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Does Macy's Excellent Q1 Mean Its Debt Troubles Are Gone?

By Parkev Tatevosian - May 28, 2021 at 1:42PM

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The retailer reported positive earnings when expectations were for it to lose money in the quarter.

Macy's (M 5.27%) first-quarter results were a sigh of relief for all stakeholders. But, unfortunately, the department store retailing giant was one of the companies that was severely negatively affected by the coronavirus pandemic. Sales cratered at the onset as it had to close all of its stores to in-person shopping. That put Macy's in a bit of a liquidity crunch, and it tapped credit facilities and increased other borrowings. 

The combination of an increased debt burden with reduced operations became a focus for shareholders of the retailer. However, as states are easing business restrictions and people are moving around more often, sales are surging at Macy's. So it appears that the worst of the pandemic is over for Macy's, and it's on a path to recovery. Let's take a closer look at whether that means its debt load is less of a strain now. 

A woman purchasing clothes at a retail store.

Macy's reported $4.7 billion in sales in the first quarter. Image source: Getty Images.

A remarkable quarter

Macy's saw comparable-store sales, which exclude the effect of store openings and closings, increase by 62.5% in the first quarter from the same quarter last year. Keep in mind that the same quarter last year included the most devastating effects of the pandemic for Macy's. This year its stores were almost all open, and consumer confidence was boosted by stimulus checks that hit bank accounts in March and April.

Overall revenue came in at $4.7 billion and was far better than the $4.3 billion that analysts on Wall Street were expecting. Even more impressively, Macy's reported earnings per share of $0.32, again, far better than expectations of a loss per share of $0.44.

What's more, Macy's adjusted EBITDA margin was better in the first quarter than the same quarter in 2019, before the onset of the pandemic. Sure, overall revenue is still down about $800 million from 2019, but Macy's more than made up for it by reduced spending -- mostly in areas of selling, general, and administrative.

That all summed up to Macy's generating free cash flow of $403 million in the first quarter.

Debt management

As of May 1, Macy's had $4.5 billion of long-term debt on its balance sheet and roughly $1.8 billion in cash and equivalents. That's a major improvement from the same time last year when it had $4.9 billion in debt and $1.5 billion in cash and equivalents. The operating environment was also a lot more uncertain last year, and its access to credit was a lot more limited. Now that more of its stores are open and the risk of COVID-19 is trending downward, its operating profitability is improved, and subsequently, its access to credit has improved.

Chart showing Macy's cash from operations trending downward.

Data source: YCharts.

Debt usually comes with an interest expense, and Macy's had to pay $79 million in interest expenses in the most recent quarter. However, the amount is manageable for Macy's, as even during a non-holiday quarter, it generated $215 million in operating income. And although cash from operations was declining over the last decade, Macy's still comfortably generated more than $1 billion annually in operating cash flow before the pandemic (see chart).

Therefore, while the $4.5 billion in long-term debt remains a risk, that risk has become more manageable now that the worst of the pandemic is behind it, and it is operating more efficiently. That should be one less worry for those looking to invest in Macy's shares. 

 

Parkev Tatevosian owns shares of Macys. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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