This summary is based on the first quarter fiscal 2008 earnings call conducted by Macy''s, Inc. (M: chart) on May 14, 2008.
Management:
Chief Financial Officer, Executive Vice President: Karen M. Hoguet
Key Investors Issues
- Operating income totaled $30 million compared $208 million for the same period last year.
- Net cash was $21 million compared to $370 million in the first quarter last year.
- Sales declined to $5.7 billion from $5.9 billion last year.
First Quarter Highlights
Sales were $5.75 billion compared to $5.9 billion last year.
- On a comparable-store basis, sales declined 2.6%.
- The overall economic environment remains challenging. Geographically, sales were strongest in the Northeast and in Texas, while weaker performances were on the West Coast and in Florida. Additionally, direct-to-customer business was strong.
The strongest businesses were men’s furnishings, men’s collections, young men, cosmetics, fashion jewelry and watches, handbags, mattresses, and housewares.
- The weakest categories were women’s ready-to-wear and home textiles.
- Not all of women’s apparel was weak. The company continues to see more strength in the contemporary and denim-based brands. More casual looks are what are selling, especially value-driven pick-me-up items that refresh the customers’ wardrobe. Serious outfit and structured career dressing are not selling as well, and while value appears to be important in this economic environment, highly desirable premium brands are selling well.
- Private brands performed well relative to other brands, since they do represent affordable fashion for customers.
Gross margin was 38.6%, down 120 basis points from last year.
- The company had expected a decline due to the weak sales, as well as the need to commonize assortments in the consolidated division. At the end of the quarter, inventory was down 4%, demonstrating continued discipline with regards to managing inventory levels.
- SG&A dollars were down $10 million versus last year but up 90 basis points as a percent of sales. However, included in the SG&A was a $23 million charge for a potential settlement of litigation related to a wage and hour class action lawsuit in California. A settlement is contingent on final agreement and court approval. This increased SG&A by a rate of 40 basis points.
- Excluding this settlement reserve, SG&A was therefore $33 million below last year, demonstrating expense discipline. However, because of the sales decline, the SG&A as a percent of sales was down 50 basis points.
- The company benefited from lower depreciation and amortization, which was $315 million this year and $329 million a year ago. The company benefited from some early departures in the consolidated division.
Negatively impacting SG&A were higher costs related to investment in the direct-to-customer infrastructure and lower income than last year from credit portfolio.
While the company sold credit business to Citi, economics are still impacted by the profitability of the portfolio, albeit to a much reduced degree. The key challenge with credit portfolio is the fact that bad debt remains high and the company is experiencing additional bankruptcy exposure. The company and Citi are working together to take actions to mitigate the risk.
Operating income before division consolidation costs was $117 million.
- The company booked $87 million of division consolidation related costs, primarily related to severance and relocation. Last year in the first quarter, the company had $36 million in May company integration costs.
- Interest expense was $136 million versus $125 million last year. The tax benefit was $47 million, which is higher than ongoing rate due to a $10 million tax settlement in California.
- Net loss excluding consolidation expense was $4 million.
- Average share count was 420.9 million shares. The company did not buy back any stock.
The company lost 1 cent a share excluding the division consolidation costs, and excluding the legal settlement of 3 cents per share, EPS would have been a positive 2 cents per share.
- Net cash provided by continuing operating activities was $21 million this year versus a use of $370 million last year, for a positive year to year spread of $391 million.
- Cash used by continuing investing activities was $99 million, which was $68 million unfavorable to last year, primarily due to the disposition last year of after-hours as well as the May related asset sales.
- CapEx and capitalized software was $108 million this year, below last year’s $150 million. The company ended the quarter with $366 million of cash on the balance sheet.
