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
February 3, 2018
 
Commission File Number:
1-13536
macysinclogoblackonwhitehigh.jpg
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting 
company  o
 
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
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 29, 2017) was approximately $7,288,096,032.
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 March 3, 2018
Common Stock, $0.01 par value per share
 
305,322,583 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Parts Into
Which Incorporated
Proxy Statement for the Annual Meeting of Stockholders to be held May 18, 2018
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 “2017,” “2016,” “2015,” “2014” and “2013” are references to the Company’s fiscal years ended February 3, 2018, January 28, 2017, January 30, 2016, January 31, 2015 and February 1, 2014, respectively. Fiscal year 2017 included 53 weeks; fiscal years 2016, 2015, 2014 and 2013 included 52 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;
the Company’s ability to remain competitive and relevant as consumers’ shopping behaviors migrate to other shopping channels and to maintain its brand and reputation;
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 the weather or natural disasters;
conditions to, or changes in the timing of, proposed transactions, including planned store closures, and changes in expected synergies, cost savings and non-recurring charges;
the success of the Company’s operational decisions (e.g., product curation and marketing programs) and strategic initiatives;
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;
the cost of employee benefits as well as attracting and retaining quality employees;
transactions involving our real estate portfolio;
the seasonal nature of the Company’s business;
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;
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; and
duties, taxes, other charges and quotas on imports




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 approximately 850 stores in 44 states, the District of Columbia, Guam and Puerto Rico. As of February 3, 2018, 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 2017, 2016 and 2015, the following merchandise constituted the following percentages of sales:
 
 
2017
 
2016
 
2015
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 2017, 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 7th Street, Cincinnati, Ohio 45202, telephone number: (513) 579-7000 and 151 West 34th Street, New York, New York 10001, telephone number: (212) 494-1602.





Employees
As of February 3, 2018, excluding seasonal employees, the Company had approximately 130,000 employees, primarily including regular full-time and part-time. Because of the seasonal nature of the retail business, the number of employees peaks in the holiday season. Approximately 7% of the Company’s employees were represented by unions as of February 3, 2018.
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 purchases during 2017. 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, 2025, 2030 and 2030, respectively.
Competition
The retail industry is intensely competitive. The Company’s operations compete with many retail 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:
Charters of the Audit Committee, Compensation and Management Development Committee, Finance Committee, and Nominating and Corporate Governance Committee,
Corporate Governance Principles,
Lead Independent Director Policy,
Non-Employee Director Code of Business Conduct and Ethics,

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Code of Conduct,
Standards for Director Independence,
Related Party Transaction Policy, and
Method to Facilitate Receipt, Retention and Treatment of Communications.
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 7th Street, Cincinnati, OH 45202.
Executive Officers of the Registrant
The following table sets forth certain information as of March 23, 2018 regarding the executive officers of the Company:
 
Name
 
Age
 
Position with the Company
Jeff Gennette
 
56

 
Chairman of the Board and Chief Executive Officer; Director
Elisa D. Garcia
 
60

 
Chief Legal Officer and Secretary
Karen M. Hoguet
 
61

 
Chief Financial Officer
Danielle L. Kirgan
 
42

 
Chief Human Resources Officer
Harry A. Lawton III
 
43

 
President
Felicia Williams
 
52

 
Executive Vice President, Controller and Enterprise Risk Officer

Executive Officer Biographies
Jeff Gennette has been Chief Executive Officer of the Company since March 2017 and Chairman of the Board since January 2018; prior thereto he was President from March 2014 to August 2017, Chief Merchandising Officer from February 2009 to March 2014, Chairman and Chief Executive Officer of Macy’s West in San Francisco from February 2008 to February 2009 and Chairman and Chief Executive Officer of Seattle-based Macy’s Northwest from February 2006 through February 2008.
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, Inc. from 2013 to September 2016, and Executive Vice President, General Counsel and Secretary from 2007 to 2013.
Karen M. Hoguet has been Chief Financial Officer of the Company since October 1997.
Danielle L. Kirgan has been Chief Human Resources Officer of the Company since October 2017; prior thereto she served as Senior Vice President, People at American Airlines Group, Inc. from October 2016 to October 2017, Chief Human Resources Officer at Darden Restaurants, Inc. from 2010 to 2016, Vice President, Global Human Resources at ACI Worldwide, Inc. in 2009, and Vice President, Human Resources at Conagra Foods, Inc. from 2004 to 2008.
Harry (Hal) A. Lawton III has been President of the Company since September 2017; prior thereto he served as Senior Vice President, North America at eBay, Inc. from 2015 to September 2017 and held a number of leadership positions at Home Depot, Inc. from 2005 to 2015, including Senior Vice President of Merchandising and head of Home Depot’s online business.
Felicia Williams has been Executive Vice President, Controller and Enterprise Risk Officer of the Company since June 2016; prior thereto she served as Senior Vice President, Finance and Risk Management from February 2011 to June 2016, Senior Vice President, Treasury and Risk Management from September 2009 to February 2011, Vice President, Finance and Risk Management from October 2008 to September 2009, and Vice President, Internal Audit from March 2004 to October 2008.

Recent Developments

On April 4, 2018, the Company issued a press release announcing that Karen M. Hoguet has decided to retire.  At the Company’s request, Ms. Hoguet will remain with the Company until February 2019 to ensure a smooth transition.

Item 1A.
Risk Factors.

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In evaluating Macy's, 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 our business, prospects, financial condition, results of operations and cash flows, as well as on the attractiveness and value of an investment in Macy's securities.

Strategic, Operational and Competitive Risks

Macy’s strategic initiatives may not be successful, which could negatively affect our profitability and growth.
We are pursuing strategic initiatives to achieve our objective of accelerating profitable growth in our stores and our digital operations. This includes the adoption of new technologies, merchandising strategies and customer service initiatives all designed to improve the shopping experience. Our ability to achieve profitable growth is subject to the successful implementation of our strategic plans. If these investments or initiatives do not perform as expected or create implementation or operational difficulties, we may incur impairment charges and our profitability and growth could suffer.
Our 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. Our sales and operating results depend in part on our ability to predict or respond to changes in fashion trends and consumer preferences in a timely manner. We develop new retail concepts and continuously adjust our 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 our business and results of operations.
Our sales are significantly affected by discretionary spending by consumers. Consumer spending may be affected by many factors outside of our 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 our business and results of operations.
As we rely on the ability of our physical retail locations to remain relevant, providing desirable and sought-out shopping experiences is paramount to our 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 our financial condition or performance.
We may not be able to successfully execute our real estate strategy.
We continue to explore opportunities to monetize our real estate portfolio, including sales of stores as well as non-store real estate such as warehouses, outparcels and parking garages. We also continue to evaluate our real estate portfolio to identify opportunities where the redevelopment value of our real estate exceeds the value of non-strategic operating locations. 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 our real estate strategy is inherently volatile and could have a significant impact on our results of operations or financial condition.
Macy’s revenues and cash requirements are affected by the seasonal nature of our business.
Our 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 our revenues fall in the fourth quarter, which coincides with the holiday season. We incur 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.
We depend on our ability to attract and retain quality employees.
Our business is dependent upon attracting and retaining quality employees. Macy's has a large number of employees, many of whom are in entry level or part-time positions with historically high rates of turnover. Macy's ability to meet our 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, Macy's is highly dependent upon management personnel to develop and effectively execute successful business strategies and tactics. Any

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circumstances that adversely impact our ability to attract, train, develop and retain quality employees throughout the organization could negatively affect our business and results of operations.

Macy's depends on the success of advertising and marketing programs.
Our business depends on effective marketing and high customer traffic. Macy's has many initiatives in this area, and we often change advertising and marketing programs. There can be no assurance as to our continued ability to effectively execute our advertising and marketing programs, and any failure to do so could negatively affect our business and results of operations.
If cash flows from our private label credit card decrease, our financial and operational results may be negatively impacted.
We sold most of our credit accounts and related receivables to Citibank. Following the sale, we share 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 Macy’s receiving lower payments under the credit card program.
Credit card operations are subject to many federal and state laws that may impose certain requirements and limitations on credit card providers. Citibank and our subsidiary bank, FDS Bank, may be required to comply with regulations that may negatively impact the operation of our private label credit card. In turn, this negative impact may affect our revenue streams derived from the sale of such credit card accounts and negatively impact our financial results.
Gross margins could suffer if we are unable to effectively manage our inventory.
Our profitability depends on our ability to manage inventory levels and respond to shifts in consumer demand patterns. Overestimating customer demand for merchandise will likely result in the need to record inventory markdowns and sell excess inventory at clearance prices which would negatively impact our gross margins and operating results. Underestimating customer demand for merchandise can lead to inventory shortages, missed sales opportunities and negative customer experiences.
Our defined benefit plan funding requirements or plan settlement expense could impact our 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 our plans and could increase future funding requirements of the plans. A significant increase in future funding requirements could have a negative impact on our cash flows, financial condition or results of operations.
As of February 3, 2018, we had unrecognized actuarial losses of $992 million for the funded defined benefit pension plan (the “Pension Plan”) and $244 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, we 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 our results of operations.
Increases in the cost of employee benefits could impact our financial results and cash flow.
Our expenses relating to employee health benefits are significant. Unfavorable changes in the cost of such benefits could negatively affect our 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, we are not able to fully determine the impact that future healthcare reform will have on our company-sponsored medical plans.
If our company’s reputation and brand are not maintained at a high level, our operations and financial results may suffer.
We believe our reputation and brand are partially based on the perception that we act equitably and honestly in dealing with our customers, employees, business partners and shareholders. Our reputation and brand may be deteriorated by any incident that erodes the trust or confidence of our customers or the general public, particularly if the incident results in significant adverse publicity or governmental inquiry. In addition, information concerning us, whether or not true, may be instantly and easily posted on social media platforms at any time, which information may be adverse to our reputation or brand. The harm may be immediate without affording us an opportunity for redress or correction. If our reputation or

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brand is damaged, our customers may refuse to continue shopping with us, potential employees may be unwilling to work for us, business partners may be discouraged from seeking future business dealings with us and, as a result, our operations and financial results may suffer.
Macy's faces significant competition in the retail industry and we depend on our ability to differentiate Macy's in retail's ever-changing environment.
We conduct our retail merchandising business under highly competitive conditions. Although Macy's is one of the nation’s largest retailers, we have 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 our 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 us to compete effectively could negatively affect our business and results of operations.
As consumers continue to migrate online, we face pressures to not only compete from a price perspective with our competitors, some of whom sell the same products, but also to differentiate Macy's to stay relevant in retail's ever-changing industry. We continue to significantly invest in our omnichannel capabilities in order to provide a seamless shopping experience to our customers between our brick and mortar locations and our online and mobile environments. Insufficient, untimely or misguided investments in this area could significantly impact our profitability and growth and affect our ability to attract new customers, as well as maintain our existing ones.
In addition, declining customer store traffic and migration of sales from brick and mortar stores to digital platforms could lead to store closures, restructuring and other costs that could adversely impact our results of operations and cash flows.
Our sales and operating results could be adversely affected by product safety concerns.
If Macy's merchandise offerings do not meet applicable safety standards or consumers' expectations regarding safety, we 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 Macy's to government enforcement action and/or private litigation. Reputational damage caused by real or perceived product safety concerns could negatively affect our business and results of operations.
Technology and Data Security Risks
A material disruption in our computer systems could adversely affect our business or results of operations.
We rely extensively on our computer systems to process transactions, summarize results and manage our business. Our 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 our employees. If our computer systems are damaged or cease to function properly, including a material disruption in our ability to authorize and process transactions at our stores or on our online systems, we may have to make a significant investment to fix or replace them, and we may suffer loss of critical data and interruptions or delays in our operations. Any material interruption in our computer systems could negatively affect our business and results of operations.
If our technology-based e-commerce systems do not function properly, our operating results could be materially adversely affected.
Customers are increasingly using computers, tablets and smart phones to shop online and to do price and comparison shopping. We strive to anticipate and meet our customers’ changing expectations and are focused on building a seamless shopping experience across our omnichannel business. Any failure to provide user-friendly, secure e-commerce platforms that offer a variety of merchandise at competitive prices with low cost and quick delivery options that meet customers’ expectations could place us at a competitive disadvantage, result in the loss of e-commerce and other sales, harm our reputation with customers and have a material adverse impact on the growth of our business and our operating results.
A breach of information technology systems could adversely affect our reputation, business partner and customer relationships, operations and result in high costs.
Through our sales, marketing activities, and use of third-party information, we collect and store certain non-public personal information that customers provide to purchase products or services, enroll in promotional programs, register on websites, or otherwise communicate to us. This may include phone numbers, driver license numbers, contact preferences, personal information stored on electronic devices, and payment information, including credit and debit card data. We

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gather and retain information about employees in the normal course of business. We may share information about such persons with vendors that assist with certain aspects of our business. In addition, our online operations depend upon the transmission of confidential information over the Internet, such as information permitting cashless payments.    
We employ safeguards for the protection of this information and have made significant investments to secure access to our information technology network. For instance, we have implemented authentication protocols, installed firewalls and anti-virus/anti-malware software, conducted continuous risk assessments, and established data security breach preparedness and response plans. We also employ encryption and other methods to protect our data, promote security awareness with our associates and work with business partners in an effort to create secure and compliant systems.
However, 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.
Retail data frequently targeted by cybercriminals is consumer credit card data, personally identifiable information, including social security numbers, and health care information. For retailers, point of sale and e-commerce websites are often attacked through compromised credentials, including those obtained through phishing, vishing and credential stuffing. Other methods of attack include advanced malware, the exploitation of software and operating vulnerabilities, and physical device tampering/skimming at card reader units and we believe these attack methods will continue to evolve.
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, we have experienced and expect to continue to experience attempts to compromise our information systems. Unauthorized parties may attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deception to employees, contractors, vendors and temporary staff. We may be unable to protect the integrity of our systems or company data. An alleged or actual unauthorized access or unauthorized disclosure of non-public personal information could:
materially damage our reputation and brand, negatively affect customer satisfaction and loyalty, expose us to individual claims or consumer class actions, administrative, civil or criminal investigations or actions, and infringe on proprietary information; and
cause us to incur substantial costs, including 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 we maintain 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.
Supply Chain and Third Party Risks
Macy's depends upon designers, vendors and other sources of merchandise, goods and services. Our business could be affected by disruptions in, or other legal, regulatory, political or economic issues associated with, our supply network.
Our relationships with established and emerging designers have been a significant contributor to Macy's past success. Our 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. Our 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. We source the majority of our 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 our business, results of operations and liquidity. In addition, the procurement of all our goods and services are subject to the effects of price increases which we may or may not be able to pass through to our customers. All of these factors may affect our ability to access suitable merchandise on acceptable terms, are beyond our control and could negatively affect our business and results of operations
Disruption of global sourcing activities and Macy's own brands’ quality concerns could negatively impact brand reputation and earnings.

9



Economic and civil unrest in areas of the world where we source products, as well as shipping and dockage issues, could adversely impact the availability or cost of our products, or both. Most of Macy’s goods imported to the U.S. arrive from Asia through ports located on the U.S. west coast and are 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, we have substantially increased the number and types of merchandise that are sold under Macy’s proprietary brands. While we have focused on the quality of our proprietary branded products, we rely on third-parties to manufacture these products. Such third-party manufacturers may prove to be unreliable, the quality of our globally sourced products may vary from expectations and standards, the products may not meet applicable regulatory requirements which may require us to recall these products, or the products may infringe upon the intellectual property rights of other third-parties. As we seek indemnities from manufacturers of these products, the uncertainty of recovering on such indemnity and the lack of understanding of U.S. product liability laws in certain foreign jurisdictions make it more likely that we may have to respond to claims or complaints from customers.
Parties with whom Macy's does business may be subject to insolvency risks or may otherwise become unable or unwilling to perform on their obligations to us.
Macy's 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 Macy's. In some cases, we depend 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 our 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 Macy's 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 with respect to our contracts, transactions and business relationships with such third parties could be terminated, modified in a manner adverse to us, or otherwise impaired. We may be unable to arrange for alternate or replacement contracts, transactions or business relationships on terms as favorable as existing contracts, transactions or business relationships. Our inability to do so could negatively affect our cash flows, financial condition and results of operations.
Global, Legal and External Risks
Macy’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 our 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 our business and results of operations. In addition, unstable political conditions, civil unrest, terrorist activities and armed conflicts may disrupt commerce and could negatively affect our business and results of operations.
Our 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 net income.
Our business could be affected by extreme weather conditions, regional or global health pandemics or natural disasters.
Extreme weather conditions in the areas in which our stores are located could negatively affect our 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 our customers to travel to our stores and thereby reduce our sales and profitability. Our 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 our inventory and thereby reduce our sales and profitability. In addition, extreme weather conditions could result in disruption or delay of production and delivery of materials and products in our supply chain and cause staffing shortages in our stores.
Our 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 our stores. A

10



regional or global health pandemic might also result in disruption or delay of production and delivery of materials and products in our supply chain and cause staffing shortages in our stores.
Natural disasters such as hurricanes, tornadoes and earthquakes, or a combination of these or other factors, could damage or destroy our facilities or make it difficult for customers to travel to our stores, thereby negatively affecting our business and results of operations.
Litigation, legislation or regulatory developments could adversely affect our business and results of operations.
We are subject to various federal, state and local laws, rules, regulations, inquiries and initiatives in connection with both our core business operations and our 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). Recent and future developments relating to such matters could increase our compliance costs and adversely affect the profitability of our credit card and other operations. We are 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 we undertake to monitor changes in these laws, if these laws change without our knowledge, or are violated by importers, designers, manufacturers, distributors or agents, we 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 our business and results of operations. In addition, we are regularly involved in various litigation matters that arise in the ordinary course of our business. Adverse outcomes in current or future litigation could negatively affect our financial condition, results of operations and cash flows.
Financial Risks
Inability to access capital markets could adversely affect our 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 our access to this potential source of future liquidity. A decrease in the ratings that rating agencies assign to Macy’s short and long-term debt may negatively impact our access to the debt capital markets and increase our cost of borrowing. In addition, our bank credit agreements require us to maintain specified interest coverage and leverage ratios. Our ability to comply with the ratios may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If our results of operations or operating ratios deteriorate to a point where we are not in compliance with our debt covenants, and we are unable to obtain a waiver, much of our debt would be in default and could become due and payable immediately. Our assets may not be sufficient to repay in full this indebtedness, resulting in a need for an alternate source of funding. We cannot make any assurances that we would be able to obtain such an alternate source of funding on satisfactory terms, if at all, and our inability to do so could cause the holders of our securities to experience a partial or total loss of their investments in Macy's.
Factors beyond our control could affect Macy's stock price.
Macy’s stock price, like that of other retail companies, is subject to significant volatility because of many factors, including factors beyond our control. These factors may include:
general economic, stock, credit and real estate market conditions;
risks relating to Macy’s business and industry, including those discussed above;
strategic actions by us or our competitors;
variations in our quarterly results of operations;
future sales or purchases of Macy’s Common Stock; and
investor perceptions of the investment opportunity associated with Macy’s Common Stock relative to other investment alternatives.
We may fail to meet the expectations of our stockholders or of analysts at some time in the future. If the analysts that regularly follow Macy’s stock lower their rating or lower their projections for future growth and financial performance, Macy’s stock price could decline. Also, sales of a substantial number of shares of Macy’s Common Stock in the public market or the appearance that these shares are available for sale could adversely affect the market price of Macy’s Common Stock.


11



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 February 3, 2018, the operations of the Company included 852 stores in 44 states, the District of Columbia, Puerto Rico and Guam, comprising a total of approximately 128 million square feet. Of such stores, 370 were owned, 359 were leased, 118 stores were operated under arrangements where the Company owned the building and leased the land and five 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.

12



The Company's operations were conducted through the following branded store locations:
 
2017
 
2016
 
2015
Macy's
660

 
673

 
737

Bloomingdale's
55

 
55

 
54

bluemercury
137

 
101

 
77

 
852

 
829

 
868


Store count activity was as follows:
 
2017
 
2016
 
2015
Store count at beginning of fiscal year
829

 
868

 
823

Stores opened
38

 
27

 
26

Acquisition of bluemercury stores

 

 
62

Stores closed or consolidated into existing centers
(15
)
 
(66
)
 
(43
)
Store count at end of fiscal year
852

 
829

 
868


Additional information about the Company’s stores as of February 3, 2018 is as follows:
 
Geographic Region
 
Total
 
Owned
 
Leased
 

Subject to
a Ground
Lease
 
Partly Owned and Partly
Leased
North Central
 
144

 
81

 
43

 
19

 
1

Northeast
 
258

 
88

 
140

 
30

 

Northwest
 
131

 
44

 
63

 
21

 
3

South
 
188

 
110

 
53

 
25

 

Southwest
 
131

 
47

 
60

 
23

 
1

 
 
852

 
370

 
359

 
118

 
5


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.


13



Additional information about the Company’s logistics network as of February 3, 2018 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
 
Leased
 
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.
 

14




PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company's Common Stock is listed on the NYSE under the trading symbol “M.” As of February 3, 2018, the Company had approximately 15,300 stockholders of record. The following table sets forth for each quarter during 2017 and 2016 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.
 
 
2017
 
2016
 
Low
 
High
 
Dividend
 
Low
 
High
 
Dividend
1st Quarter
27.72

 
34.37

 
0.3775

 
37.71

 
45.50

 
0.3600

2nd Quarter
20.85

 
29.83

 
0.3775

 
29.94

 
40.15

 
0.3775

3rd Quarter
19.32

 
24.45

 
0.3775

 
31.02

 
40.98

 
0.3775

4th Quarter
17.41

 
27.64

 
0.3775

 
28.55

 
45.41

 
0.3775


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 2017.
 
 
Total
Number
of Shares
Purchased
 
Average
Price per
Share ($)
 
Number of Shares
Purchased under
Program (1)
 
Open
Authorization
Remaining ($)(1)
 
(thousands)
 
 
 
(thousands)
 
(millions)
October 29, 2017 – November 25, 2017

 

 

 
1,716

November 26, 2017 – December 30, 2017

 

 

 
1,716

December 31, 2017 – February 3, 2018

 

 

 
1,716

 

 

 

 
 
 ___________________
(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 February 3, 2018, $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.

15



The following graph compares the cumulative total stockholder return on the Company's Common Stock with the Standard & Poor's 500 Composite Index and the Company's peer group for the period from February 2, 2013 through February 3, 2018, assuming an initial investment of $100 and the reinvestment of all dividends, if any.
chart-16d6acead745504281f.jpg

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.




16



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.
 
 
2017*
 
2016
 
2015
 
2014
 
2013
 
(millions, except per share)
Consolidated Statement of Income Data:
 
 
 
 
 
 
 
 
 
Net sales
$
24,837

 
$
25,778

 
$
27,079

 
$
28,105

 
$
27,931

Cost of sales
(15,152
)
 
(15,621
)
 
(16,496
)
 
(16,863
)
 
(16,725
)
Gross margin
9,685

 
10,157

 
10,583

 
11,242

 
11,206

Selling, general and administrative expenses
(8,131
)
 
(8,474
)
 
(8,468
)
 
(8,447
)
 
(8,514
)
Gains on sale of real estate
544

 
209

 
212

 
92

 
74

Restructuring, impairment, store closing and other costs
(186
)
 
(479
)
 
(288
)
 
(87
)
 
(88
)
Settlement charges
(105
)
 
(98
)
 

 

 

Operating income
1,807

 
1,315

 
2,039

 
2,800

 
2,678

Interest expense
(321
)
 
(367
)
 
(363
)
 
(395
)
 
(390
)
Net premiums on early retirement of debt
10

 

 

 
(17
)
 

Interest income
11

 
4

 
2

 
2

 
2

Income before income taxes
1,507

 
952

 
1,678

 
2,390

 
2,290

Federal, state and local income tax benefit (expense) (a)
29

 
(341
)
 
(608
)
 
(864
)
 
(804
)
Net income
1,536

 
611

 
1,070

 
1,526

 
1,486

Net loss attributable to noncontrolling interest
11

 
8

 
2

 

 

Net income attributable to Macy's, Inc. shareholders
$
1,547

 
$
619

 
$
1,072

 
$
1,526

 
$
1,486

 
 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to
Macy's, Inc. shareholders
$
5.07

 
$
2.01

 
$
3.26

 
$
4.30

 
$
3.93

Diluted earnings per share attributable to
Macy's, Inc. shareholders
$
5.04

 
$
1.99

 
$
3.22

 
$
4.22

 
$
3.86

Average number of shares outstanding
305.4

 
308.5

 
328.4

 
355.2

 
378.3

Cash dividends paid per share
$
1.5100

 
$
1.4925

 
$
1.3925

 
$
1.1875

 
$
.9500

Depreciation and amortization
$
991

 
$
1,058

 
$
1,061

 
$
1,036

 
$
1,020

Capital expenditures
$
760

 
$
912

 
$
1,113

 
$
1,068

 
$
863

Balance Sheet Data (at year end):
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,455

 
$
1,297

 
$
1,109

 
$
2,246

 
$
2,273

Property and Equipment - net
6,672

 
7,017

 
7,616

 
7,800

 
7,930

Total assets
19,381

 
19,851

 
20,576

 
21,330

 
21,499

Short-term debt
22

 
309

 
642

 
76

 
463

Long-term debt
5,861

 
6,562

 
6,995

 
7,233

 
6,688

Total Shareholders’ equity
5,661

 
4,322

 
4,253

 
5,378

 
6,249

 ___________________
*
53 weeks
(a) The income tax benefit in 2017 is due to U.S. federal tax reform that led to the recognition of an income tax benefit of $571 million associated with the remeasurement of the Company's deferred tax balances.






17



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 approximately 850 stores in 44 states, the District of Columbia, Guam and Puerto Rico. As of February 3, 2018, 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 implement its North Star strategy to transform its omnichannel business and focus on key growth areas, embrace customer centricity, and optimize value in its real estate portfolio. Inspired by the North Star, there are five points to this strategy.
1.
From Familiar to Favorite includes everything the Company does to further its brand awareness and identity to its core customers. Actions include understanding and anticipating customers’ needs, strengthening the Company's fashion authority and executing initiatives around its loyalty and pricing strategies. It celebrates the Company's iconic events and includes strategies to appeal to more value-oriented customers.
2.
It Must Be Macy’s encompasses delivering the products and experiences customers love and are exclusive to the Company. This includes styles and home fashion for every day and special occasions, from the Company's leading private brands, as well as exclusive national brands or assortments.
3.
Every Experience Matters, in-store and online. The Company's competitive advantage is the ability to combine the human touch in its physical stores with cutting-edge technology in its mobile applications and websites. Key to this point is the enhancement of a customer's experience as they explore our stores, mobile applications and websites, find their favorite styles, sizes and colors, and receive their purchases through the shopping channels they prefer.
4.
Funding our Future represents the decisions and actions the Company takes to identify and realize resources to fuel growth. This involves a focus on cost reduction and reinvestment as well as creating value from the Company's real estate portfolio.
5.
What’s New, What’s Next explores and develops innovations to turn consumer and technology trends to the Company's advantage and to drive growth. This includes exploring previously unmet customer needs and making smart investment decisions based on customer insights and analytics.

The Company has taken a number of key steps over the past couple of years to position itself to successfully implement the North Star strategy. In 2017, the Company continued its investment in technology, reengineered its merchandising and marketing structure, improved its curation of merchandise and expanded different Company initiatives to stores throughout its portfolio. The Company also launched a new Macy's Star Rewards loyalty program in October 2017 that focused on strengthening relationships with the Company's best customers, migrating existing customers to higher spending levels and attracting new or infrequent customers. The initial launch of the rewards program focused on proprietary cardholders with additional enhancements and expansion beyond proprietary cardholders planned for the future.

In August 2017, the Company announced a restructuring which included the consolidation of three functions (merchandising, planning and private brands) into a single merchandising function. During the third quarter of 2017, the Company recognized $33 million of costs primarily associated with this restructuring effort as well as a restructuring within the marketing function. Additional financial and operational impacts of such restructuring actions are expected to include future annual savings of approximately $38 million, all of which may be used for reinvestment in the business in 2018.

18




In January 2018, the Company announced actions to continue improvements in organizational efficiency and to allocate resources to support its growth strategy. Major components of these restructuring activities included staffing adjustments across the stores organization with reductions in some stores and increases in others, further streamlining of some non-store functions and the closure of 11 stores in early 2018.

In 2017, the Company continued to execute on its real estate strategy through both monetization and redevelopment of certain assets:
Overall, the Company had asset sale gains of $544 million, totaling $411 million in cash proceeds, in 2017. These gains and proceeds include the sale of its store and parking facility in downtown Minneapolis, the sale of an additional two floors of the downtown Seattle Macy's store (four floors were sold in a similar transaction in fiscal 2015) and additional gains and proceeds from Macy's Brooklyn transaction executed in 2015. In addition, the gains recognized in 2017 include those related to the 2016 sale of the Company's Union Square Men's store in San Francisco.
In 2016, the Company finalized the formation of a strategic alliance with Brookfield Asset Management ("Brookfield"), 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. Currently, the Company expects approximately two-thirds of these real estate assets to have potential for redevelopment. In February 2018, the Company announced that it had agreed to allow Brookfield to redevelop nine of these assets once it has received the necessary approvals. Upon the completion of approval and entitlements, Macy’s will either sell its interests in the individual assets to Brookfield or contribute them into individual joint ventures. If sold, the cumulative value of the nine properties is estimated to be approximately $50 million plus a retained participation in the upside profits of the three largest assets.
In February 2018, the Company signed an agreement to sell the upper seven floors of its State Street store in Chicago to a private real estate fund sponsored by Brookfield. The Company expects to receive a total of $30 million upfront for the transaction, which includes a $3 million contribution towards redevelopment costs for migrating operations to the floors the Company will continue to own. In addition, the Company will receive a percentage of profit earned over and above a threshold internal rate of return.

In 2017, the Company opened new Macy’s stores in Murray, UT and Los Angeles, CA as well as a Bloomingdale’s store in Kuwait under a license agreement with Al Tayer Group, LLC. The Company expects to open two additional Bloomingdale's stores in San Jose, CA and Norwalk, CT in fiscal 2019.

Both Macy's off-price business, Macy's Backstage, and its clearance strategy, Last Act, have been successful in providing unique value opportunities to both existing and new Macy's customers. The Company has rolled out Last Act to all families of business and is currently focused on opening new Macy's Backstage stores within existing Macy's store locations. As of February 3, 2018, the Company has a total of 52 Macy's Backstage locations (7 freestanding and 45 inside Macy's stores).

The Company is focused on accelerating the growth of its luxury beauty products and spa retailer, bluemercury, by opening additional freestanding bluemercury stores in urban and suburban markets, enhancing its online capabilities and adding bluemercury products and boutiques to Macy's stores. As of February 3, 2018, the Company is operating 157 bluemercury locations (137 freestanding and 20 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.




19



2017 Overview
2017 saw the implementation of the Company's North Star strategy and included the roll-outs of different initiatives that had been tested by the Company on a smaller scale. 2017 ended with a strong fourth quarter and selected results of 2017 include:
Net sales, which include a 53rd week of operations, decreased 3.7% compared to 2016.
Comparable sales on an owned basis decreased 2.2% and comparable sales on an owned plus licensed basis decreased 1.9%.
Operating income for 2017 was $1,807 million or 7.3% of sales; while operating income, excluding restructuring, impairment, store closing and other costs and settlement charges, was $2,098 million or 8.4% of sales.
Federal, state, and local income tax benefit for 2017 was $29 million compared to expense of $341 million in 2016, due to U.S. federal tax reform which led to a non-cash tax benefit of $571 million associated with the remeasurement of the Company's deferred tax balances.
Net income attributable to Macy's, Inc. shareholders for 2017 was $1,547 million, an increase of $928 million from $619 million in 2016.
Diluted earnings per share attributable to Macy's, Inc. shareholders increased to $5.04 in 2017 compared to $1.99 in 2016. Diluted earnings per share attributable to Macy's, Inc. shareholders, excluding certain items, increased to $3.77 in 2017 from $3.11 in 2016.
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, restructuring, impairment, store closing and other costs and settlement charges) as a percent to net sales was 12.4% in 2017, as compared to 11.4% in 2016.
Return on invested capital ("ROIC"), a key measure of operating productivity, was 20.8% for 2017.
The Company repurchased or repaid approximately $950 million of debt in 2017, consisting of $247 million of debt repurchased in the open market, $300 million of a debt maturity and $400 million of debt repurchased in a tender offer ("tender offer").
See pages 29 to 32 for reconciliations of the non-GAAP financial measures presented above to the most comparable U.S. generally accepted accounting principles ("GAAP") financial measures and other important information.






















20



Results of Operations
 
 
2017
 
 
2016
 
 
2015
 
 
 
Amount
 
% to Sales
 
 
Amount
 
% to Sales
 
 
Amount
 
% to Sales
 
 
 
(dollars in millions, except per share figures)
 
Net sales
 
$
24,837

 
 
 
 
$
25,778

 
 
 
 
$
27,079

 
 
 
Decrease in sales
 
(3.7
)
%
 
 
(4.8
)
%
 
 
(3.7
)
%
 
Decrease in comparable sales
 
(2.2
)
%
 
 
(3.5
)
%
 
 
(3.0
)
%
 
Cost of sales
 
(15,152
)
 
(61.0
)
%
(15,621
)
 
(60.6
)
%
(16,496
)
 
(60.9
)
%
Gross margin
 
9,685

 
39.0

%
10,157

 
39.4

%
10,583

 
39.1

%
Selling, general and administrative expenses
 
(8,131
)
 
(32.8
)
%
(8,474
)
 
(32.8
)
%
(8,468
)
 
(31.3
)
%
Gains on sale of real estate
 
544

 
2.2

%
209

 
0.8

%
212

 
0.8

%
Restructuring, impairment, store closing and other costs
 
(186
)
 
(0.7
)
%
(479
)
 
(1.9
)
%
(288
)
 
(1.1
)
%
Settlement charges
 
(105
)
 
(0.4
)
%
(98
)
 
(0.4
)
%

 

%
Operating income
 
1,807

 
7.3

%
1,315

 
5.1

%
2,039

 
7.5

%
Interest expense - net
 
(310
)
 
 
 
 
(363
)
 
 
 
 
(361
)
 
 
 
Net premiums on early retirement of debt
 
10

 
 
 
 

 
 
 
 

 
 
 
Income before income taxes
 
1,507

 
 
 
 
952

 
 
 
 
1,678

 
 
 
Federal, state and local income tax benefit (expense)
 
29

 
 
 
 
(341
)
 
 
 
 
(608
)
 
 
 
Net income
 
1,536

 
 
 
 
611

 
 
 
 
1,070

 
 
 
Net loss attributable to noncontrolling interest
 
11

 
 
 
 
8

 
 
 
 
2

 
 
 
Net income attributable to
Macy's, Inc. shareholders
 
$
1,547

 
6.2

%
$
619

 
2.4

%
$
1,072

 
4.0

%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share attributable to
Macy's, Inc. shareholders
 
$
5.04

 
 
 
 
$
1.99

 
 
 
 
$
3.22

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental Non-GAAP Financial Measures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Decrease in comparable sales on
an owned plus licensed basis
 
(1.9
)
%
 
 
(2.9
)
%
 
 
(2.5
)
%
 
Operating income, excluding certain items
 
$
2,098

 
8.4

%
$
1,892

 
7.3

%
$
2,327

 
8.6

%
Diluted earnings per share attributable to
Macy's, Inc. shareholders, excluding
certain items
 
$
3.77

 
 
 
 
$
3.11

 
 
 
 
$
3.77

 
 
Adjusted EBITDA as a percent to net sales
 
12.4

%
 
 
11.4

%
 
 
12.5

%
 
ROIC
 
20.8

%
 
 
18.5

%
 
 
20.1

%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See pages 29 to 32 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
 
852

 
 
 
 
829

 
 
 
 
868

 
 
 
Square footage (in millions)
 
127.7

 
 
 
 
130.2

 
 
 
 
141.9

 
 
 


21



Comparison of 2017 and 2016
Net Sales
Net sales for 2017 include a 53rd week of operations and were $24,837 million, a decrease of $941 million, or 3.7%, from 2016. The decrease in comparable sales on an owned basis, which exclude the 53rd week of sales, for 2017 was 2.2% compared to 2016. The decrease in comparable sales on an owned plus licensed basis for 2017 was 1.9% compared to 2016. (See page 30 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). Although net sales were down compared to 2016, the Company experienced a strong fourth quarter in 2017 with comparable sales on an owned basis up 1.3% and up 1.4% on an owned plus licensed basis. Geographically, sales in 2017 were strongest in Florida, Eastern Texas, Louisiana, Hawaii, Oregon, Southern California and Arizona. Digital sales continued to be strong in 2017 and experienced double digit growth. By family of business, sales in 2017 were strongest in active apparel, fine jewelry, fragrances, dresses and men's tailored clothing. Sales in 2017 were less strong in handbags although the trend improved in the second half of the year. Sales of the Company's private label brands represented approximately 20% of net sales in the Macy's-branded operations in 2017 and 2016.
Cost of Sales and Gross Margin
Cost of sales for 2017 decreased $469 million from 2016. The cost of sales rate as a percent to net sales of 61.0% was 40 basis points higher in 2017, as compared to 60.6% in 2016, primarily due to higher delivery expenses associated with the Company's omnichannel activities and free shipping promotions. Gross margin improved in the second half of 2017 as the Company benefited from its inventory management strategies.
SG&A Expenses
SG&A expenses for 2017 decreased $343 million from 2016 and the SG&A rate as a percent to net sales of 32.8% approximated the rate in 2016. The dollar decrease from 2016 was mainly due to store closings and the restructuring activities announced by the Company in 2016 and 2017, offset slightly by higher expenses associated with the continued investments in the Company's omnichannel operations, and investments in bluemercury and Macy's Backstage. The decrease was also driven by higher income from credit operations. Income from credit operations was $768 million in 2017 as compared to $736 million in 2016. Advertising expense, net of cooperative advertising allowances, was $1,108 million for 2017 compared to $1,153 million for 2016.
Gains on Sale of Real Estate
The Company recognized gains of $544 million in 2017 associated with sales of real estate, as compared to $209 million in 2016. 2017 included gains of $234 million related to the Macy's Union Square location, $71 million related to the Macy's Brooklyn transaction, $47 million related to the downtown Minneapolis properties and $40 million related to the downtown Seattle Macy's location. 2016 included $33 million of gains related to the Macy's Brooklyn transaction.
Restructuring, Impairment, Store Closing and Other Costs
Restructuring, impairment, store closing and other costs for 2017 includes costs and expenses primarily associated with the organizational changes and store closings announced in August 2017 and January 2018. In 2017, these costs included $120 million of severance and other human resource-related costs primarily associated with organization changes and store closings, $53 million of asset impairment charges and $13 million of other related costs and expenses. Restructuring, impairment, store closing and other costs for 2016 includes costs and expenses primarily associated with the organizational changes and store closings announced in August 2016 and 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.
Settlement Charges
$105 million and $98 million of non-cash settlement charges were recognized in 2017 and 2016, respectively. 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 and Net Premiums on the Early Retirement of Debt
Net interest expense, excluding net premiums on the early retirement of debt, for 2017 decreased $53 million from 2016. This decrease was primarily driven by the early repayment of $647 million of debt and the maturity of $300 million

22



of debt in 2017. This early repayment resulted in the recognition of a $10 million benefit related to the write-off of the premium associated with the debt repayments, net of the premium costs and other expenses incurred with the early repayment. This benefit is presented as a net premium on the early retirement of debt on the Consolidated Statements of Income.
 
Effective Tax Rate
The Company's effective tax rate was a benefit of 1.9% for 2017 and expense of 35.8% for 2016. 2017 differs from the federal income tax statutory rate of 33.7%, and on a comparative basis, principally due to 2017 U.S. federal tax reform that led to the recognition of a non-cash tax benefit of $571 million associated with the remeasurement of the Company's deferred tax balances. Further, 2017 included the recognition of approximately $15 million of net tax deficiencies associated with share-based payment awards due to the adoption of Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting. Historically, the Company had recognized such amounts as an offset to accumulated excess tax benefits previously recognized in additional paid-in capital.

Net Income Attributable to Macy's, Inc. Shareholders
Net income attributable to Macy's, Inc. shareholders for 2017 increased compared to 2016, driven by higher operating income due to higher asset sale gains, lower selling, general and administrative expenses, restructuring, impairment, store closing and other costs, partially offset by lower sales and gross margin. Coupled with lower net interest expense and a net income tax benefit resulted in net income attributable to Macy's Inc. shareholders increasing by $928 million in 2017 as compared to 2016.
Comparison of 2016 and 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 page 30 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 and Gross Margin
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.
SG&A Expenses
SG&A expenses for 2016 increased $6 million from 2015, however the SG&A rate as a percent to net sales of 32.8% 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. Retirement expenses were $44 million in 2016 as compared to $77 million in 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.



23



Gains on Sale of Real Estate
Gains on sale of real estate decreased $3 million to $209 million in 2016 compared to $212 million in 2015. 2016 and 2015 included $33 million and $84 million, respectively, of gains related to the Macy's Brooklyn transaction. 2015 also included a $57 million gain related to the sale of a portion of the downtown Macy's Seattle location.
Restructuring, Impairment, Store Closing and Other Costs
Restructuring, impairment, store closing and other costs for 2016 includes costs and expenses primarily associated with the organizational changes and store closings announced in August 2016 and 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. Restructuring, impairment, 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 decreased $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.
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, restructuring, 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.


24



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 and reflecting the adoption of new revenue recognition and pension accounting standards issued by the FASB, the Company's 2018 assumptions include the following:
Net sales estimated decline of approximately 0.5% to 2.0% from 2017 levels. Net sales in 2017 reflected a 53rd week of sales, whereas comparable sales below are on a 52-week basis.
Comparable sales on both an owned and owned plus licensed basis are estimated to be flat to up 1.0%.
Gross margin on retail sales is estimated to be flat to up slightly compared to 2017.
Credit income, reflecting changes from the new revenue recognition standard, estimated to be approximately $645 million to $665 million.
Selling, general and administrative expense dollars are expected to be approximately flat with 2017 or up slightly depending on sales.
Estimated asset sale gains of approximately $300 million to $325 million, including a successful sale of the Company's I. Magnin section of its Union Square store in San Francisco.
Estimated interest expense of approximately $255 million to $260 million.
Effective tax rate is expected to be 23.25%.
Diluted earnings per share attributable to Macy's, Inc. shareholders, excluding certain items, is expected to be $3.55 to $3.75.
Depreciation and amortization is expected to be approximately flat with 2017.
Capital expenditures are estimated at approximately $1,050 million.
The Company's forecasted capital expenditures are primarily related to investments in several merchandising initiatives, continued growth of Backstage and bluemercury locations, expansion of store pick up, and the store, digital and technological enhancements associated with the Company's Growth 50 initiative. This initiative includes the roll-out of various strategies incubated in 2017 to 50 Macy's stores of different sizes and geography.
In 2018, the Company expects excess cash to be used to invest in strategies and initiatives to help grow the business, continue to fund the Company's dividends and repay debt.



25



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 $1,944 million in 2017 compared to $1,801 million in 2016. The increase was driven by a 53rd week of operations and lower selling, general and administrative expenses offset by higher tax payments as compared to 2016.
Investing Activities
Net cash used by investing activities for 2017 was $373 million, compared to net cash used by investing activities of $187 million for 2016. Investing activities for 2017 included purchases of property and equipment totaling $487 million and capitalized software of $273 million, compared to purchases of property and equipment totaling $596 million and capitalized software of $316 million for 2016.
Capital expenditures were lower by $152 million in 2017 as compared to 2016. This decrease was mainly driven by intentional delays in capital projects that are estimated to begin in 2018 and are included in the Company's aforementioned 2018 guidance.
In 2017, the Company continued to execute on its real estate strategy that includes creating value through monetization and, in some cases, redevelopment of real estate assets. Overall, property and equipment sales, primarily related to real estate, generated cash proceeds of $411 million in 2017 compared to $673 million in 2016.
During 2017, the Company opened two new Macy's stores and 36 new freestanding bluemercury stores. 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.
Financing Activities
Net cash used by the Company for financing activities was $1,413 million for 2017, including the repayment of $954 million of debt and the payment of $461 million of cash dividends, partially offset by the issuance of $6 million of Common Stock, primarily related to the exercise of stock options, and proceeds of $13 million received from Macy's China Limited's noncontrolling interest shareholder.

During December 2017, the Company completed a tender offer and purchased $400 million in aggregate principal amount of certain senior unsecured notes and debentures. The purchased senior unsecured notes and debentures included $147 million of 6.9% senior debentures due 2032, $108 million of 6.7% senior debentures due 2034, $96 million of 6.375% senior notes due 2037, $43 million of 8.75% senior debentures due 2029, and $6 million of 7.875% senior debentures due 2030. The total cash cost for the tender offer was $423 million. The Company recognized $11 million of income related to the recognition of the unamortized debt premium partially offset by the redemption premium and other costs associated with this debt as net premiums on early retirement of debt on the Consolidated Statements of Income during 2017.

In July 2017 the Company paid $300 million of debt at maturity. During the first and second quarters of 2017, the Company repurchased $247 million face value of senior notes and debentures. The debt repurchases were made in the open market for a total cash cost of $257 million, including expenses related to the transactions. Such repurchases resulted in the recognition of expense of $1 million during 2017 presented as net premiums on early retirement of debt on the Consolidated Statements of Income.

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

During August 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

26



unamortized debt premium associated with this debt. During October 2016, the Company repaid $59 million of 7.45% senior debentures at maturity. During December 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 as of 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 February 3, 2018, and January 28, 2017, there were no revolving credit loans outstanding under this credit agreement, and there were no borrowings under the agreement during 2017 and 2016. In addition, there were no standby letters of credit outstanding at February 3, 2018 and January 28, 2017. 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. Over the past two fiscal years, the amount of borrowings under the commercial paper program increased to its highest level for 2016 of approximately $388 million during the fourth quarter of 2016. There were no borrowings under the program during 2017. As of February 3, 2018 and January 28, 2017, there were no remaining borrowings outstanding under the commercial paper program.
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 2017 was 8.94 and its leverage ratio at February 3, 2018 was 2.04, 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 February 3, 2018, no notes or debentures contain provisions requiring acceleration of payment upon a debt rating downgrade. However, the terms of approximately $4,019 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.
During 2016, the Company repurchased approximately 7.9 million shares of its Common Stock for a total of approximately $316 million. As of February 3, 2018, 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 23, 2018, the Company's board of directors declared a quarterly dividend of 37.75 cents per share on its Common Stock, payable April 2, 2018, to shareholders of record at the close of business on March 15, 2018.

27



Contractual Obligations and Commitments
At February 3, 2018, 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
$
21

 
$
21

 
$

 
$

 
$

Long-term debt
5,806

 

 
581

 
553

 
4,672

Interest on debt
3,114

 
286

 
566

 
500

 
1,762

Capital lease obligations
49

 
3

 
6

 
6

 
34

Operating leases
3,546

 
327

 
586

 
494

 
2,139

Letters of credit
28

 
28

 

 

 

Other obligations
4,525

 
2,476

 
1,026

 
230

 
793

 
$
17,089

 
$
3,141

 
$
2,765

 
$
1,783

 
$
9,400

“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 $125 million of long-term liabilities for unrecognized tax benefits for various tax positions taken. The table also excludes federal, state and local interest and penalties related to unrecognized tax benefits of $27 million included in other liabilities and $24 million included in current income taxes. 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 $11 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.

28



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.

Important Information Regarding Non-GAAP Financial Measures
The Company reports its financial results in accordance with 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, on a comparable basis, and in evaluating the impact of changes in the manner in which certain departments are operated. In addition, management believes that excluding certain items that are not associated with the Company's core operations and that may vary substantially in frequency and magnitude period-to-period from diluted earnings per share attributable to Macy's, Inc. shareholders, operating income, EBIT (earnings before interest and taxes) 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 EBIT, EBITDA, Adjusted EBIT 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 excluding certain items because the timing and amount of excluded items 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 or 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.


29



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.
 
 
14 weeks ended February 3, 2018
 
2017
 
2016
 
2015
 
2014
 
2013
Increase (decrease) in comparable sales on an owned
basis (note 1)
 
1.3%
 
(2.2)%
 
(3.5)%
 
(3.0)%
 
0.7%
 
1.9%
Impact of growth in comparable sales of departments licensed to third parties (note 2)
 
0.1%
 
0.3%
 
0.6%
 
0.5%
 
0.7%
 
0.9%
Increase (decrease) in comparable sales on an owned plus licensed basis
 
1.4%
 
(1.9)%
 
(2.9)%
 
(2.5)%
 
1.4%
 
2.8%
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, adjusting for the 53rd week in 2017, excluding commissions from departments licensed to third parties. Stores impacted by a natural disaster or undergoing significant expansion or shrinkage 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, adjusting for the 53rd week in 2017, 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.
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(millions, except percentages)
Net sales
 
$
24,837

 
$
25,778

 
$
27,079

 
$
28,105

 
$
27,931

 
 
 
 
 
 
 
 
 
 
 
Operating income
 
$
1,807

 
$
1,315

 
$
2,039

 
$
2,800

 
$
2,678

 
 
 
 
 
 
 
 
 
 
 
Operating income as a percent to net sales
 
7.3
%
 
5.1
%
 
7.5
%
 
10.0
%
 
9.6
%
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
$
1,807

 
$
1,315

 
$
2,039

 
$
2,800

 
$
2,678

Add back restructuring, impairment, store closing and
other costs
 
186

 
479

 
288

 
87

 
88

Add back settlement charges
 
105

 
98

 

 

 

Operating income, excluding certain items
 
$
2,098

 
$
1,892

 
$
2,327

 
$
2,887

 
$
2,766

Operating income, excluding certain items, as a
percent to net sales
 
8.4
%
 
7.3
%
 
8.6
%
 
10.3
%
 
9.9
%

30



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.
 
 
2017
 
2016
 
2015
 
2014
 
2013
Diluted earnings per share attributable to
Macy's, Inc. shareholders
 
$
5.04

 
$
1.99

 
$
3.22

 
$
4.22

 
$
3.86

Add back the pre-tax impact of restructuring, impairment, store closing and other costs
 
0.61

 
1.54

 
0.86

 
0.24

 
0.23

Add back the pre-tax impact of settlement charges
 
0.34

 
0.31

 

 

 

Add back (deduct) the pre-tax impact of net premiums on the early retirement of debt
 
(0.03
)
 

 

 
0.05

 

Deduct the income tax impact of certain items identified above
 
(0.33
)
 
(0.73
)
 
(0.31
)
 
(0.11
)
 
(0.09
)
Deduct the deferred tax effects of federal tax reform
 
(1.86
)
 

 

 

 

Diluted earnings per share attributable to
Macy's, Inc. shareholders, excluding certain items
 
$
3.77

 
$
3.11

 
$
3.77

 
$
4.40

 
$
4.00

Adjusted EBIT and EBITDA as a Percent to Net Sales
The following is a tabular reconciliation of the non-GAAP financial measure earnings before interest and taxes ("EBIT") and earnings before interest, taxes, and depreciation and amortization ("EBITDA"), as adjusted to exclude certain items ("Adjusted EBIT and 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.
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(millions, except percentages)
Net sales
 
$
24,837

 
$
25,778

 
$
27,079

 
$
28,105

 
$
27,931

 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
1,536

 
$
611

 
$
1,070

 
$
1,526

 
$
1,486

 
 
 
 
 
 
 
 
 
 
 
Net income as a percent to net sales
 
6.2
%
 
2.4
%
 
4.0
%
 
5.4
%
 
5.3
%
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
1,536

 
$
611

 
$
1,070

 
$
1,526

 
$
1,486

Add back restructuring, impairment, store
closing and other costs
 
186

 
479

 
288

 
87

 
88

Add back settlement charges
 
105

 
98

 

 

 

Add back interest expense - net
 
310

 
363

 
361

 
393

 
388

Add back (deduct) net premiums on the early retirement of debt
 
(10
)
 

 

 
17

 

Add back (deduct) federal, state and local income
tax expense (benefit)
 
(29
)
 
341

 
608

 
864

 
804

Adjusted EBIT
 
$
2,098

 
$
1,892

 
$
2,327

 
$
2,887

 
$
2,766

Adjusted EBIT as a percent to net sales
 
8.4
%
 
7.3
%
 
8.6
%
 
10.3
%
 
9.9
%
 
 
 
 
 
 
 
 
 
 
 
Add back depreciation and amortization
 
991

 
1,058

 
1,061

 
1,036

 
1,020

Adjusted EBITDA
 
$
3,089

 
$
2,950

 
$
3,388

 
$
3,923

 
$
3,786

Adjusted EBITDA as a percent to net sales
 
12.4
%
 
11.4
%
 
12.5
%
 
14.0
%
 
13.6
%

31



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.
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(millions, except percentages)
Operating income
 
$
1,807

 
$
1,315

 
$
2,039

 
$
2,800

 
$
2,678

 
 
 
 
 
 
 
 
 
 
 
Property and equipment - net
 
$
6,845

 
$
7,317

 
$
7,708

 
$
7,865

 
$
8,063

 
 
 
 
 
 
 
 
 
 
 
Operating income as a percent to property and
equipment - net
 
26.4
%
 
18.0
%
 
26.5
%
 
35.6
%
 
33.2
%
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
$
1,807

 
$
1,315

 
$
2,039

 
$
2,800

 
$
2,678

Add back restructuring, impairment, store closing and
other costs
 
186

 
479

 
288

 
87

 
88

Add back settlement charges
 
105

 
98

 

 

 

Add back depreciation and amortization
 
991

 
1,058

 
1,061

 
1,036

 
1,020

Add back rent expense, net
 
 
 
 
 
 
 
 
 
 
Real estate
 
325

 
319

 
301

 
279

 
268

Personal property
 
10

 
11

 
12

 
12

 
11

Deferred rent amortization
 
14

 
9

 
8

 
7

 
8

Adjusted operating income
 
$
3,438

 
$
3,289

 
$
3,709

 
$
4,221

 
$
4,073

 
 
 
 
 
 
 
 
 
 
 
Property and equipment - net
 
$
6,845

 
$
7,317

 
$
7,708

 
$
7,865

 
$
8,063

Add back accumulated depreciation and amortization
 
4,733

 
5,088

 
5,457

 
5,830

 
6,007

Add capitalized value of non-capitalized leases
 
2,792

 
2,712

 
2,568

 
2,384

 
2,296

Add (deduct) other selected assets and liabilities:
 
 
 
 
 
 
 
 
 
 
Receivables
 
327

 
402

 
338

 
336

 
339

Merchandise inventories
 
5,712

 
6,012

 
6,226

 
6,155

 
6,065

Prepaid expenses and other current assets
 
422

 
456

 
453

 
443

 
398

Other assets
 
830

 
881

 
775

 
784

 
659

Merchandise accounts payable
 
(2,115
)
 
(2,173
)
 
(2,366
)
 
(2,472
)
 
(2,520
)
Accounts payable and accrued liabilities
 
(3,027
)
 
(2,924
)
 
(2,677
)
 
(2,511
)
 
(2,328
)
Total average invested capital
 
$
16,519

 
$
17,771

 
$
18,482

 
$
18,814

 
$
18,979

 
 
 
 
 
 
 
 
 
 
 
ROIC
 
20.8
%
 
18.5
%
 
20.1
%
 
22.4
%
 
21.5
%



32



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. Resolution of these matters could 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.

33



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 2017 and 2016. As of the date of this report, the Company does not anticipate making funding contributions to the Pension Plan in 2018. 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.
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.
The Company's assumed annual long-term rate of return for the Pension Plan's assets was 7.00% for 2017, 2016 and 2015 based on expected future returns on the portfolio of assets. For 2018, the Company is lowering the assumed annual long-term rate of return to 6.75% based on expected future returns of 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 2018 pension expense by approximately $8 million.
The Company discounted its future pension obligations using a weighted-average rate of 3.74% at February 3, 2018 and 4.00% at January 28, 2017 for the Pension Plan and 3.78% at February 3, 2018 and 4.07% at January 28, 2017 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, the 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 February 3, 2018 by approximately $92 million and would decrease estimated 2018 pension expense by approximately $3 million. Increasing the discount rates by 0.25% would decrease the projected benefit obligations at February 3, 2018 by approximately $85 million and would increase estimated 2018 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.



34



New Pronouncements
Revenue Recognition
In May 2014, the 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 various related amendments 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 were effective for the Company on February 4, 2018. On the effective date, the Company will apply the new guidance retrospectively to each prior reporting period presented.
Overall, the new standard will not have a material impact to the results of the Company's operations or consolidated statements of financial position, but will change the presentation and timing of certain revenue transactions. The Company currently estimates the impacts to its consolidated financial statements to include gross presentation of its estimates for future sales returns and related recoverable assets, presenting income from credit operations, gift card breakage income and Thanks For Sharing loyalty program income as separate components of revenue and recognizing gift card breakage revenue over the period of redemption for gift cards associated with certain returns. In addition, on a quarterly basis, the timing of recognizing revenue for the Company's Thanks For Sharing loyalty program will change as compared to historical recognition. The Company's evaluation of the new standards included a review of certain vendor arrangements to determine whether the Company acts as principal or agent in such arrangements. The Company does not expect material changes in gross versus net presentation as a result of the adoption of the new standard.
The following tables reflect the preliminary and unaudited expected impacts to reported 2017 and 2016 results, respectively, for the impact of the adoption of the new standard on our consolidated financial statements.
 
 
2017 (Unaudited)
 
 
 
As Reported
 
New Revenue Standard Adjustments
 
As Adjusted
 
Consolidated Statement of Income:
 
(dollars in millions, except per share figures)
 
Net sales
 
$
24,837

 
$
104

 
$
24,941

 
Credit card revenues, net
 

 
702

 
702

 
Cost of sales
 
(15,152
)
 
(30
)
 
(15,182
)
 
Selling, general and administrative expenses
 
(8,131
)
 
(766
)
 
(8,897
)
 
Federal, state and local income tax benefit
 
29

 
(2
)
 
27

 
Net income attributable to
Macy's, Inc. shareholders
 
1,547

 
8

 
1,555

 
Diluted earnings per share attributable to
Macy's, Inc. shareholders
 
5.04

 
0.02

 
5.06

 
 
 
2016 (Unaudited)
 
 
 
As Reported
 
New Revenue Standard Adjustments
 
As Adjusted
 
Consolidated Statement of Income:
 
(dollars in millions, except per share figures)
 
Net sales
 
$
25,778

 
$
132

 
$
25,910

 
Credit card revenues, net
 

 
656

 
656

 
Cost of sales
 
(15,621
)
 
(46
)
 
(15,667
)
 
Selling, general and administrative expenses
 
(8,474
)
 
(728
)
 
(9,202
)
 
Federal, state and local income tax expense
 
(341
)
 
(5
)
 
(346
)
 
Net income attributable to
Macy's, Inc. shareholders
 
619

 
9

 
628

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

 
0.03

 
2.02

 

35



 
 
2017 (Unaudited)
 
 
 
As Reported
 
New Revenue Standard Adjustments
 
As Adjusted
 
Consolidated Balance Sheet:
 
(dollars in millions)
 
Prepaid expenses and other current assets
448

$
448

 
$
201

 
$
649

 
Accounts payable and accrued liabilities
3,167

3,167

 
102

 
3,269

 
Deferred income taxes
1,122

1,122

 
25

 
1,147

 
Total Shareholders' equity
5,661

5,661

 
74

 
5,735