by, followed by or that include the words “may,” “will,” “could,” “should,” “believe,” “expect,” “future,” “potential,” “anticipate,” “intend,” “plan,” “think,” “estimate” or “continue” or the negative or other variations thereof, and (ii) statements regarding matters that are not historical facts. Such forward-looking statements are subject to various risks and uncertainties, including risks and uncertainties relating to:


•	the possible invalidity of the underlying beliefs and assumptions;


•	competitive pressures from department and specialty stores, general merchandise stores, manufacturers’ outlets, off-price and discount stores, and all other retail channels, including the Internet, catalogs and television;


•	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, mall vacancy issues, the costs of basic necessities and other goods and the effects of the weather or natural disasters;


•	conditions to, or changes in the timing of, proposed transactions and changes in expected synergies, cost savings and non-recurring charges;


•	transactions involving the Company's real estate portfolio;


•	possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions;


•	possible actions taken or omitted to be taken by third parties, including customers, suppliers, business partners, competitors and legislative, regulatory, judicial and other governmental authorities and officials;


•	changes in relationships with vendors and other product and service providers;


•	currency, interest and exchange rates and other capital market, economic and geo-political conditions;


•	severe or unseasonable weather, possible outbreaks of epidemic or pandemic diseases and natural disasters;


•	unstable political conditions, civil unrest, terrorist activities and armed conflicts;


•	the possible inability of the Company’s manufacturers or transporters to deliver products in a timely manner or meet the Company’s quality standards;


•	the Company’s reliance on foreign sources of production, including risks related to the disruption of imports by labor disputes, regional health pandemics, and regional political and economic conditions;


•	duties, taxes, other charges and quotas on imports; and


•	possible systems failures and/or security breaches, including, any security breach that results in the theft, transfer or unauthorized disclosure of customer, employee or company information, or the failure to comply with various laws applicable to the Company in the event of such a breach.

In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the statements in the immediately preceding sentence and the statements under captions such as “Risk Factors” in reports, statements and information filed by the Company with the SEC from time to time constitute cautionary statements identifying important factors that could cause actual amounts, results, events and circumstances to differ materially from those expressed in or implied by such forward-looking statements.


Item 1.	Business.

General

The Company is a corporation organized under the laws of the State of Delaware in 1985. The Company and its predecessors have been operating department stores since 1830. The Company operates 829 stores in 45 states, the District of Columbia, Guam and Puerto Rico. As of January 28, 2017, the Company's operations were conducted through Macy's, Bloomingdale's, Bloomingdale’s The Outlet, Macy’s Backstage, Bluemercury and Macy’s China Limited. In addition, Bloomingdale's in Dubai, United Arab Emirates and Al Zahra, Kuwait are operated under license agreements with Al Tayer Insignia, a company of Al Tayer Group, LLC.

The Company sells a wide range of merchandise, including apparel and accessories (men’s, women’s and children’s), cosmetics, home furnishings and other consumer goods. The specific assortments vary by size of store, merchandising assortments and character of customers in the trade areas. Most stores are located at urban or suburban sites, principally in densely populated areas across the United States.

For 2016, 2015 and 2014, the following merchandise constituted the following percentages of sales:



	2016		2015		2014
Women’s Accessories, Intimate Apparel, Shoes, Cosmetics and Fragrances	38	%	38	%	38	%
Women’s Apparel	23		23		23
Men’s and Children’s	23		23		23
Home/Miscellaneous	16		16		16
	100	%	100	%	100	%

In 2016, the Company’s subsidiaries provided various support functions to the Company’s retail operations on an integrated, company-wide basis.


•	The Company’s bank subsidiary, FDS Bank, provides credit processing, certain collections, customer service and credit marketing services in respect of all credit card accounts that are owned either by Department Stores National Bank (“DSNB”), a subsidiary of Citibank, N.A., or FDS Bank and that constitute a part of the credit programs of the Company’s retail operations.


•	Macy’s Systems and Technology, Inc. (“MST”), a wholly-owned indirect subsidiary of the Company, provides operational electronic data processing and management information services to all of the Company’s operations other than Bluemercury and Macy's China Limited.

•

Macy’s Merchandising Group, Inc. (“MMG”), a wholly-owned direct subsidiary of the Company, and its subsidiary Macy's Merchandising Group International, LLC, are responsible for the design, development and marketing of Macy’s private label brands and certain licensed brands. Bloomingdale’s uses MMG for a small portion of its private label merchandise. The Company believes that its private label merchandise differentiates its merchandise assortments from those of its competitors and delivers exceptional value to its customers. MMG also offers its services, either directly or indirectly, to unrelated third parties.


•	Macy’s Logistics and Operations (“Macy’s Logistics”), a division of a wholly-owned indirect subsidiary of the Company, provides warehousing and merchandise distribution services for the Company’s operations and digital customer fulfillment.

The Company’s executive offices are located at 7 West 7^th Street, Cincinnati, Ohio 45202, telephone number: (513) 579-7000 and 151 West 34^th Street, New York, New York 10001, telephone number: (212) 494-1602.

Employees

As of January 28, 2017, the Company had approximately 148,300 regular full-time and part-time employees. Because of the seasonal nature of the retail business, the number of employees peaks in the holiday season. Approximately 10% of the Company’s employees as of January 28, 2017 were represented by unions.

Seasonality

The retail business is seasonal in nature with a high proportion of sales and operating income generated in the months of November and December. Working capital requirements fluctuate during the year, increasing in mid-summer in anticipation of the fall merchandising season and increasing substantially prior to the holiday season when the Company carries significantly higher inventory levels.

Purchasing

The Company purchases merchandise from many suppliers, no one of which accounted for more than 5% of the Company’s net purchases during 2016. The Company has no material long-term purchase commitments with any of its suppliers, and believes that it is not dependent on any one supplier. The Company considers its relations with its suppliers to be good.

Private Label Brands and Related Trademarks

The principal private label brands currently offered by the Company include Alfani, American Rag, Aqua, Bar III, Belgique, Charter Club, Club Room, Epic Threads, first impressions, Giani Bernini, Greg Norman for Tasso Elba, Holiday Lane, Home Design, Hotel Collection, Hudson Park, Ideology, I-N-C, jenni, JM Collection, John Ashford, Karen Scott, lune+aster, M-61, Maison Jules, Martha Stewart Collection, Material Girl, Morgan Taylor, Oake, Sky, Style & Co., Sutton Studio, Tasso Elba, Thalia Sodi, the cellar, and Tools of the Trade.

The trademarks associated with the Company's aforementioned private label brands, other than American Rag, Greg Norman for Tasso Elba, Martha Stewart Collection, Material Girl and Thalia Sodi are owned by the Company. The American Rag, Greg Norman, Martha Stewart Collection, Material Girl and Thalia Sodi brands are owned by third parties, which license the trademarks associated with such brands to Macy’s pursuant to agreements which have renewal rights that extend through 2050, 2020, 2027, 2030 and 2030, respectively.

Competition

The retailing industry is intensely competitive. The Company’s operations compete with many retailing formats, including department stores, specialty stores, general merchandise stores, off-price and discount stores, manufacturers’ outlets, online retailers, catalogs and television shopping, among others. The Company seeks to attract customers by offering most wanted selections, obvious value, and distinctive marketing in stores that are located in premier locations, and by providing an exciting shopping environment and superior service through an omnichannel experience. Other retailers may compete for customers on some or all of these bases, or on other bases, and may be perceived by some potential customers as being better aligned with their particular preferences.

Available Information

The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge through its internet website at http://www.macysinc.com as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. The public also may read and copy any of these filings at the SEC’s Public Reference Room, 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-732-0330. The SEC also maintains an Internet site that contains the Company’s filings; the address of that site is http://www.sec.gov. In addition, the Company has made the following available free of charge through its website at http://www.macysinc.com:


•	Audit Committee Charter,


•	Compensation and Management Development Committee Charter,


•	Finance Committee Charter,


•	Nominating and Corporate Governance Committee Charter,


•	Corporate Governance Principles,


•	Lead Independent Director Policy,


•	Non-Employee Director Code of Business Conduct and Ethics, and


•	Code of Conduct.

Any of these items are also available in print to any shareholder who requests them. Requests should be sent to the Corporate Secretary of Macy’s, Inc. at 7 West 7^th Street, Cincinnati, OH 45202.

Executive Officers of the Registrant

The following table sets forth certain information as of March 24, 2017 regarding the executive officers of the Company:



Name	Age	Position with the Company
Terry J. Lundgren	65	Executive Chairman and Chairman of the Board; Director
Jeff Gennette	55	President, Chief Executive Officer; Director
Timothy Baxter	47	Chief Merchandising Officer
Elisa D. Garcia	59	Chief Legal Officer and Secretary
Robert B. Harrison	53	Chief Omnichannel and Operations Officer
Karen M. Hoguet	60	Chief Financial Officer
Jeffrey A. Kantor	58	Chief Stores and Human Resources Officer
Molly Langenstein	53	Chief Private Brands Officer
Richard A. Lennox	51	Chief Marketing Officer
Justin S. MacFarlane	44	Chief Strategy, Analytics and Innovation Officer
Patti H. Ongman	61	Chief Merchandise Planning Officer
Tony Spring	52	Chairman and Chief Executive Officer, Bloomingdale's
Felicia Williams	51	Executive Vice President, Controller and Enterprise Risk

Chief Executive Officer ("CEO") Transition

The Company announced that Terry J. Lundgren, the Company’s CEO since 2003 and Chairman since 2004, transitioned the position of CEO to Jeff Gennette on March 23, 2017. The transition is part of the Board of Directors’ succession plan that included Mr. Gennette’s election as president of Macy’s, Inc. in 2014. Mr. Lundgren will continue as Executive Chairman and Chairman of the Board and work side-by-side with Mr. Gennette as President and CEO.

Mr. Gennette was named President of Macy’s, Inc. in March 2014 after serving as Macy’s Chief Merchandising Officer since February 2009. From February 2008 to February 2009, Mr. Gennette served as Chairman and CEO of Macy’s West in San Francisco. He began his retail career in 1983 as an executive trainee at Macy’s West. He held positions of increasing responsibilities, including Vice President and Division Merchandise Manager for men’s collection and Senior Vice President and General Merchandise Manager for men’s and children’s apparel. In 2004, Mr. Gennette was appointed Executive Vice President and Director of Stores at Macy’s Central in Atlanta. From February 2006 to February 2008, Mr. Gennette was Chairman and Chief Executive Officer of Seattle-based Macy’s Northwest. During his career, Mr. Gennette also served as a Store Manager for FAO Schwarz and Director of Stores for Broadway Stores, Inc. Mr. Gennette, a native of San Diego, is a graduate of Stanford University.

Executive Officer Biographies

Terry J. Lundgren has been Executive Chairman of the Company since March 2017 and Chairman of the Board since January 2004; prior thereto he was Chief Executive Officer of the Company from February 2003 to March 2017.

Jeff Gennette has been Chief Executive Officer since March 2017 and President of the Company since March 2014; prior thereto he was the Chief Merchandising Officer from February 2009 to March 2014.

Tim Baxter has been Chief Merchandising Officer of the Company since February 2015; prior thereto he was Executive Vice President GMM - Ready to Wear from March 2013 to February 2015; as Executive Vice President - Fashion Office, Licensed Businesses and Multicultural Business Development from March 2012 to March 2013; as Senior Vice President - Ready to Wear from June 2011 to March 2012; as Group Vice President Ready to Wear - Bridge/Impulse/NC/Neo Collections Sportswear from August 2010 to June 2011; and as Group Vice President Fashion Jewelry, Watches, Sterling Silver from March 2009 to July 2010.

Elisa D. Garcia has been Chief Legal Officer and Secretary of the Company since September 2016; prior thereto she served as Chief Legal Officer of Office Depot from 2013 to September 2016 and as Executive Vice President, General Counsel and Secretary from 2007 to 2013.

Robert B. Harrison has been Chief Omnichannel and Operations Officer of the Company since February 2017; prior thereto he served as Chief Omnichannel Officer from January 2013 to February 2017; as Executive Vice President - Omnichannel Strategy from July 2012 to January 2013; as Executive Vice President - Finance from 2011 to July 2012 and as President - Stores from 2009 to 2011.

Karen M. Hoguet has been Chief Financial Officer of the Company since October 1997.

Jeffrey A. Kantor has been Chief Stores and Human Resources Officer of the Company since February 2017; prior thereto he served as Chief Stores Officer from February 2015 to February 2017; as Chairman of macys.com from February 2012 to February 2015; as President - Merchandising for macys.com from August 2010 to February 2012; as President - Merchandising for Home from May 2009 to August 2010 and as President for furniture for Macy’s Home Store from February 2006 to May 2009.

Molly Langenstein has been Chief Private Brands Officer of the Company since February 2015; prior thereto she served as Executive Vice President - Men’s and Kids at Macy’s Private Brands from April 2014 to February 2015; as Executive Vice President GMM - Millennial from March 2012 to March 2014; as Executive Vice President Fashion and New Business Development from July 2010 to March 2012 and as Group Vice President DMM Neo, Impulse and Bridge Sportswear from March 2009 to July 2010.

Richard A. Lennox has been Chief Marketing Officer of the Company since September 2016; prior thereto he served as Senior Vice President and Chief Marketing Officer of Toys “R” Us from mid-2014 to September 2016; and as Executive Vice President/Chief Marketing and E-Commerce Officer at Zale’s Corporation from August 2009 to July 2014.

Justin MacFarlane has been Chief Strategy, Analytics and Innovation Officer since February 2016; prior thereto he served as Senior Vice President - Corporate Strategy for ANN, Inc., a women's multichannel fashion retailer, from July 2010 to August 2015 and as Director, Global Retail for AlixPartners, a global restructuring consulting and financial advisory firm, from August 2006 to June 2010.

Patti H. Ongman has been Chief Merchandise Planning Officer of the Company since February 2015; prior thereto she served as Executive Vice President - Omnichannel Strategies from June 2014 - February 2015; as Executive Vice President GMM - Center Core from October 2010 to May 2014 and as Executive Vice President GPM - Cosmetics, Fragrances and Shoes from February 2009 to September 2010.

Tony Spring has been Chairman and Chief Executive Officer of Bloomingdale’s since February 2014; prior thereto he served as President and Chief Operating Officer from February 2008 to February 2014; as Senior Executive Vice President from July 2005 to January 2008; and as Executive Vice President from April 1998 to July 2005.

Felicia Williams has been Executive Vice President, Controller and Enterprise Risk of the Company since June 2016; prior thereto she served as Senior Vice President, Finance and Risk Management from February 2011 to June 2016; as Senior Vice President, Treasury and Risk Management from September 2009 to February 2011; as Vice President, Finance and Risk Management from October 2008 to September 2009; and as Vice President, Internal Audit from March 2004 to October 2008.


Item 1A.	Risk Factors.

In evaluating the Company, the risks described below and the matters described in “Forward-Looking Statements” should be considered carefully. Such risks and matters are numerous and diverse, may be experienced continuously or intermittently, and may vary in intensity and effect. Any of such risks and matters, individually or in combination, could have a material adverse effect on the Company's business, prospects, financial condition, results of operations and cash flows, as well as on the attractiveness and value of an investment in the Company's securities.

The Company faces significant competition in the retail industry and depends on its ability to differentiate itself in retail's ever-changing environment.

The Company conducts its retail merchandising business under highly competitive conditions. Although the Company is one of the nation’s largest retailers, it has numerous and varied competitors at the national and local levels, including department stores, specialty stores, general merchandise stores, off-price and discount stores, manufacturers’ outlets, online retailers, catalogs and television shopping, among others. Competition may intensify as the Company’s competitors enter into business combinations or alliances. Competition is characterized by many factors, including assortment, advertising, price, quality, service, location, reputation and credit availability. Any failure by the Company to compete effectively could negatively affect the Company's business and results of operations.

As consumers continue to migrate online, the Company faces pressures to not only compete from a price perspective with its competitors, some of whom sell the same products, but also must differentiate itself to stay relevant in retail's ever-changing industry. The Company continues to significantly invest in its omnichannel capabilities in order to provide a seamless shopping experience to its customers between the Company's brick and mortar locations and its online and mobile environments. Insufficient, untimely or misguided investments in this area could significantly impact the Company's profitability and growth and affect the Company's ability to attract new customers as well as maintain its existing ones.

The Company’s sales and operating results depend on consumer preferences and consumer spending.

The fashion and retail industries are subject to sudden shifts in consumer trends and consumer spending. The Company’s sales and operating results depend in part on its ability to predict or respond to changes in fashion trends and consumer preferences in a timely manner. The Company develops new retail concepts and continuously adjusts its industry position in certain major and private-label brands and product categories in an effort to satisfy customers. Any sustained failure to anticipate, identify and respond to emerging trends in lifestyle and consumer preferences could negatively affect the Company’s business and results of operations. The Company’s sales are significantly affected by discretionary spending by consumers. Consumer spending may be affected by many factors outside of the Company’s control, including general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt and consumer behaviors towards incurring and paying debt, the costs of basic necessities and other goods, the strength of the U.S. Dollar relative to foreign currencies and the effects of the weather or natural disasters. Any decline in discretionary spending by consumers could negatively affect the Company's business and results of operations.

As the Company relies on the ability of its physical retail locations to remain relevant, providing desirable and sought-out shopping experiences is paramount to the Company's financial success. Changes in consumer shopping habits, financial difficulties at other anchor tenants, significant mall vacancy issues, mall violence and new mall developments could each adversely impact the traffic at current retail locations and lead to a decline in the Company's financial condition or performance.

The Company’s business is subject to unfavorable economic and political conditions and other related risks.

Unfavorable global, domestic or regional economic or political conditions and other developments and risks could negatively affect the Company’s business and results of operations. For example, unfavorable changes related to interest rates, rates of economic growth, fiscal and monetary policies of governments, inflation, deflation, consumer credit availability, consumer debt levels, consumer debt payment behaviors, tax rates and policy, unemployment trends, energy prices, and other matters that influence the availability and cost of merchandise, consumer confidence, spending and tourism could negatively affect the Company’s business and results of operations. These same conditions and related risks could affect the success of the Company's credit card program. Following the sale of most of the Company's credit accounts and related receivables to Citibank, the Company shares in the economic performance of the credit card program with CitiBank. Deterioration in economic or political conditions could adversely affect the volume of new credit accounts, the amount of credit card program balances and the ability of credit card holders to pay their balances. These conditions could result in the Company receiving lower payments under the credit card program. In addition, unstable political conditions, civil unrest, terrorist activities and armed conflicts may disrupt commerce and could negatively affect the Company’s business and results of operations.

The Company's effective tax rate is impacted by a number of factors, including changes in federal or state tax law, interpretation of existing laws and the ability to defend and support the tax positions taken on historical tax returns. Certain changes in any of these factors could materially impact the effective tax rate and the Company's net income.

The Company’s revenues and cash requirements are affected by the seasonal nature of its business.

The Company’s business is seasonal, with a high proportion of revenues and operating cash flows generated during the second half of the year, which includes the fall and holiday selling seasons. A disproportionate amount of the Company's revenues fall in the fourth quarter, which coincides with the holiday season. In addition, the Company incurs significant additional expenses in the period leading up to the months of November and December in anticipation of higher sales volume in those periods, including for additional inventory, advertising and employees.

The Company’s business could be affected by extreme weather conditions, regional or global health pandemics or natural disasters.

Extreme weather conditions in the areas in which the Company’s stores are located could negatively affect the Company’s business and results of operations. For example, frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather conditions over a prolonged period could make it difficult for the Company’s customers to travel to its stores and thereby reduce the Company’s sales and profitability. The Company’s business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could reduce demand for a portion of the Company’s inventory and thereby reduce the Company's sales and profitability. In addition, extreme weather conditions could result in disruption or delay of production and delivery of materials and products in the Company's supply chain and cause staffing shortages in the Company's stores.

The Company's business and results of operations could also be negatively affected if a regional or global health pandemic were to occur, depending upon its location, duration and severity. To halt or delay the spread of disease, local, regional or national governments might limit or ban public gatherings or customers might avoid public places, such as the Company's stores. A regional or global health pandemic might also result in disruption or delay of production and delivery of materials and products in the Company's supply chain and cause staffing shortages in the Company's stores.

In addition, natural disasters such as hurricanes, tornadoes and earthquakes, or a combination of these or other factors, could damage or destroy the Company’s facilities or make it difficult for customers to travel to its stores, thereby negatively affecting the Company’s business and results of operations.

The Company’s defined benefit plan funding requirements or plan settlement expense could impact the Company’s financial results and cash flow.

Significant changes in interest rates, decreases in the fair value of plan assets and benefit payments could affect the funded status of the Company’s plans and could increase future funding requirements of the plans. A significant increase in future funding requirements could have a negative impact on the Company’s cash flows, financial condition or results of operations.

As of January 28, 2017, the Company had unrecognized actuarial losses of $1,232 million for the funded defined benefit pension plan (the “Pension Plan”) and $248 million for the unfunded defined benefit supplementary retirement plan (the “SERP”). These plans allow eligible retiring employees to receive lump sum distributions of benefits earned. Under applicable accounting rules, if annual lump sum distributions exceed an actuarially determined threshold of the total of the annual service and interest costs, the Company would be required to recognize in the current period of operations a settlement expense of a portion of the unrecognized actuarial loss and could have a negative impact on the Company’s results of operations.

Increases in the cost of employee benefits could impact the Company’s financial results and cash flow.

The Company’s expenses relating to employee health benefits are significant. Unfavorable changes in the cost of such benefits could negatively affect the Company’s financial results and cash flow. Healthcare costs have risen significantly in recent years, and recent legislative and private sector initiatives regarding healthcare reform have resulted and could continue to result in significant changes to the U.S. healthcare system. Due to uncertainty regarding legislative or regulatory changes to the Affordable Care Act and related legislation, the Company is not able at this time to fully determine the impact that future healthcare reform will have on Company-sponsored medical plans.

Inability to access capital markets could adversely affect the Company’s business or financial condition.

Changes in the credit and capital markets, including market disruptions, limited liquidity and interest rate fluctuations, may increase the cost of financing or restrict the Company’s access to this potential source of future liquidity. A decrease in the ratings that rating agencies assign to the Company’s short and long-term debt may negatively impact the Company’s access to the debt capital markets and increase the Company’s cost of borrowing. In addition, the Company’s bank credit agreements require the Company to maintain specified interest coverage and leverage ratios. The Company’s ability to comply with the ratios may be affected by events beyond its control, including prevailing economic, financial and industry conditions. If the Company’s results of operations or operating ratios deteriorate to a point where the Company is not in compliance with its debt covenants, and the Company is unable to obtain a waiver, much of the Company’s debt would be in default and could become due and payable immediately. The Company’s assets may not be sufficient to repay in full this indebtedness, resulting in a need for an alternate source of funding. The Company cannot make any assurances that it would be able to obtain such an alternate source of funding on satisfactory terms, if at all, and its inability to do so could cause the holders of its securities to experience a partial or total loss of their investments in the Company.

The Company depends on its ability to attract and retain quality employees.

The Company’s business is dependent upon attracting and retaining quality employees. The Company has a large number of employees, many of whom are in entry level or part-time positions with historically high rates of turnover. The Company’s ability to meet its labor needs while controlling the costs associated with hiring and training new employees is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics. In addition, as a large and complex enterprise operating in a highly competitive and challenging business environment, the Company is highly dependent upon management personnel to develop and effectively execute successful business strategies and tactics. Any circumstances that adversely impact the Company’s ability to attract, train, develop and retain quality employees throughout the organization could negatively affect the Company’s business and results of operations.

The Company depends upon designers, vendors and other sources of merchandise, goods and services. The Company's business could be affected by disruptions in, or other legal, regulatory, political or economic issues associated with, the Company's supply network.

The Company’s relationships with established and emerging designers have been a significant contributor to the Company’s past success. The Company’s ability to find qualified vendors and access products in a timely and efficient manner is often challenging, particularly with respect to goods sourced outside the United States. The Company’s procurement of goods and services from outside the United States is subject to risks associated with political or financial

instability, trade restrictions, tariffs, currency exchange rates, transport capacity and costs and other factors relating to foreign trade. The Company sources the majority of its merchandise from manufacturers located outside of the U.S., primarily Asia, and any major changes in tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of unilateral tariffs on imported goods, could have a material adverse effect on the Company's business, results of operations and liquidity. The Company is also subject to costs and uncertainties associated with efforts to identify and disclose sources of "conflict minerals" used in products that the Company causes to be manufactured and potential sell-through difficulties and reputational damage that may be associated with the inability of the Company to determine that such products are "DRC conflict-free." In addition, the Company’s procurement of all its goods and services is subject to the effects of price increases which the Company may or may not be able to pass through to its customers. All of these factors may affect the Company’s ability to access suitable merchandise on acceptable terms, are beyond the Company’s control and could negatively affect the Company’s business and results of operations

The Company's sales and operating results could be adversely affected by product safety concerns.

If the Company's merchandise offerings do not meet applicable safety standards or consumers' expectations regarding safety, the Company could experience decreased sales, increased costs and/or be exposed to legal and reputational risk. Events that give rise to actual, potential or perceived product safety concerns could expose the Company to government enforcement action and/or private litigation. Reputational damage caused by real or perceived product safety concerns could negatively affect the Company's business and results of operations.

The Company depends on the success of its advertising and marketing programs.

The Company’s business depends on effective marketing and high customer traffic. The Company has many initiatives in this area, and often changes its advertising and marketing programs. There can be no assurance as to the Company’s continued ability to effectively execute its advertising and marketing programs, and any failure to do so could negatively affect the Company’s business and results of operations.

Parties with whom the Company does business may be subject to insolvency risks or may otherwise become unable or unwilling to perform their obligations to the Company.

The Company is a party to contracts, transactions and business relationships with various third parties, including, without limitation, vendors, suppliers, service providers, lenders and participants in joint ventures, strategic alliances and other joint commercial relationships, pursuant to which such third parties have performance, payment and other obligations to the Company. In some cases, the Company depends upon such third parties to provide essential leaseholds, products, services or other benefits, including with respect to store and distribution center locations, merchandise, advertising, software development and support, logistics, other agreements for goods and services in order to operate the Company’s business in the ordinary course, extensions of credit, credit card accounts and related receivables, and other vital matters. Current economic, industry and market conditions could result in increased risks to the Company associated with the potential financial distress or insolvency of such third parties. If any of these third parties were to become subject to bankruptcy, receivership or similar proceedings, the rights and benefits of the Company in relation to its contracts, transactions and business relationships with such third parties could be terminated, modified in a manner adverse to the Company, or otherwise impaired. The Company cannot make any assurances that it would be able to arrange for alternate or replacement contracts, transactions or business relationships on terms as favorable as the Company’s existing contracts, transactions or business relationships, if at all. Any inability on the part of the Company to do so could negatively affect the Company’s cash flows, financial condition and results of operations.

A material disruption in the Company’s computer systems could adversely affect the Company’s business or results of operations.

The Company relies extensively on its computer systems to process transactions, summarize results and manage its business. The Company’s computer systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyber-attack or other security breaches, catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes, acts of war or terrorism, and usage errors by the Company’s employees. If the Company’s computer systems are damaged or cease to function properly, the Company may have to make a significant investment to fix or replace them, and the Company may suffer loss of critical data and interruptions or delays in its operations. Any material interruption in the Company’s computer systems could negatively affect its business and results of operations.

A breach of information technology systems could adversely affect the Company's reputation, business partner and customer relationships, operations and result in high costs.

Through the Company's sales, marketing activities, and use of third-party information, the Company collects and stores certain non-public personal information that customers provide to purchase products or services, enroll in promotional programs, register on websites, or otherwise communicate to the Company. This may include, but is not limited to, phone numbers, driver license numbers, contact preferences, personal information stored on electronic devices, and payment information, including credit and debit card data. The Company also gathers and retains information about employees in the normal course of business. The Company may share information about such persons with vendors that assist with certain aspects of the Company's business. In addition, the Company's online operations depend upon the transmission of confidential information over the Internet, such as information permitting cashless payments.

The Company employs safeguards for the protection of such information. These protections may be compromised as a result of third-party security breaches, burglaries, cyberattack, errors by employees or employees of third-party vendors, or contractors, misappropriation of data by employees, vendors or unaffiliated third-parties, or other irregularities that may result in persons obtaining unauthorized access to company data. Despite instituting controls for the protection of such information, no commercial or government entity can be entirely free of vulnerability to attack or compromise given that the techniques used to obtain unauthorized access, disable or degrade service change frequently. During the normal course of business, the Company has experienced and expects to continue to experience attempts to compromise information systems security. Unauthorized parties may attempt to gain access to the Company's systems or facilities, or those of third parties with whom the Company does business, through fraud, trickery, or other forms of deception to employees, contractors, vendors and temporary staff. The Company may be unable to protect the integrity of systems or company data. Moreover, an alleged or actual unauthorized access or unauthorized disclosure of non-public personal information could:


•	materially damage the Company's reputation and brand, negatively affect customer satisfaction and loyalty, expose the Company to individual claims or consumer class actions, administrative, civil or criminal investigations or actions, and infringe on proprietary information; and

•

cause the Company to incur substantial costs, including but not limited to, costs associated with remediation of information technology systems, customer protection costs and incentive payments for the maintenance of business relationships, litigation costs, lost revenues resulting from negative changes in consumer shopping patterns, unauthorized use of proprietary information or the failure to retain or attract customers following an attack. While the Company maintains insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be unavailable or insufficient to cover all losses or all types of claims that may arise in the continually evolving area of cyber risk.

Disruption of global sourcing activities and the Company's own brands' quality concerns could negatively impact brand reputation and earnings

Economic and civil unrest in areas of the world where the Company source products, as well as shipping and dockage issues, could adversely impact the availability or cost of the Company’s products, or both. Most of the Company’s goods imported to the U.S. arrive from Asia through ports located on the U.S. west coast and are, therefore, subject to potential disruption due to labor unrest, security issues or natural disasters affecting any or all of these ports. In addition, in recent years, the Company has substantially increased the number and types of merchandise that are sold under the Company’s proprietary brands. While the Company has focused on the quality of its proprietary branded products, the Company relies on third-parties to manufacture these products. Such third-party manufacturers may prove to be unreliable, the quality of the Company’s globally sourced products may vary from the Company’s expectations and standards, such products may not meet applicable regulatory requirements which may require the Company to recall these products, or such products may infringe upon the intellectual propriety rights of other third-parties. Moreover, as the Company seeks indemnities from manufactures of these products, the uncertainty of realization of any such indemnity and the lack of understanding of U.S. product liability laws in certain foreign jurisdictions make it more likely that the Company may have to respond to claims or complaints from customers.

Litigation, legislation or regulatory developments could adversely affect the Company’s business and results of operations.

The Company is subject to various federal, state and local laws, rules, regulations, inquiries and initiatives in connection with both its core business operations and its credit card and other ancillary operations (including the Credit Card Act of 2009 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”)).

Recent and future developments relating to such matters could increase the Company's compliance costs and adversely affect the profitability of its credit card and other operations. The Company is also subject to anti-bribery, customs, child labor, truth-in-advertising and other laws, including consumer protection regulations and zoning and occupancy ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise and the operation of retail stores and warehouse facilities. Although the Company undertakes to monitor changes in these laws, if these laws change without the Company's knowledge, or are violated by importers, designers, manufacturers, distributors or agents, the Company could experience delays in shipments and receipt of goods or be subject to fines or other penalties under the controlling regulations, any of which could negatively affect the Company's business and results of operations. In addition, the Company is regularly involved in various litigation matters that arise in the ordinary course of its business. Adverse outcomes in current or future litigation could negatively affect the Company’s financial condition, results of operations and cash flows.

The Company may not be able to successfully execute its real estate strategy.

The Company continues to explore opportunities to monetize its real estate portfolio and is focused on opportunities for sale transactions and, in some cases, redevelopment of assets. This strategy is multi-pronged and may include transactions, strategic alliances or other arrangements with mall developers or unrelated third-parties. Due to the cyclical nature of real estate markets, the performance of the Company's real estate strategy is inherently volatile and could have a significant impact on the Company’s results of operations or financial condition.

Factors beyond the Company’s control could affect the Company’s stock price.

The Company’s stock price, like that of other retail companies, is subject to significant volatility because of many factors, including factors beyond the control of the Company. These factors may include:


•	general economic, stock, credit and real estate market conditions;


•	risks relating to the Company’s business and its industry, including those discussed above;


•	strategic actions by the Company or its competitors;


•	variations in the Company’s quarterly results of operations;


•	future sales or purchases of the Company’s common stock; and


•	investor perceptions of the investment opportunity associated with the Company’s common stock relative to other investment alternatives.

In addition, the Company may fail to meet the expectations of its stockholders or of analysts at some time in the future. If the analysts that regularly follow the Company’s stock lower their rating or lower their projections for future growth and financial performance, the Company’s stock price could decline. Also, sales of a substantial number of shares of the Company’s common stock in the public market or the appearance that these shares are available for sale could adversely affect the market price of the Company’s common stock.


Item 1B.	Unresolved Staff Comments.

None.


Item 2.	Properties.

The properties of the Company consist primarily of stores and related facilities, including a logistics network. The Company also owns or leases other properties, including corporate office space in Cincinnati and New York and other facilities at which centralized operational support functions are conducted. As of January 28, 2017, the operations of the Company included 829 stores in 45 states, the District of Columbia, Puerto Rico and Guam, comprising a total of approximately130 million square feet. Of such stores, 382 were owned, 330 were leased, 113 stores were operated under arrangements where the Company owned the building and leased the land and 4 stores were comprised of partly owned and partly leased buildings. All owned properties are held free and clear of mortgages. Pursuant to various shopping center agreements, the Company is obligated to operate certain stores for periods of up to 20 years. Some of these agreements require that the stores be operated under a particular name. Most leases require the Company to pay real estate taxes, maintenance and other 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.

The Company's operations were conducted through the following branded store locations:



	2016	2015	2014
Macy's	673	737	773
Bloomingdale's	55	54	50
Bluemercury	101	77	—
	829	868	823

Store count activity was as follows:



	2016		2015		2014
Store count at beginning of fiscal year	868		823		840
Stores opened	27		26		5
Acquisition of Bluemercury stores	—		62		—
Stores closed or consolidated into existing centers	(66	)	(43	)	(22	)
Store count at end of fiscal year	829		868		823

Additional information about the Company’s stores as of January 28, 2017 is as follows:



Geographic Region	Total	Owned	Leased	Subject to a Ground Lease	Partly Owned and Partly Leased
North Central	142	84	38	20	—
Northeast	250	90	132	28	—
Northwest	131	44	62	22	3
South	179	116	42	21	—
Southwest	127	48	56	22	1
	829	382	330	113	4

The five geographic regions detailed in the foregoing table are based on the Company’s Macy’s-branded operational structure. The Company’s retail stores are located at urban or suburban sites, principally in densely populated areas across the United States.

Additional information about the Company’s logistics network as of January 28, 2017 is as follows:



Location	Primary Function	Owned or Leased	Square Footage (thousands)
Cheshire, CT	Direct to customer	Owned	565
Chicago, IL	Stores	Owned	861
Denver, CO	Stores	Leased	20
Goodyear, AZ	Direct to customer	Owned	960
Hayward, CA	Stores	Owned	386
Houston, TX	Stores	Owned	1,124
Joppa, MD	Stores	Owned	850
Kapolei, HI	Stores	Owned	260
Los Angeles, CA	Stores	Owned	1,178
Martinsburg, WV	Direct to customer	Owned	1,300
Miami, FL	Stores	Leased	535
Portland, TN	Direct to customer	Owned	950
Raritan, NJ	Stores	Owned	980
Sacramento, CA	Direct to customer	Leased	385
Secaucus, NJ	Stores	Leased	675
South Windsor, CT	Stores	Owned	510
Stone Mountain, GA	Stores	Owned	1,000
Tampa, FL	Stores	Owned	670
Tulsa, OK	Direct to customer	Owned	1,300
Tukwila, WA	Stores	Leased	500
Union City, CA	Stores	Leased	165
Youngstown, OH	Stores	Owned	851


Item 3.	Legal Proceedings.

The Company and its subsidiaries are involved in various proceedings that are incidental to the normal course of their businesses. As of the date of this report, the Company does not expect that any of such proceedings will have a material adverse effect on the Company’s financial position or results of operations.

PART II


Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Common Stock is listed on the NYSE under the trading symbol “M.” As of January 28, 2017, the Company had approximately 16,200 stockholders of record. The following table sets forth for each quarter during 2016 and 2015 the high and low sales prices per share of Common Stock as reported on the NYSE and the dividends declared with respect to each quarter on each share of Common Stock.



	2016			2015
	Low	High	Dividend	Low	High	Dividend
1st Quarter	37.71	45.50	0.3600	61.10	69.98	0.3125
2nd Quarter	29.94	40.15	0.3775	62.80	73.61	0.3600
3rd Quarter	31.02	40.98	0.3775	47.10	70.12	0.3600
4th Quarter	28.55	45.41	0.3775	34.05	52.48	0.3600

The declaration and payment of future dividends will be at the discretion of the Company’s Board of Directors, are subject to restrictions under the Company’s credit facility and may be affected by various other factors, including the Company’s earnings, financial condition and legal or contractual restrictions.

The following table provides information regarding the Company’s purchases of Common Stock during the fourth quarter of 2016.



	Total Number of Shares Purchased	Average Price per Share ($)	Number of Shares Purchased under Program (1)	Open Authorization Remaining ($)(1)
	(thousands)		(thousands)	(millions)
October 30, 2016 – November 26, 2016	727	42.90	727	1,763
November 27, 2016 – December 31, 2016	1,152	40.61	1,152	1,716
January 1, 2017 – January 28, 2017	—	—	—	1,716
	1,879	41.49	1,879

___________________

(1)

Commencing in January 2000, the Company’s Board of Directors has from time to time approved authorizations to purchase, in the aggregate, up to $18 billion of Common Stock. All authorizations are cumulative and do not have an expiration date. As of January 28, 2017, $1,716 million of authorization remained unused. The Company may continue, discontinue or resume purchases of Common Stock under these or possible future authorizations in the open market, in privately negotiated transactions or otherwise at any time and from time to time without prior notice.

The following graph compares the cumulative total stockholder return on the Common Stock with the Standard & Poor's 500 Composite Index and the Company's peer group for the period from January 28, 2012 through January 28, 2017, assuming an initial investment of $100 and the reinvestment of all dividends, if any.

The companies included in the peer group are Bed, Bath & Beyond, Dillard's, Gap, J.C. Penney, Kohl's, L Brands, Nordstrom, Ross Stores, Sears Holdings, Target, TJX Companies and Wal-Mart.


Item 6.	Selected Financial Data.

The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and the notes thereto and the other information contained elsewhere in this report.



	2016			2015			2014			2013			2012*
	(millions, except per share)
Consolidated Statement of Income Data:
Net sales	$	25,778		$	27,079		$	28,105		$	27,931		$	27,686
Cost of sales	(15,621		)	(16,496		)	(16,863		)	(16,725		)	(16,538		)
Gross margin	10,157			10,583			11,242			11,206			11,148
Selling, general and administrative expenses	(8,265		)	(8,256		)	(8,355		)	(8,440		)	(8,482		)
Impairments, store closing and other costs	(479		)	(288		)	(87		)	(88		)	(5		)
Settlement charges	(98		)	—			—			—			—
Operating income	1,315			2,039			2,800			2,678			2,661
Interest expense	(367		)	(363		)	(395		)	(390		)	(425		)
Premium on early retirement of debt	—			—			(17		)	—			(137		)
Interest income	4			2			2			2			3
Income before income taxes	952			1,678			2,390			2,290			2,102
Federal, state and local income tax expense	(341		)	(608		)	(864		)	(804		)	(767		)
Net income	611			1,070			1,526			1,486			1,335
Net loss attributable to noncontrolling interest	8			2			—			—			—
Net income attributable to Macy's, Inc. shareholders	$	619		$	1,072		$	1,526		$	1,486		$	1,335

Basic earnings per share attributable to Macy's, Inc. shareholders	$	2.01		$	3.26		$	4.30		$	3.93		$	3.29
Diluted earnings per share attributable to Macy's, Inc. shareholders	$	1.99		$	3.22		$	4.22		$	3.86		$	3.24
Average number of shares outstanding	308.5			328.4			355.2			378.3			405.5
Cash dividends paid per share	$	1.4925		$	1.3925		$	1.1875		$	.9500		$	.8000
Depreciation and amortization	$	1,058		$	1,061		$	1,036		$	1,020		$	1,049
Capital expenditures	$	912		$	1,113		$	1,068		$	863		$	942
Balance Sheet Data (at year end):
Cash and cash equivalents	$	1,297		$	1,109		$	2,246		$	2,273		$	1,836
Total assets	19,851			20,576			21,330			21,499			20,858
Short-term debt	309			642			76			463			124
Long-term debt	6,562			6,995			7,233			6,688			6,768
Total Shareholders’ equity	4,322			4,253			5,378			6,249			6,051

___________________


*	53 weeks


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The discussion in this Item 7 should be read in conjunction with the Consolidated Financial Statements and the related notes included elsewhere in this report. The discussion in this Item 7 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 “Forward-Looking Statements.”

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 operates 829 stores in 45 states, the District of Columbia, Guam and Puerto Rico. As of January 28, 2017, the Company's operations were conducted through Macy's, Bloomingdale's, Bloomingdale’s The Outlet, Macy’s Backstage, Bluemercury and Macy’s China Limited which are aggregated into one reporting segment in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting.”

The Company continues to be focused on key strategies for growth in sales, earnings and cash flow in the years ahead that include:


•	Transforming the omnichannel business and focusing on key growth areas,


•	Embracing customer centricity, including a simplified value proposition, and


•	Optimizing value in the real estate portfolio.

These strategies continue to evolve and the Company has developed specific initiatives to deliver an exclusive and distinctive merchandise assortment, including the Company's private brands; expand the digital frontier while delivering repeatable, signature encounters; and develop an omnichannel customer relationship through personalized experiences, powerful brand messaging and strengthened, cross-channel loyalty programs.

The Company remains focused on driving additional profitable sales growth through a series of organic and new business initiatives. The initiatives include a focus on fine jewelry, watches and women’s shoes, a reinvention of the beauty business that includes expansion of Bluemercury freestanding locations and inside existing Macy's stores and a focus on enhancements to digital content and mobile technology, an expansion of "Last Act"- a simplified pricing approach to clearance merchandise in Macy's stores, the expansion of Macy's Backstage within existing Macy's store locations, and utilization of different customer incentive programs to increase customer choice and provide value in transactions previously limited by coupon exclusions.

Macy’s will continue to focus on customer initiatives including the development and testing of new merchandise concepts and categories, new services to increase traffic and new technology to improve the customer experience and the store’s ability to operate more efficiently. Such initiatives will enable the Company’s stores to personalize and simplify its customers’ shopping experiences, develop meaningful relationships with new customers and deepen relationships with its existing ones.

In January 2017, the Company announced a series of actions to streamline its store portfolio, intensify cost efficiency efforts and execute its real estate strategy. These actions are intended to support the Company's strategy to further invest in omnichannel capabilities, improve customer experience and create shareholder value. In August 2016, the Company announced its intention to close approximately 100 Macy’s stores. The Company subsequently announced in January 2017, the closure of sixty-eight Macy’s stores by mid-2017, with the balance closing as leases and certain operating covenants expire or are amended and waived. In addition, the Company announced the reorganization of the field structure that supports the remaining stores and a significant restructuring of the Company's central operations to focus resources on strategic priorities, improve organizational agility and reduce expense.

The Company’s real estate strategy is designed to create value through both monetization and redevelopment of certain assets:

•

In January 2016, the Company completed a $270 million real estate transaction to recreate Macy's Brooklyn store. The Company continues to own and operate the first four floors and lower level of its existing nine-story retail store, which is currently being reconfigured and remodeled. The remaining portion of the store and its nearby parking facility were sold to Tishman Speyer in a single sales transaction. As the sales agreement required the Company to conduct certain redevelopment activities at Macy's Brooklyn store, the Company is recognizing the gain on the transaction, approximately $250 million, under the percentage of completion method of accounting over the redevelopment period. Accordingly, $117 million has been recognized to-date and the remaining gain is anticipated to be recognized over the next two years.

•

In 2016, the Company had property and equipment sales, primarily related to real estate, totaling $673 million in cash proceeds and recognized real estate gains of $209 million. This includes the sale of its 248,000 square-foot Union Square Men’s building in San Francisco for approximately $250 million in January 2017. The Company will use part of the proceeds to consolidate the Men’s store into its main Union Square store. The Company will lease the Men’s store property for two to three years as it completes the reconfiguration of the main store. The Company is expected to recognize a gain of approximately $235 million in January 2018.

•

In January 2017, the Company finalized the formation of a strategic alliance with Brookfield Asset Management, a leading global alternative asset manager, to create increased value in its real estate portfolio. Under the alliance, Brookfield has an exclusive right for up to 24 months to create a “pre-development plan” for each of approximately 50 Macy’s real estate assets, with an option for Macy’s to continue to identify and add assets into the alliance. The breadth of opportunity within the portfolio ranges from the additional development on a portion of an asset (such as a Company-controlled land parcel adjacent to a store) to the complete redevelopment of an existing store. Once a "pre-development plan" is created, the Company has the option to contribute the asset into a joint venture for the development plan to commence or sell the asset to Brookfield. If the Company chooses to contribute the asset into a joint venture, the Company may elect to participate as a funding or non-funding partner. After development, the joint venture may sell the asset and distribute proceeds accordingly.


•	On February 28, 2017, the Company sold its downtown Minneapolis store and parking facility for $59 million of proceeds and a gain of approximately $47 million that is expected to be recognized in the first quarter of 2017. The downtown Minneapolis store will close in early 2017.

In 2015, the Company opened the first six freestanding 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, cosmetics, shoes, fashion accessories, housewares, home textiles, toys intimate apparel and jewelry. The Company is now focused on opening Macy's Backstage stores within existing Macy's store locations as a way of increasing store productivity, increasing the number of shopping trips to Macy's and attracting new customers. As of January 28, 2017, the Company is operating 22 Macy's Backstage locations (7 freestanding and 15 inside Macy's stores).

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. During 2016, the Company opened 24 new freestanding Bluemercury stores and 15 new Bluemercury locations inside existing Macy's stores and as of January 28, 2017, the Company is operating 120 Bluemercury locations (101 freestanding and 19 inside Macy's stores).

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 reporting includes the financial operations of Macy's China Limited, with the thirty-five percent ownership reported as a noncontrolling interest.

In early 2017, the Company opened a Macy’s store at Fashion Place in Murray, UT and plans to open a store at Westfield Century City in Los Angeles, CA, later in the year. In addition, the Company expects to open approximately 30 additional Bluemercury locations and approximately 30 Macy’s Backstage locations inside Macy’s stores. Announced new stores in future years include Bloomingdale’s in San Jose, CA (2019), and Norwalk, CT (2019). In addition, under license agreements with Al Tayer Group, a new Bloomingdale’s store opened at 360 Mall in Al Zahra, Kuwait in March 2017 and new Macy’s and Bloomingdale’s stores are planned to open in Al Maryah Central in Abu Dhabi, United Arab Emirates in 2018.

2016 Overview

2016 was another challenging year due in part to changes in consumer buying habits and spending. However, the Company began implementation of a number of initiatives, including those announced in 2015 as well as a major organizational restructuring and streamlining the Company's store portfolio, which are expected to improve performance in the coming years.

Selected results of 2016 include:


•	Comparable sales on an owned basis decreased 3.5% and comparable sales on an owned plus licensed basis decreased 2.9%.


•	Operating income for 2016 was $1.892 billion or 7.3% of sales, excluding impairments, store closing and other costs and settlement charges, a decrease of 18.7% and 130 basis points as a percent of sales from 2015 on a comparable basis.


•	Diluted earnings per share attributable to Macy's, Inc. shareholders, excluding certain items, declined 17.5% to $3.11 in 2016 from $3.77 in 2015.


•	Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, impairments, store closing and other costs and settlement charges) as a percent to net sales was 11.4% in 2016, as compared to 12.5% in 2015.


•	Return on invested capital ("ROIC"), a key measure of operating productivity, was 18.5%, a decrease from 20.1% in 2015.


•	Net cash provided by operating activities, net of cash used by investing activities increased significantly in 2016 as compared to 2015.


•	The Company repurchased 7.9 million shares of its common stock for $316 million in 2016, and increased its annualized dividend rate to $1.51 per share. This annualized dividend rate represents an increase of 5% and is the sixth increase in the dividend in the past five years.

See pages 20 to 23 for reconciliations of the non-GAAP financial measures presented above to the most comparable GAAP financial measures and other important information.

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 basis, which includes the impact of growth in comparable sales of departments licensed to third parties, assists in evaluating the Company's ability to generate sales growth, whether through owned businesses or departments licensed to third parties, and in evaluating the impact of changes in the manner in which certain departments are operated. Management believes that excluding certain items that may vary substantially in frequency and magnitude period-to-period from diluted earnings per share attributable to Macy's, Inc. shareholders and from operating income and EBITDA as percentages to sales provides 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. In addition, management believes that ROIC is a useful supplemental measure in evaluating how efficiently the Company employs its capital. The Company uses some of these non-GAAP financial measures as performance measures for components of executive compensation.

The reconciliation of the forward-looking non-GAAP financial measure of changes in comparable sales on an owned plus licensed basis to GAAP comparable sales (i.e., on an owned basis) is in the same manner as illustrated below, where the impact of growth in comparable sales of departments licensed to third parties is the only reconciling item. In addition, the Company does not provide the most directly comparable forward-looking GAAP measure of diluted earnings per share attributable to Macy’s, Inc. shareholders because the timing and amount of excluded items (e.g., asset impairment charges, retirement settlement charges and other store closing related costs) are unreasonably difficult to fully and accurately estimate.

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 and 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 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.

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



	2016	2015	2014	2013	2012
Increase (decrease) in comparable sales on an owned basis (note 1)	(3.5)%	(3.0)%	0.7%	1.9%	3.7%
Impact of growth in comparable sales of departments licensed to third parties (note 2)	0.6%	0.5%	0.7%	0.9%	0.3%
Increase (decrease) in comparable sales on an owned plus licensed basis	(2.9)%	(2.5)%	1.4%	2.8%	4.0%

Notes:

(1)

Represents the period-to-period percentage change in net sales from stores in operation throughout the year presented and the immediately preceding year and all online sales of macys.com and bloomingdales.com, adjusting for the 53rd week in 2012, excluding commissions from departments licensed to third parties. Stores undergoing remodeling, expansion or relocation remain in the comparable sales calculation unless the store is closed for a significant period of time. Definitions and calculations of comparable sales 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 of macys.com and bloomingdales.com, adjusting for the 53rd week in 2012, in the calculation of comparable sales. The Company licenses third parties to operate certain departments in its stores and online and receives commissions from these third parties based on a percentage of their net sales. In its financial statements prepared in conformity with GAAP, the Company includes these commissions (rather than sales of the departments licensed to third parties) in its net sales. The Company does not, however, include any amounts in respect of licensed department 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 are not material to its net sales for the periods presented.

Operating Income, Excluding Certain Items, as a Percent to Net Sales

The following is a tabular reconciliation of the non-GAAP financial measure operating income, excluding certain items, as a percent to net sales to GAAP operating income as a percent to net sales, which the Company believes to be the most directly comparable GAAP financial measure.



	2016			2015			2014			2013			2012
	(millions, except percentages)
Net sales	$	25,778		$	27,079		$	28,105		$	27,931		$	27,686

Operating income	$	1,315		$	2,039		$	2,800		$	2,678		$	2,661

Operating income as a percent to net sales	5.1		%	7.5		%	10.0		%	9.6		%	9.6		%

Operating income	$	1,315		$	2,039		$	2,800		$	2,678		$	2,661
Add back impairments, store closing and other costs	479			288			87			88			5
Add back settlement charges	98			—			—			—			—
Operating income, excluding certain items	$	1,892		$	2,327		$	2,887		$	2,766		$	2,666
Operating income, excluding certain items, as a percent to net sales	7.3		%	8.6		%	10.3		%	9.9		%	9.6		%

Diluted Earnings Per Share Attributable to Macy's, Inc. Shareholders, Excluding Certain Items

The following is a tabular reconciliation of the non-GAAP financial measure diluted earnings per share attributable to Macy's, Inc. shareholders, excluding certain items, to GAAP diluted earnings per share attributable to Macy's, Inc. shareholders, which the Company believes to be the most directly comparable GAAP measure.



	2016			2015			2014			2013			2012
Diluted earnings per share attributable to Macy's, Inc. shareholders	$	1.99		$	3.22		$	4.22		$	3.86		$	3.24
Add back the pre-tax impact of impairments, store closing and other costs	1.54			0.86			0.24			0.23			0.01
Add back the pre-tax impact of settlement charges	0.31			—			—			—			—
Add back the pre-tax impact of premium on early retirement of debt	—			—			0.05			—			0.33
Deduct the income tax impact of impairments, store closing and other costs, settlement charges and premium on early retirement of debt	(0.73		)	(0.31		)	(0.11		)	(0.09		)	(0.12		)
Diluted earnings per share attributable to Macy's, Inc. shareholders, excluding the impact of impairments, store closing and other costs, settlement charges and premium on early retirement of debt	$	3.11		$	3.77		$	4.40		$	4.00		$	3.46

Adjusted EBITDA as a Percent to Net Sales

The following is a tabular reconciliation of the non-GAAP financial measure earnings before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted to exclude premium on early retirement of debt, impairments, store closing and other costs and settlement charges ("Adjusted EBITDA"), as a percent to net sales to GAAP net income as a percent to net sales, which the Company believes to be the most directly comparable GAAP financial measure.



	2016			2015			2014			2013			2012
	(millions, except percentages)
Net sales	$	25,778		$	27,079		$	28,105		$	27,931		$	27,686

Net income	$	611		$	1,070		$	1,526		$	1,486		$	1,335

Net income as a percent to net sales	2.4		%	4.0		%	5.4		%	5.3		%	4.8		%

Net income	$	611		$	1,070		$	1,526		$	1,486		$	1,335
Add back impairments, store closing and other costs	479			288			87			88			5
Add back settlement charges	98			—			—			—			—
Add back interest expense - net	363			361			393			388			422
Add back premium on early retirement of debt	—			—			17			—			137
Add back federal, state and local income tax expense	341			608			864			804			767
Add back depreciation and amortization	1,058			1,061			1,036			1,020			1,049
Adjusted EBITDA	$	2,950		$	3,388		$	3,923		$	3,786		$	3,715
Adjusted EBITDA as a percent to net sales	11.4		%	12.5		%	14.0		%	13.6		%	13.4		%

ROIC

The Company defines ROIC as adjusted operating income as a percent to average invested capital. Average invested capital is comprised of an annual two-point (i.e., end of the year presented and the immediately preceding year) average of gross property and equipment, a capitalized value of non-capitalized leases equal to periodic annual reported net rent expense multiplied by a factor of eight and a four-point (i.e., end of each quarter within the period presented) average of other selected assets and liabilities. The calculation of the capitalized value of non-capitalized leases is consistent with industry and credit rating agency practice and the specified assets are subject to a four-point average to compensate for seasonal fluctuations.

The following is a tabular reconciliation of the non-GAAP financial measure of ROIC to operating income as a percent to property and equipment - net, which the Company believes to be the most directly comparable GAAP financial measure.



	2016			2015			2014			2013			2012
	(millions, except percentages)
Operating income	$	1,315		$	2,039		$	2,800		$	2,678		$	2,661

Property and equipment - net	$	7,317		$	7,708		$	7,865		$	8,063		$	8,308

Operating income as a percent to property and equipment - net	18.0		%	26.5		%	35.6		%	33.2		%	32.0		%

Operating income	$	1,315		$	2,039		$	2,800		$	2,678		$	2,661
Add back impairments, store closing and other costs	479			288			87			88			5
Add back settlement charges	98			—			—			—			—
Add back depreciation and amortization	1,058			1,061			1,036			1,020			1,049
Add back rent expense, net
Real estate	319			301			279			268			258
Personal property	11			12			12			11			11
Deferred rent amortization	9			8			7			8			7
Adjusted operating income	$	3,289		$	3,709		$	4,221		$	4,073		$	3,991

Property and equipment - net	$	7,317		$	7,708		$	7,865		$	8,063		$	8,308
Add back accumulated depreciation and amortization	5,088			5,457			5,830			6,007			5,967
Add capitalized value of non-capitalized leases	2,712			2,568			2,384			2,296			2,208
Add (deduct) other selected assets and liabilities:
Receivables	411			338			336			339			322
Merchandise inventories	6,012			6,226			6,155			6,065			5,754
Prepaid expenses and other current assets	456			453			443			398			390
Other assets	881			775			784			659			579
Merchandise accounts payable	(2,182		)	(2,366		)	(2,472		)	(2,520		)	(2,362		)
Accounts payable and accrued liabilities	(2,924		)	(2,677		)	(2,511		)	(2,328		)	(2,333		)
Total average invested capital	$	17,771		$	18,482		$	18,814		$	18,979		$	18,833

ROIC	18.5		%	20.1		%	22.4		%	21.5		%	21.2		%

Results of Operations



	2016							2015							2014
	Amount				% to Sales			Amount				% to Sales			Amount				% to Sales
	(dollars in millions, except per share figures)
Net sales	$	25,778						$	27,079						$	28,105
Increase (decrease) in sales	(4.8		)	%				(3.7		)	%				0.6			%
Increase (decrease) in comparable sales	(3.5		)	%				(3.0		)	%				0.7			%
Cost of sales	(15,621		)		(60.6	)	%	(16,496		)		(60.9	)	%	(16,863		)		(60.0	)	%
Gross margin	10,157				39.4		%	10,583				39.1		%	11,242				40.0		%
Selling, general and administrative expenses	(8,265		)		(32.0	)	%	(8,256		)		(30.5	)	%	(8,355		)		(29.7	)	%
Impairments, store closing and other costs	(479		)		(1.9	)	%	(288		)		(1.1	)	%	(87		)		(0.3	)	%
Settlement charges	(98		)		(0.4	)	%	—				—		%	—				—		%
Operating income	1,315				5.1		%	2,039				7.5		%	2,800				10.0		%
Interest expense - net	(363		)					(361		)					(393		)
Premium on early retirement of debt	—							—							(17		)
Income before income taxes	952							1,678							2,390
Federal, state and local income tax expense	(341		)					(608		)					(864		)
Net income	611							1,070							1,526
Net loss attributable to noncontrolling interest	8							2							—
Net income attributable to Macy's, Inc. shareholders	$	619			2.0	%	%	$	1,072			4.0		%	$	1,526			5.4		%

Diluted earnings per share attributable to Macy's, Inc. shareholders	$	1.99						$	3.22						$	4.22

Supplemental Non-GAAP Financial Measures
Increase (decrease) in comparable sales on an owned plus licensed basis	(2.9		)	%				(2.5		)	%				1.4			%
Operating income, excluding certain items	$	1,892			7.3		%	$	2,327			8.6		%	$	2,887			10.3		%
Diluted earnings per share attributable to Macy's, Inc. shareholders, excluding certain items	$	3.11						$	3.77						$	4.40
Adjusted EBITDA as a percent to net sales	11.4			%				12.5			%				14.0			%
ROIC	18.5			%				20.1			%				22.4			%

See pages 20 to 23 for a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measure and for other important information.

Store information (at year-end):
Stores operated	829							868							823
Square footage (in millions)	130.2							141.9							147.4

Comparison of 2016 and 2015

Net Income Attributable to Macy's, Inc. Shareholders

Net income attributable to Macy's, Inc. shareholders for 2016 decreased compared to 2015, reflecting lower sales and gross margin and higher selling, general and administrative expenses, impairments, store closing costs and other costs, settlement charges and net interest expense, partially offset by lower income taxes in 2016 as compared to 2015.

Net Sales

Net sales for 2016 decreased $1,301 million or 4.8% compared to 2015. The decrease in comparable sales on an owned basis for 2016 was 3.5% compared to 2015. The decrease in comparable sales on an owned plus licensed basis for 2016 was 2.9% compared to 2015. (See pages 20 and 21 for information regarding the Company's calculation of comparable sales, a reconciliation of the non-GAAP measure which takes into account sales of departments licensed to third parties to the most comparable GAAP measure and other important information). The Company experienced an overall weakness in sales, but geographically sales in 2016 were strongest in the Southwest, particularly southern California. Digital sales continued to be strong in 2016 and experienced double digit growth. By family of business, sales in 2016 were strongest in apparel, fine jewelry, shoes, intimate apparel and fragrances. Sales in 2016 were less strong in fashion jewelry, handbags, and fashion watches. Sales of the Company's private label brands represented approximately 20% of net sales in the Macy's-branded operations in 2016 and 2015.

Cost of Sales

Cost of sales for 2016 decreased $875 million from 2015. The cost of sales rate as a percent to net sales of 60.6% was 30 basis points lower in 2016, as compared to 60.9% in 2015, primarily due to fewer markdowns taken in 2016 as compared to 2015 and offset slightly by higher delivery expenses associated with the Company's omnichannel activities and free shipping promotions. The application of the last-in, first-out (LIFO) retail inventory method did not result in the recognition of any LIFO charges or credits affecting cost of sales in either period.

SG&A Expenses

SG&A expenses for 2016 increased $9 million from 2015 and the SG&A rate as a percent to net sales of 32.0% was 150 basis points higher in 2016, as compared to 2015. SG&A expenses in 2016 were impacted by lower income from credit operations and higher expenses associated with the continued investments in the Company's omnichannel operations, investments in Bluemercury, Macy's Backstage and Macy's China Limited. These increases were partially offset by lower retirement expenses (including Pension Plan, SERP and defined contribution plan expenses), lower advertising expense, net of cooperative advertising allowances and the impact of the restructuring announced at the end of 2015. Income from credit operations was $736 million in 2016 as compared to $831 million in 2015. SG&A expenses included gains on the sales of certain store locations and surplus properties of $209 million in 2016 compared to $212 million in 2015. Retirement expenses were $44 million in 2016 as compared to $77 million in 2015. Depreciation and amortization expense was $1,058 million for 2016, compared to $1,061 million for 2015. Advertising expense, net of cooperative advertising allowances, was $1,153 million for 2016 compared to $1,173 million for 2015. Advertising expense, net of cooperative advertising allowances, as a percent to net sales was 4.5% for 2016 and 4.3% for 2015.

Impairments, Store Closing and Other Costs

Impairments, store closing and other costs for 2016 includes costs and expenses primarily associated with the organizational changes and store closings announced in January 2017. During 2016, these costs and expenses included asset impairment charges of $265 million, $168 million of severance and other human resource-related costs and $46 million of other related costs and expenses. Impairments, store closing and other costs for 2015 included costs and expenses primarily associated with organization changes and store closings announced in January 2016. During 2015, these costs and expenses included asset impairment charges of $148 million, $123 million of severance and other human resource-related costs and $17 million of other related costs and expenses.

Settlement Charges

$98 million of non-cash settlement charges were recognized in 2016. These charges relate to the pro-rata recognition of net actuarial losses associated with the Company’s defined benefit retirement plans and are the result of an increase in lump sum distributions associated with store closings, a voluntary separation program, organizational restructuring, and periodic distribution activity.

Net Interest Expense

Net interest expense for 2016 increased $2 million from 2015. Net interest expense for 2016 was impacted by lower capitalized interest associated with the Company's construction projects, offset slightly by lower rates on outstanding borrowings as compared to 2015.

Effective Tax Rate

The Company's effective tax rate of 35.8% for 2016 and 36.2% for 2015 differ from the federal income tax statutory rate of 35%, and on a comparative basis, principally because of the effect of state and local income taxes, including the settlement of various tax issues and tax examinations.

Comparison of 2015 and 2014

Net Income Attributable to Macy's, Inc. Shareholders

Net income attributable to Macy's, Inc. shareholders for 2015 decreased compared to 2014, reflecting lower sales and gross margin and higher impairments, store closing costs and other costs, partially offset by lower selling, general and administrative expenses, interest expense and income taxes in 2015 as compared to 2014.

Net Sales

Net sales for 2015 decreased $1,026 million or 3.7% compared to 2014. The decrease in comparable sales on an owned basis for 2015 was 3.0% compared to 2014. The decrease in comparable sales on an owned plus licensed basis for 2015 was 2.5% compared to 2014. (See pages 20 and 21 for information regarding the Company's calculation of comparable sales, a reconciliation of the non-GAAP measure which takes into account sales of departments licensed to third parties to the most comparable GAAP measure and other important information). The Company experienced an overall weakness in sales, but geographically sales in 2015 were stronger in the western and southern regions, where weather was less of a factor, while sales at locations that are frequented by international tourists, such as New York City, Las Vegas, San Francisco and Chicago were negatively impacted by lower levels of spending by these tourists. Digital sales growth continued to be strong in 2015. By family of business, sales in 2015 were strongest in active apparel, cosmetics and fragrances and furniture and mattresses. Sales in 2015 were less strong in fashion watches, cold weather items, and the housewares and tabletop businesses. Sales of the Company's private label brands represented approximately 20% of net sales in the Macy's-branded operations in 2015.

Cost of Sales

Cost of sales for 2015 decreased $367 million from 2014. The cost of sales rate as a percent to net sales of 60.9% was 90 basis points higher in 2015, as compared to 60.0% in 2014, primarily due to higher markdowns resulting from the need to clear inventory based on the weaker sales trend as well as continued growth of the omnichannel businesses and the resulting impact of free shipping. The application of the last-in, first-out (LIFO) retail inventory method did not result in the recognition of any LIFO charges or credits affecting cost of sales in either period.

SG&A Expenses

SG&A expenses for 2015 decreased $99 million from 2014, however the SG&A rate as a percent to net sales of 30.5% was 80 basis points higher in 2015, as compared to 2014. SG&A expenses in 2015 benefited from higher income from credit operations and higher gains on the sale of certain store locations and surplus properties, partially offset by higher retirement expenses (including Pension Plan, SERP and defined contribution plan expenses), higher expenses associated with the continued investments in the Company's omnichannel operations, investments in Bluemercury, Macy's Backstage and Macy's China Limited and higher depreciation and amortization expense. Income from credit operations was $831 million in 2015 as compared to $776 million in 2014. SG&A expenses included gains on the sales of certain store locations and surplus properties of $212 million in 2015 as compared to $92 million in 2014. Included in the gains on the sales of store locations and surplus properties in 2015 was $84 million related to the sale of Brooklyn real estate and $57 million related to the downtown Seattle real estate transaction. Retirement expenses were $77 million in 2015 as compared to $65 million in 2014. Depreciation and amortization expense was $1,061 million for 2015, compared to $1,036 million for 2014. Advertising expense, net of cooperative advertising allowances, was $1,173 million for 2015 compared to $1,177 million for 2014. Advertising expense, net of cooperative advertising allowances, as a percent to net sales was 4.3% for 2015 and 4.2% for 2014.

Impairments, Store Closing and Other Costs

Impairments, store closing and other costs for 2015 included costs and expenses primarily associated with the cost efficiency initiatives and store closings announced in January 2016. During 2015, these costs and expenses included $123 million of severance and other human resource-related costs and asset impairment charges of $148 million. Impairments, store closing and other costs for 2014 included costs and expenses primarily associated with organization changes and store closings announced in January 2015. During 2014, these costs and expenses included $46 million of severance and other human resource-related costs and asset impairment charges of $33 million.

Net Interest Expense

Net interest expense for 2015 decreased $32 million from 2014. Net interest expense for 2015 benefited from lower rates on outstanding borrowings as compared to 2014 and from the recognition of unamortized debt premium associated with the $76 million of 8.125% senior debentures due 2035 which were redeemed at par on August 17, 2015, pursuant to the terms of the debentures.

Premium on Early Retirement of Debt

On November 14, 2014, the Company provided a notice of redemption related to all of the $407 million of 7.875% senior notes due 2015, as allowed under the terms of the indenture. The price for the redemption was calculated pursuant to the indenture and resulted in the recognition of additional interest expense of $17 million during 2014. The additional interest expense resulting from this transaction is presented as premium on early retirement of debt on the Consolidated Statements of Income.

Effective Tax Rate

The Company's effective tax rate of 36.2% for 2015 and 2014 differ from the federal income tax statutory rate of 35%, and on a comparative basis, principally because of the effect of state and local income taxes, including the settlement of various tax issues and tax examinations. Additionally, income tax expense for 2015 and 2014 benefited from historic rehabilitation tax credits.

Guidance

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.

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's 2017 assumptions include the following:


•	Total sales decline of approximately 3.2% - 4.3% from 2016 levels. Total sales in 2017 reflect a 53rd week of sales, whereas comparable sales below are on a 52-week basis.


•	Comparable sales decrease on an owned basis of approximately 2.2% - 3.3%, with comparable sales on an owned plus licensed basis to decline approximately 2% - 3%.


•	Asset sale gains of approximately $415 million - $435 million, including an expected $235 million gain associated with the sale of the Company's Union Square Macy's store and $100 million of additional gain from the sale of the Brooklyn real estate.


•	Selling, general and administrative expense savings of approximately $550 million from the restructuring and store closures announced at the end of 2016, partially offset by increased growth spending of approximately $250 million (resulting in a net expense savings of approximately $300 million).


•	Credit income of approximately $740 million - $760 million.

•

Adjusted diluted earnings per share attributable to Macy's, Inc. shareholders of $3.37 to $3.62, excluding any charges associated with store closures, restructuring, or settlement charges associated with Company's defined benefit plans. Included in this guidance is the expected gain of approximately $235 million, or approximately $.47 per diluted share, associated with the sale of the Company's Union Square Macy's Men's store.


•	Capital expenditures of approximately $900 million.


•	Excess cash after capital expenditures, payment of the Company's dividends and the $300 million debt maturity in July 2017 is expected to be used to repurchase debt.

The Company's budgeted capital expenditures are primarily related to new stores, store remodels, development costs associated with the Brookfield Strategic Alliance joint venture, technology and omnichannel investments, distribution network improvements and new growth initiatives. In early 2017, the Company opened a Macy’s store at Fashion Place in Murray, UT and plans to open a store at Westfield Century City in Los Angeles, CA, later in the year. In addition, the Company expects to open approximately 30 additional Bluemercury locations and approximately 30 Macy’s Backstage locations inside Macy’s stores. Announced new stores in future years include Bloomingdale’s in San Jose, CA (2019), and Norwalk, CT (2019). In addition, under license agreements with Al Tayer Group, a new Bloomingdale’s store opened at 360 Mall in Al Zahra, Kuwait in March 2017 and new Macy’s and Bloomingdale’s stores are planned to open in Al Maryah Central in Abu Dhabi, United Arab Emirates in 2018.

Liquidity and Capital Resources

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

Operating Activities

Net cash provided by operating activities was $1,801 million in 2016 compared to $1,984 million in 2015, reflecting lower net income.

Investing Activities

Net cash used by investing activities for 2016 was $187 million, compared to net cash used by investing activities of $1,092 million for 2015. Investing activities for 2016 included purchases of property and equipment totaling $596 million and capitalized software of $316 million, compared to purchases of property and equipment totaling $777 million and capitalized software of $336 million for 2015. Investing activities for 2015 includes the acquisition of Bluemercury, Inc., net of cash acquired, for $212 million.

In 2016, the Company continued to execute on its real estate strategy that includes creating value through monetization and, in some case, redevelopment of real estate assets. Overall, property and equipment sales, primarily related to real estate, generated cash proceeds of $673 million in 2016, compared to $204 million in 2015.

During 2016, the Company opened one new Macy's store, one new Bloomingdale's The Outlet store, one new freestanding Macy's Backstage store and 24 new freestanding Bluemercury stores. During 2015, the Company opened one new Macy's store, one new Bloomingdale's store, three new Bloomingdale's The Outlet stores, six new Macy's freestanding Backstage stores and 15 new freestanding Bluemercury stores. Since the acquisition of Bluemercury in March 2015, the Company has opened 39 freestanding Bluemercury stores and 19 locations within an existing Macy's.

Financing Activities

Net cash used by the Company for financing activities was $1,426 million for 2016, including the acquisition of the Company's common stock under its share repurchase program at an approximate cost of $316 million, the repayment of $751 million of debt and the payment of $459 million of cash dividends, partially offset by the issuance of $36 million of common stock, primarily related to the exercise of stock options, and an increase in outstanding checks of $61 million.

On August 15, 2016, the Company redeemed at par the principal amount of $108 million of 7.875% senior debentures due 2036, pursuant to the terms of the debentures. Interest expense in 2016 benefited from the recognition of unamortized debt premium associated with this debt. On October 14, 2016, the Company repaid $59 million of 7.45% senior debentures at maturity. On December 1, 2016, the Company repaid $577 million of 5.9% senior notes at maturity.

The Company entered into a new 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 replaced the prior agreement which was set to expire May 10, 2018.

As of January 28, 2017, and January 30, 2016, there were no revolving credit loans outstanding under this credit agreement, and there were no borrowings under the agreement throughout all of 2016 and 2015. In addition, there were no standby letters of credit outstanding at January 28, 2017 and there were less than $1 million of standby letters of credit outstanding at January 30, 2016. Revolving loans under the credit agreement bear interest based on various published rates.

The Company is party to a $1,500 million unsecured commercial paper program. The Company may issue and sell commercial paper in an aggregate amount outstanding at any particular time not to exceed its then-current combined borrowing availability under the bank credit agreement with certain financial institutions. The amount of borrowings under the commercial paper program increased to its highest level for 2016 of approximately $388 million during the fourth quarter. As of January 28, 2017, there were no remaining borrowings outstanding under the commercial paper program.

Net cash used by the Company for financing activities was $2,029 million for 2015 and included the acquisition of the Company's common stock under its share repurchase program at an approximate cost of $2,000 million, the repayment of $152 million of debt and the payment of $456 million of cash dividends and a decrease in outstanding checks of $83 million, partially offset by the issuance of approximately $500 million of debt and the issuance of $163 million of common stock, primarily related to the exercise of stock options.

On June 1, 2015, the Company repaid $69 million of 7.5% senior debentures at maturity. On August 17, 2015, the Company redeemed at par the principal amount of $76 million of 8.125% senior debentures due 2035, pursuant to the terms of the debentures. Interest expense in 2015 benefited from the recognition of unamortized debt premium associated with the $76 million of 8.125% senior debentures.

The credit agreement requires the Company to maintain a specified interest coverage ratio for the latest four quarters of no less than 3.25 and a specified leverage ratio as of and for the latest four quarters of no more than 3.75. The Company's interest coverage ratio for 2016 was 7.36 and its leverage ratio at January 28, 2017 was 2.38, in each case as calculated in accordance with the credit agreement. The interest coverage ratio is defined as EBITDA divided by net interest expense and the leverage ratio is defined as debt divided by EBITDA. For purposes of these calculations EBITDA is calculated as net income plus interest expense, taxes, depreciation, amortization, non-cash impairment of goodwill, intangibles and real estate, non-recurring cash charges not to exceed in the aggregate $300 million and extraordinary losses less interest income and non-recurring or extraordinary gains. Debt is adjusted to exclude the premium on acquired debt and net interest is adjusted to exclude the amortization of premium on acquired debt and premium on early retirement of debt.

A breach of a restrictive covenant in the Company's credit agreement or the inability of the Company to maintain the financial ratios described above could result in an event of default under the credit agreement. In addition, an event of default would occur under the credit agreement if any indebtedness of the Company in excess of an aggregate principal amount of $150 million becomes due prior to its stated maturity or the holders of such indebtedness become able to cause it to become due prior to its stated maturity. Upon the occurrence of an event of default, the lenders could, subject to the terms and conditions of the credit agreement, elect to declare the outstanding principal, together with accrued interest, to be immediately due and payable. Moreover, most of the Company's senior notes and debentures contain cross-default provisions based on the non-payment at maturity, or other default after an applicable grace period, of any other debt, the unpaid principal amount of which is not less than $100 million that could be triggered by an event of default under the credit agreement. In such an event, the Company's senior notes and debentures that contain cross-default provisions would also be subject to acceleration.

At January 28, 2017, no notes or debentures contain provisions requiring acceleration of payment upon a debt rating downgrade. However, the terms of approximately $4,250 million in aggregate principal amount of the Company's senior notes outstanding at that date require the Company to offer to purchase such notes at a price equal to 101% of their principal amount plus accrued and unpaid interest in specified circumstances involving both a change of control (as defined in the applicable indenture) of the Company and the rating of the notes by specified rating agencies at a level below investment grade.

On February 26, 2016, the Company's board of directors approved an additional $1,500 million in authorization to purchase Common Stock. During 2016, the Company repurchased approximately 7.9 million shares of its common stock for a total of approximately $316 million. As of January 28, 2017, the Company had $1,716 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.

On February 24, 2017, the Company's board of directors declared a quarterly dividend of 37.75 cents per share on its common stock, payable April 3, 2017 to Macy's shareholders of record at the close of business on March 15, 2017.

Contractual Obligations and Commitments

At January 28, 2017, the Company had contractual obligations (within the scope of Item 303(a)(5) of Regulation S-K) as follows:



	Obligations Due, by Period
	Total		Less than 1 Year		1 – 3 Years		3 – 5 Years		More than 5 Years
	(millions)
Short-term debt	$	308	$	308	$	—	$	—	$	—
Long-term debt	6,459		—		48		1,092		5,319
Interest on debt	4,162		342		658		631		2,531
Capital lease obligations	52		3		6		6		37
Operating leases	3,683		321		587		486		2,289
Letters of credit	30		30		—		—		—
Other obligations	4,325		2,744		470		279		832
	$	19,019	$	3,748	$	1,769	$	2,494	$	11,008

“Other obligations” in the foregoing table includes post employment and postretirement benefits, self-insurance reserves, group medical/dental/life insurance programs, merchandise purchase obligations and obligations under outsourcing arrangements, construction contracts, energy and other supply agreements identified by the Company and liabilities for unrecognized tax benefits that the Company expects to settle in cash in the next year. The Company's merchandise purchase obligations fluctuate on a seasonal basis, typically being higher in the summer and early fall and being lower in the late winter and early spring. The Company purchases a substantial portion of its merchandise inventories and other goods and services otherwise than through binding contracts. Consequently, the amounts shown as “Other obligations” in the foregoing table do not reflect the total amounts that the Company would need to spend on goods and services in order to operate its businesses in the ordinary course.

The Company has not included in the contractual obligations table $157 million of long-term liabilities for unrecognized tax benefits for various tax positions taken or $54 million of related accrued federal, state and local interest and penalties. These liabilities may increase or decrease over time as a result of tax examinations, and given the status of examinations, the Company cannot reliably estimate the period of any cash settlement with the respective taxing authorities. The Company has included in the contractual obligations table $6 million of liabilities for unrecognized tax benefits that the Company expects to settle in cash in the next year.

Liquidity and Capital Resources Outlook

Management believes that, with respect to the Company's current operations, cash on hand and funds from operations, together with its credit facility and other capital resources, will be sufficient to cover the Company's reasonably foreseeable working capital, capital expenditure and debt service requirements and other cash requirements in both the near term and over the longer term. The Company's ability to generate funds from operations may be affected by numerous factors, including general economic conditions and levels of consumer confidence and demand; however, the Company expects to be able to manage its working capital levels and capital expenditure amounts so as to maintain sufficient levels of liquidity. To the extent that the Company's cash balances from time to time exceed amounts that are needed to fund its immediate liquidity requirements, the Company will consider alternative uses of some or all of such excess cash. Such alternative uses may include, among others, the redemption or repurchase of debt, equity or other securities through open market purchases, privately negotiated transactions or otherwise, and the funding of pension related obligations. Depending upon its actual and anticipated sources and uses of liquidity, conditions in the capital markets and other factors, the Company will from time to time consider the issuance of debt or other securities, or other possible capital markets transactions, for the purpose of raising capital which could be used to refinance current indebtedness or for other corporate purposes including the redemption or repurchase of debt, equity or other securities through open market purchases, privately negotiated transactions or otherwise, and the funding of pension related obligations.

The Company intends from time to time to consider additional acquisitions of, and investments in, retail businesses and other complementary assets and companies. Acquisition transactions, if any, are expected to be financed from one or more of the following sources: cash on hand, cash from operations, borrowings under existing or new credit facilities and the issuance of long-term debt or other securities, including common stock.

Critical Accounting Policies

Merchandise Inventories

Merchandise inventories are valued at the lower of cost or market using the last-in, first-out (LIFO) retail inventory method. Under the retail inventory method, inventory is segregated into departments of merchandise having similar characteristics, and is stated at its current retail selling value. The retail inventory method inherently requires management judgments and estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation as well as gross margins.

Permanent markdowns designated for clearance activity are recorded when the utility of the inventory has diminished. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise and fashion trends. When a decision is made to permanently mark down merchandise, the resulting gross profit reduction is recognized in the period the markdown is recorded.

Long-Lived Asset Impairment and Restructuring Charges

The carrying values of long-lived assets are periodically reviewed by the Company whenever events or changes in circumstances indicate that the carrying value may not be recoverable, such as historical operating losses or plans to close stores before the end of their previously estimated useful lives. Additionally, on an annual basis, the recoverability of the carrying values of individual stores is evaluated. A potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management's assumptions of cash inflows and outflows directly resulting from the use of those assets in operations. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long-lived asset exceeds its fair value. The Company believes its estimated cash flows are sufficient to support the carrying value of its long-lived assets. If estimated cash flows significantly differ in the future, the Company may be required to record asset impairment write-downs.

If the Company commits to a plan to dispose of a long-lived asset before the end of its previously estimated useful life, estimated cash flows are revised accordingly, and the Company may be required to record an asset impairment write-down. Additionally, related liabilities arise such as severance, contractual obligations and other accruals associated with store closings from decisions to dispose of assets. The Company estimates these liabilities based on the facts and circumstances in existence for each restructuring decision. The amounts the Company will ultimately realize or disburse could differ from the amounts assumed in arriving at the asset impairment and restructuring charge recorded.

Income Taxes

Income taxes are estimated based on the tax statutes, regulations and case law of the various jurisdictions in which the Company operates. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets are evaluated for recoverability based on all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. Deferred income tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred income tax assets will not be realized.

Uncertain tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Uncertain tax positions meeting the more-likely-than-not recognition threshold are then measured to determine the amount of benefit eligible for recognition in the financial statements. Each uncertain tax position is measured at the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. Uncertain tax positions are evaluated and adjusted as appropriate, while taking into account the progress of audits of various taxing jurisdictions. The Company does not anticipate that resolution of these matters will have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Significant judgment is required in evaluating the Company's uncertain tax positions, provision for income taxes, and any valuation allowance recorded against deferred tax assets. Although the Company believes that its judgments are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the Company's historical income provisions and accruals.

Pension and Supplementary Retirement Plans

The Company has a funded defined benefit pension plan (the “Pension Plan”) and an unfunded defined benefit supplementary retirement plan (the “SERP”). The Company accounts for these plans in accordance with ASC Topic 715, “Compensation - Retirement Benefits.” Under ASC Topic 715, an employer recognizes the funded status of a defined benefit postretirement plan as an asset or liability on the balance sheet and recognizes changes in that funded status in the year in which the changes occur through comprehensive income. Additionally, pension expense is generally recognized on an accrual basis over the average remaining lifetime of participants. The pension expense calculation is generally independent of funding decisions or requirements.

The Pension Protection Act of 2006 provides the funding requirements for the Pension Plan which are different from the employer's accounting for the plan as outlined in ASC Topic 715. No funding contributions were required, and the Company made no funding contributions to the Pension Plan in 2016. As of the date of this report, the Company does not anticipate making funding contributions to the Pension Plan in 2017. Management believes that, with respect to the Company's current operations, cash on hand and funds from operations, together with available borrowing under its credit facility and other capital resources, will be sufficient to cover the Company's Pension Plan cash requirements in both the near term and also over the longer term.

At January 28, 2017, the Company had unrecognized actuarial losses of $1,232 million for the Pension Plan and $248 million for the SERP. The unrecognized losses for the Pension Plan and the SERP will be recognized as a component of pension expense in future years in accordance with ASC Topic 715, and is expected to impact 2017 Pension and SERP net periodic benefit costs by approximately $41 million. The Company generally amortizes unrecognized gains and losses on a straight-line basis over the average remaining lifetime of participants using the corridor approach. In addition, approximately $80 to 90 million of net actuarial losses are also expected to be recognized in 2017 as part of a non-cash settlement charge, resulting from an anticipated increase in lump sum distributions associated with store closings, a voluntary separation program and organizational restructuring and small balance force outs, in addition to annual distribution activity.

The calculation of pension expense and pension liabilities requires the use of a number of assumptions. Changes in these assumptions can result in different expense and liability amounts, and future actual experience may differ significantly from current expectations. The Company believes that the most critical assumptions relate to the long-term rate of return on plan assets (in the case of the Pension Plan) and the discount rate used to determine the present value of projected benefit obligations.

As of January 31, 2015, the Company lowered the assumed annual long-term rate of return for the Pension Plan's assets from 7.50% to 7.00% based on expected future returns on the portfolio of assets. The Company develops its expected long-term rate of return assumption by evaluating input from several professional advisors taking into account the asset allocation of the portfolio and long-term asset class return expectations, as well as long-term inflation assumptions. Pension expense increases or decreases as the expected rate of return on the assets of the Pension Plan decreases or increases, respectively. Lowering or raising the expected long-term rate of return assumption on the Pension Plan's assets by 0.25% would increase or decrease the estimated 2017 pension expense by approximately $8 million.

The Company discounted its future pension obligations using a weighted-average rate of 4.00% at January 28, 2017 and 4.17% at January 30, 2016 for the Pension Plan and 4.07% at January 28, 2017 and 4.23% at January 30, 2016 for the SERP. The discount rate used to determine the present value of the Company's Pension Plan and SERP obligations is based on a yield curve constructed from a portfolio of high quality corporate debt securities with various maturities. Each year's expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate for Pension Plan and SERP obligations. As the discount rate is reduced or increased, pension liability would increase or decrease, respectively, and future pension expense would decrease or increase, respectively. Lowering the discount rates by 0.25% would increase the projected benefit obligations at January 28, 2017 by approximately $105 million and would decrease estimated 2017 pension expense by approximately $3 million. Increasing the discount rates by 0.25% would decrease the projected benefit obligations at January 28, 2017 by approximately $99 million and would increase estimated 2017 pension expense by approximately $3 million.

In 2016, the Company changed the method used to estimate the service and interest cost components of net periodic benefit costs for the Pension Plan and SERP. The new method uses a full yield curve approach in the estimation of these components of net periodic benefit costs. Under this approach, the Company applies discounting using individual spot rates from the yield curve composed of the rates of return from a portfolio of high quality corporate debt securities available at the measurement date. These spot rates align to each of the projected benefit obligation and service cost cash flows. Historically, the Company estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligations.

The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest costs. The Company accounted for this change as a change in estimate prospectively starting in 2016. The 2016 reduction in service cost and interest cost for the Pension Plan and SERP associated with this change was approximately $36 million.

New Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which establishes principles to report useful information to financial statements users about the nature, timing and uncertainty of revenue from contracts with customers. ASU No. 2014-09 along with related amendments ASU Nos. 2016-20, 2016-12, 2016-10, 2016-08, and 2015-14 comprise ASC Topic 606, Revenue from Contracts with Customers, and provide guidance that is applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns . The new standard and its related updates are effective for the Company beginning on February 4, 2018. Early adoption is permitted in 2017; however, Macy's will not early adopt the new guidance. On the effective date, the Company will apply the new guidance retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company is currently evaluating the methods of adoption and has not yet decided on the method to be applied when the new revenue guidance is effective.

Combined with the guidance in ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20), the Company currently estimates the material impacts to its consolidated financial statements to include changes in the presentation of estimates for future sales returns and related recoverable assets, presentation of earnings from credit operations, timing of certain real estate gains (particularly those with leaseback components) and the presentation of certain consignment and license arrangements.

The Company does not expect the new guidance to materially impact the revenue recognition associated with gift card breakage as well as the accounting for its warranty arrangements, loyalty programs and other customer incentive arrangements. The Company is continuing to evaluate the impact of the new standards and the final determinations of the impact of the new guidance may differ from these initial estimates.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), 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 is effective for the Company on February 3, 2019, with early adoption permitted. The new standard is to be adopted utilizing a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. The Company has not yet decided whether it will early adopt the new standard but the Company currently plans to elect all of the standard's available practical expedients on adoption.

The Company expects that the new lease standard will have a material impact on the Company's consolidated financial statements. While the Company is continuing to assess the effects of adoption, the Company currently believes the most significant changes relate to the recognition of new ROU assets and lease liabilities on the consolidated balance sheets for real property and personal property operating leases as well as changes to the timing of recognition of certain real estate asset sale gains in the consolidated statements of income due to application of the new sale-leaseback guidance and ASU No. 2017-05 as discussed above. The Company expects that substantially all of its operating lease commitments disclosed in Note 4, "Properties and Leases", to the consolidated financial statements will be subject to the new guidance and will be recognized as operating lease liabilities and ROU assets upon adoption. A significant change in leasing activity between the date of this report and adoption is not expected.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting. The new guidance includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, including accounting for income taxes, earnings per share and forfeitures. This guidance requires all excess tax benefits and tax deficiencies to be recorded in income tax expense when the awards vest or are settled, with prospective application required. The new standard is effective for the Company on January 29, 2017. The impact of the new standard will vary based on the intrinsic value of vested awards when exercised or expired but is not currently expected to have a material impact on the Company's consolidated financial position, results of operations and cash flows.

In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715), which requires employers to disaggregate the service cost component from other components of net periodic benefit costs and to disclose the amounts of net periodic benefit costs that are included in each income statement line item. The standard requires employers to report the service cost component in the same line item as other compensation costs and to report the other components of net periodic benefit costs (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) separately and outside a subtotal of operating income. The income statement guidance requires application on a retrospective basis. The new standard is effective for the Company beginning in the first quarter of 2018, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial position, results of operations, cash flows and related disclosures. The Company plans to adopt this standard on February 4, 2018.

The Company does not anticipate that the adoption of any other recent accounting pronouncements will have a material impact on the Company's consolidated financial position, results of operations or cash flows.


Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to market risk from changes in interest rates that may adversely affect its financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposures through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company does not use financial instruments for trading or other speculative purposes and is not a party to any leveraged financial instruments.

The Company is exposed to interest rate risk through its borrowing activities, which are described in Note 6 to the Consolidated Financial Statements. All of the Company’s borrowings are under fixed rate instruments. However, the Company, from time to time, may use interest rate swap and interest rate cap agreements to help manage its exposure to interest rate movements and reduce borrowing costs. At January 28, 2017, the Company was not a party to any derivative financial instruments and based on the Company’s lack of market risk sensitive instruments outstanding at January 28, 2017, the Company has determined that there was no material market risk exposure to the Company’s consolidated financial position, results of operations or cash flows as of such date.


Item 8.	Consolidated Financial Statements and Supplementary Data.

Information called for by this item is set forth in the Company’s Consolidated Financial Statements and supplementary data contained in this report and is incorporated herein by this reference. Specific financial statements and supplementary data can be found at the pages listed in the following index:

INDEX



	Page
Report of Management	F-2
Report of Independent Registered Public Accounting Firm	F-3
Consolidated Statements of Income for the fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015	F-4
Consolidated Statements of Comprehensive Income for the fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015	F-5
Consolidated Balance Sheets at January 28, 2017 and January 30, 2016	F-6
Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015	F-7
Consolidated Statements of Cash Flows for the fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015	F-8
Notes to Consolidated Financial Statements	F-9


Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.


Item 9A.	Controls and Procedures.

a. Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have carried out, as of January 28, 2017, 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) under the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are 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 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.

b. Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The Company’s management conducted an assessment of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on this assessment, the Company’s management has concluded that, as of January 28, 2017, the Company’s internal control over financial reporting is effective.

The Company’s independent registered public accounting firm, KPMG LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of January 28, 2017 and has issued an attestation report expressing an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting, as stated in their report located on page F-3.

c. Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting that occurred during the Company’s most recently completed quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III


Item 10.	Directors, Executive Officers and Corporate Governance.

The information required by this item for executive officers is set forth under “Item 1. Business - Executive Officers of the Registrant” in this report. The other information called for by this item is set forth under “Item 1 - Election of Directors” and “Further Information Concerning the Board of Directors - Committees of the Board” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement to be delivered to stockholders in connection with the 2017 Annual Meeting of Shareholders (the “Proxy Statement”), and incorporated herein by reference.

The Company’s Code of Conduct is in compliance with the applicable rules of the SEC that apply to the principal executive officer, principal financial officer and principal accounting officer or comptroller, or persons performing similar functions. A copy of the Code of Conduct is available, free of charge, through the Company’s website at http://www.macysinc.com . We intend to satisfy any disclosure requirement under Item 5 of Form 8-K regarding an amendment to or waiver from, a provision of the Code of Conduct by posting such information to the Company’s website at the address and location specified above.

Set forth below are the names, ages and principal occupations of the Company's non-employee directors as of March 24, 2017.



Name	Age	Director Since	Principal Occupation
Francis S. Blake	67	2015	Former Chairman and Chief Executive Officer of The Home Depot, Inc.
John A. Bryant	51	2015	Chairman of the Board of Kellogg Company since July 2014 and President and Chief Executive Officer since January 2011.
Deirdre P. Connelly	56	2008	Former President, North American Pharmaceuticals of GlaxoSmithKline, a global pharmaceutical company.
Leslie D. Hale	44	2015	Chief Operating Officer since 2016, Chief Financial Officer since 2007 and Executive Vice President since 2013 of RLJ Lodging Trust, a publicly-traded lodging real estate investment trust.
William H. Lenehan	40	2016	President and Chief Executive Officer of Four Corners Property Trust, Inc., a real estate investment trust, since August 2015.
Sara Levinson	66	1997	Co-Founder and Director of Katapult, a digital entertainment company making products for today's creative generation, since April 2013.
Joyce M. Roché	70	2006	Former President and Chief Executive Officer of Girls Incorporated, a national non-profit research, education and advocacy organization.
Paul C. Varga	53	2012	Chairman of Brown-Forman Corporation, a spirits and wine company, since August 2007 and Chief Executive Officer since 2005.
Marna C. Whittington	69	1993	Former Chief Executive Officer of Allianz Global Investors Capital, a diversified global investment firm.
Annie Young-Scrivner	48	2014	Executive Vice President of Starbucks Corporation since September 2009, with responsibility for global loyalty and digital development since September 2015.


Item 11.	Executive Compensation.

Information called for by this item is set forth under “Compensation Discussion & Analysis,” “Compensation of the Named Executives for 2016,” “Compensation Committee Report”, “Compensation Committee Interlocks and Insider Participation” and "Further Information Concerning the Board of Directors-Risk Oversight" in the Proxy Statement and incorporated herein by reference.


Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information called for by this item is set forth under “Stock Ownership – Certain Beneficial Owners” and “Stock Ownership – Stock Ownership of Directors and Executive Officers” in the Proxy Statement and incorporated herein by reference.


Item 13.	Certain Relationships and Related Transactions, and Director Independence.

Information called for by this item is set forth under “Further Information Concerning the Board of Directors – Director Independence” and “Policy on Related Person Transactions” in the Proxy Statement and incorporated herein by reference.


Item 14.	Principal Accountant Fees and Services.

Information called for by this item is set forth under “Item 2 – Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement and incorporated herein by reference.

PART IV


Item 15.	Exhibits and Financial Statement Schedules.

(a) The following documents are filed as part of this report:

1. Financial Statements:

The list of financial statements required by this item is set forth in Item 8 “Consolidated Financial Statements and Supplementary Data” and is incorporated herein by reference.

2. Financial Statement Schedules:

All schedules are omitted because they are inapplicable, not required, or the information is included elsewhere in the Consolidated Financial Statements or the notes thereto.

3. Exhibits:



Exhibit Number	Description	Document if Incorporated by Reference
3.1	Amended and Restated Certificate of Incorporation	Exhibit 3.1 to the Company's Current Report on Form 8-K filed on May 18, 2010

3.1.1	Certificate of Designations of Series A Junior Participating Preferred Stock	Exhibit 3.1.1 to the Company's Annual Report on Form 10-K (File No. 1-13536) for the fiscal year ended January 28, 1995

3.1.2	Article Seventh of the Amended and Restated Certificate of Incorporation	Exhibit 3.1 to the Company's Current Report on Form 8-K filed on May 24, 2011

3.2	Amended and Restated By-Laws	Exhibit 3.1 to the Company's Current Report on Form 8-K filed on September 30, 2016

4.1	Amended and Restated Certificate of Incorporation	See Exhibits 3.1, 3.1.1 and 3.1.2

4.2	Amended and Restated By-Laws	See Exhibit 3.2

4.3	Indenture, dated as of January 15, 1991, among the Company (as successor to The May Department Stores Company (“May Delaware”)), Macy's Retail Holdings, Inc. (“Macy's Retail”) (f/k/a The May Department Stores Company (NY) or “May New York”) and The Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”, successor to J.P. Morgan Trust Company and as successor to The First National Bank of Chicago), as Trustee (the “1991 Indenture”)	Exhibit 4(2) to May New York’s Current Report on Form 8-K filed on January 15, 1991

4.3.1	Guarantee of Securities, dated as of August 30, 2005, by the Company relating to the 1991 Indenture	Exhibit 10.13 to the Company's Current Report on Form 8-K filed on August 30, 2005 (the “August 30, 2005 Form 8-K”)

4.4	Indenture, dated as of December 15, 1994, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company and The First National Bank of Boston), as Trustee (the “1994 Indenture”)	Exhibit 4.1 to the Company's Registration Statement on Form S-3 (Registration No. 33-88328) filed on January 9, 1995

4.4.1	Eighth Supplemental Indenture to the 1994 Indenture, dated as of July 14, 1997, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company and The First National Bank of Boston), as Trustee	Exhibit 2 to the Company's Current Report on Form 8-K filed on July 15, 1997 (the “July 15, 1997 Form 8-K”)



Exhibit Number	Description	Document if Incorporated by Reference
4.4.2	Ninth Supplemental Indenture to the 1994 Indenture, dated as of July 14, 1997, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company and The First National Bank of Boston), as Trustee	Exhibit 3 to the July 15, 1997 Form 8-K

4.4.3	Tenth Supplemental Indenture to the 1994 Indenture, dated as of August 30, 2005, among the Company, Macy's Retail and U.S. Bank National Association (as successor to State Street Bank and Trust Company and as successor to The First National Bank of Boston), as Trustee