Q4 2016 Real-Time Call Brief

Highlights

We're not happy at all with the 2.9% decline in comp store sales on an own and licensed basis and the $3.11 in diluted earnings per share, frankly, we could have done better than that.

We took bold steps toward streamlining of our portfolio with the closure of 66 stores.

We plan to close approximately another 34 additional stores over the next few years.

Very focused on getting to that 100 store closure that was announced in last August.

Sales were $8.515 billion down 4% from last year.

On an owned plus licensed comp basis, sales were down 2.1% which was at the low end of our expectations when we started the quarter.

Our digital sales continued strong with double-digit growth while sales transacted in stores continued to be below what we had expected.

Transactions in the quarter were down 4% while average unit retail was up 2%.

Gross margin rate in the quarter was up 90 basis points over the last year.

Our comp inventory was up 2% at the end of the year.

SG&A in the quarter was $2.202 billion, down slightly from last year.

We also benefited in the fourth quarter from $20 million higher asset sale gains than we booked last year.

This year in the fourth quarter, we booked asset sale gains of $133 million.

This includes $10 million for Brooklyn and $123 million relating to other assets.

The Downtown Minneapolis transaction did not close during the quarter but we do expect that it will close shortly.

The SG&A reductions were offset primarily by expense associated with our fast growing digital business as well as by $72 million lower credit income than last year in the quarter.

We expected credit income to be below last year, it was worse than effected due to the lower sales, lower card usage, with our proprietary penetration in the fourth quarter of 47.1% compared to 47.9% last year.

Operating income before impairments, store closing, settlement charges, and other costs, was $1.62 billion in the quarter, down 4.6% from last year, on the same basis.

Impairments, store closings, and other costs in the quarter, were $230 million, slightly below our original expectations of $250 million.

Store closing related costs were approximately $68 million in the quarter, and the restructuring related and other costs were approximately $162 million.

Approximately $177 million of the fourth quarter charges will be settled in cash.

We also booked $17 million of settlement charges associated with our retirement plans in the quarter.

Net interest was $87 million and tax expense $256 million in the quarter.

Net income attributed to Macy's shareholders was $475 million.

Diluted share count was 307.8 million shares, and EPS on a diluted basis was $1.54.

Excluding impairment store closings and other costs as well as settlement charges, less EPS on a diluted basis of $2.02, which compares to last year's $2.09, on this same basis.

Cash provided by operating activities, net of cash used by investing activities, was $1.614 billion, $722 million higher than last year.

The cash provided by operating activities was a $183 million below last year but this was more than offset by $469 million in higher asset sales, $201 million in lower capital expenditures, and last year's $212 million acquisition of Bluemercury.

We utilized, during 2016, $350 million of cash to repurchase 7.9 million shares.

We repaid approximately $750 million of debt at maturity, and utilized $459 million for our dividend.

Because of the $550 million SG&A reduction that we announced last month, we expect the earnings impact from the sales decline to be far less than what it otherwise would have been.

We're assuming comp sales on an owned plus licensed basis to decline between 2% and 3% in 2017.

On an owned basis, comp is assumed to decline approximately 20 to 30 basis points further.

Total sales are expected to decline approximately 100 basis points more than comp or approximately down 3.2% to down 4.3%.

Comp guidance is on a 52-week basis.

EPS on a diluted basis, excluding any charges associated with to our closures, restructuring, or settlement, is expected to be $3.37 to $3.62.

This guidance includes the expected $236 million or approximately $0.47 per share gain on the sale of the Union Square Men's building.

Excluding these gains, our earnings guidance on that same basis would be $2.90 to $3.15.

We are assuming the SG&A savings of $550 million offset by the gross spending of approximately $250 million.

So the net reductions versus 2016 of approximately $300 million is embedded in our guidance.

Credit income to the year is assumed to be approximately $740 million to $760 million.

Depreciation and amortization is assumed to be approximately $1.010 billion.

We're assuming book gains from asset sale for Union Square of $236 million and we're also assuming $100 million roughly book gain for Brooklyn and $80 million to $100 million for other properties.

So, excluding the Union Square gain, the asset sale gains are assumed to be $180 million to $200 million, which compares to $209 million in 2016.

Capital expenditures we're assuming will be flat with this year at approximately $900 million.

The excess cash, after the capital expenditures, the payment of our dividend, and the $300 million approximate debt maturity in July, is all assumed to be used to repurchase debt.

We ended 2016 with a debt-to-EBITDA ratio of 3.3 times, which as you know, is above our targeted range of 2.5 to 2.8.

Interest expense is assumed to be approximately $320 million to $325 million.

The reduction versus from 2016 results from paying off debt in 2016 and maturity as well as the additional $300 million in '17 and an estimate of our anticipated debt repurchase.

We're assuming an effective tax rate of 37%.