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  • 10-K (Apr 2, 2014)
  • 10-K (Apr 3, 2013)
  • 10-K (Mar 28, 2012)

 
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Macy's Inc. 10-K 2013
M-02.02.2013-10K
 
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 2, 2013
 
Commission File Number:
1-13536
7 West Seventh Street
Cincinnati, Ohio 45202
(513) 579-7000
and
151 West 34th Street
New York, New York 10001
(212) 494-1602
Incorporated in Delaware
 
I.R.S. No. 13-3324058
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
 
New York Stock Exchange
7.45% Senior Debentures due 2017
 
New York Stock Exchange
6.79% Senior Debentures due 2027
 
New York Stock Exchange
7% Senior Debentures due 2028
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
  
Accelerated filer  o
  
Non-accelerated filer  o
  
Smaller reporting company  o
 
  
(Do not check if a smaller reporting company)
 
 
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 28, 2012) was approximately $14,773,300,000.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at March 1, 2013
Common Stock, $0.01 par value per share
 
389,307,949 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Parts Into
Which Incorporated
Proxy Statement for the Annual Meeting of Stockholders to be held May 17, 2013 (Proxy Statement)
Part III
 



Unless the context requires otherwise, references to “Macy’s” or the “Company” are references to Macy’s and its subsidiaries and references to “2012,” “2011,” “2010,” “2009” and “2008” are references to the Company’s fiscal years ended February 2, 2013, January 28, 2012, January 29, 2011, January 30, 2010 and January 31, 2009, respectively. Fiscal year 2012 includes 53 weeks and fiscal years 2011, 2010, 2009 and 2008 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, mail-order catalogs and television;
general consumer-spending levels, including the impact of general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, the costs of basic necessities and other goods and the effects of the weather or natural disasters;
conditions to, or changes in the timing of, proposed transactions and changes in expected synergies, cost savings and non-recurring charges;
possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions;
possible actions taken or omitted to be taken by third parties, including customers, suppliers, business partners, competitors and legislative, regulatory, judicial and other governmental authorities and officials;
changes in relationships with vendors and other product and service providers;
currency, interest and exchange rates and other capital market, economic and geo-political conditions;
severe or unseasonable weather, possible outbreaks of epidemic or pandemic diseases and natural disasters;
unstable political conditions, civil unrest, terrorist activities and armed conflicts;
the possible inability of the Company’s manufacturers to deliver products in a timely manner or meet the Company’s quality standards;
the Company’s reliance on foreign sources of production, including risks related to the disruption of imports by labor disputes, regional health pandemics, and regional political and economic conditions;
duties, taxes, other charges and quotas on imports; and
possible systems failures and/or security breaches, including, any security breach that results in the theft, transfer or unauthorized disclosure of customer, employee or company information, or the failure to comply with various laws applicable to the Company in the event of such a breach.
In addition to any risks and uncertainties specifically identified in the text surrounding such forward-looking statements, the statements in the immediately preceding sentence and the statements under captions such as “Risk Factors” and “Special Considerations” 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. As of February 2, 2013, the operations of the Company included approximately 840 stores in 45 states, the District of Columbia, Guam and Puerto Rico under the names “Macy’s” and “Bloomingdale’s” as well as macys.com and bloomingdales.com. The Company operates twelve Bloomingdale’s Outlet stores. Bloomingdale's in Dubai, United Arab Emirates is operated under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC.
The Company’s 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 character 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 2012, 2011 and 2010, the following merchandise constituted the following percentages of sales:
 
 
2012
 
2011
 
2010
Feminine Accessories, Intimate Apparel, Shoes and Cosmetics
38
%
 
37
%
 
36
%
Feminine Apparel
23

 
25

 
26

Men’s and Children’s
23

 
23

 
23

Home/Miscellaneous
16

 
15

 
15

 
100
%
 
100
%
 
100
%

In 2012, 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 proprietary and non-proprietary 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.
Macy’s Merchandising Group, Inc. (“MMG”), a wholly-owned direct subsidiary of the Company, and its subsidiary Macy's Merchandising Group International, LLC., is responsible for the design, development and marketing of Macy’s private label brands and certain licensed brands. Bloomingdale’s uses MMG for only a very small portion of its private label merchandise. The Company believes that its private label merchandise further 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.
The principal private label brands currently offered by the Company include Alfani, American Rag, Aqua, Bar III, Belgique, Charter Club, Club Room, Epic Threads, 55 Broome, first impressions, Giani Bernini, greendog, Greg Norman for Tasso Elba, Holiday Lane, Home Design, Hotel Collection, Hudson Park, Ideology, I-N-C, jenni by jennifer moore, JM Collection, John Ashford, Karen Scott, Martha Stewart Collection, Material Girl, Morgan Taylor, Oake, Pop Knits, so jenni by jennifer moore, Sky, Studio Silver, Style & Co., Style & Co. Sport, Sutton Studio, Tasso Elba, the cellar, Tools of the Trade, Tools of the Trade Basics, and Via Europa.
The trademarks associated with all of the foregoing brands, other than American Rag, Greg Norman for Tasso Elba, Martha Stewart Collection, and Material Girl are owned by the Company. The American Rag, Greg Norman for Tasso Elba, Martha Stewart Collection, and Material Girl brands are owned by third parties, which license the trademarks associated with such brands to Macy’s pursuant to agreements which have renewal rights that extend through 2050, 2020, 2027, and 2030, respectively.
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.


2


The Company’s executive offices are located at 7 West Seventh 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 2, 2013, the Company had approximately 175,700 regular full-time and part-time employees. Because of the seasonal nature of the retail business, the number of employees peaks in the holiday season. Approximately 10% of the Company’s employees as of February 2, 2013 were represented by unions. Management considers its relations with its employees to be satisfactory.
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 must carry significantly higher inventory levels.
Purchasing
The Company purchases merchandise from many suppliers, no one of which accounted for more than 5% of the Company’s net purchases during 2012. 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 satisfactory.
Competition
The retailing industry is intensely competitive. The Company’s operations compete with many retailing formats, including department stores, specialty stores, general merchandise stores, off-price and discount stores, manufacturers’ outlets, the Internet, mail order catalogs and television shopping, among others. The retailers with which the Company competes include Amazon, Bed Bath & Beyond, Belk, Bon Ton, Burlington Coat Factory, Dillard’s, Gap, J.C. Penney, Kohl’s, Limited, Lord & Taylor, Neiman Marcus, Nordstrom, Saks, Sears, Target, TJ Maxx and Wal-Mart. The Company seeks to attract customers by offering superior selections, obvious value, and distinctive marketing in stores that are located in premier locations, and by providing an exciting shopping environment and superior service through an omnichannel experience. Other retailers may compete for customers on some or all of these bases, or on other bases, and may be perceived by some potential customers as being better aligned with their particular preferences.
Available Information
The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge through its internet website at http://www.macysinc.com as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. The public also may read and copy any of these filings at the SEC’s Public Reference Room, 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-732-0330. The SEC also maintains an Internet site that contains the Company’s filings; the address of that site is http://www.sec.gov. In addition, the Company has made the following available free of charge through its website at http://www.macysinc.com:
Audit Committee Charter,
Compensation and Management Development Committee Charter,
Finance Committee Charter,
Nominating and Corporate Governance Committee Charter,
Corporate Governance Principles,
Non-Employee Director Code of Business Conduct and Ethics, and
Code of Conduct.
Any of these items are also available in print to any shareholder who requests them. Requests should be sent to the Corporate Secretary of Macy’s, Inc. at 7 West 7th Street, Cincinnati, OH 45202.

3


Executive Officers of the Registrant
The following table sets forth certain information as of March 25, 2013 regarding the executive officers of the Company:
 
Name
 
Age
 
Position with the Company
Terry J. Lundgren
 
61

 
Chairman of the Board; President and Chief Executive Officer; Director
Timothy M. Adams
 
59

 
Chief Private Brand Officer
William S. Allen
 
55

 
Chief Human Resources Officer
Jeffrey Gennette
 
51

 
Chief Merchandising Officer
Julie Greiner
 
59

 
Chief Merchandise Planning Officer
Robert B. Harrison
 
49

 
Chief Omnichannel Officer
Karen M. Hoguet
 
56

 
Chief Financial Officer
Jeffrey Kantor
 
54

 
Chairman of macys.com
Martine Reardon
 
50

 
Chief Marketing Officer
Peter Sachse
 
55

 
Chief Stores Officer
Joel A. Belsky
 
59

 
Executive Vice President and Controller
Dennis J. Broderick
 
64

 
Executive Vice President, General Counsel and Secretary

Terry J. Lundgren has been Chairman of the Board since January 2004 and President and Chief Executive Officer of the Company since February 2003.
Timothy M. Adams has been the Chief Private Brand Officer of the Company since February 2009; prior thereto he served as Chairman and CEO of Macy’s Home Store from July 2005 to February 2009.
William S. Allen has been Chief Human Resources Officer of the Company since January 2013; prior thereto he was the Senior Vice President - Group Human Resources of AP Moller-Maersk A/S from January 2008 to December 2012.
Jeffrey Gennette has been Chief Merchandising Officer of the Company since February 2009; prior thereto he served as Chairman and CEO of Macy’s West from February 2008 to February 2009.
Julie Greiner has been Chief Merchandise Planning Officer of the Company since February 2009; prior thereto she served as Chairman and CEO of Macy’s Florida from July 2005 to February 2009.
Robert B. Harrison has been Chief Omnichannel Officer since January 2013; prior thereto he served as Executive Vice President - Omnichannel Strategy from July 2012 to January 2013; as Executive Vice President - Finance from 2011 to July 2012, as President - Stores from 2009 to 2011 and as Chief Operating Officer of Macy's West from 2008 - 2009.
Karen M. Hoguet has been Chief Financial Officer of the Company since February 2009; prior thereto she served as Executive Vice President and Chief Financial Officer of the Company from June 2005 to February 2009.
Jeffrey Kantor has been Chairman of macys.com since February 2012; prior thereto he served as President for Merchandising of macys.com from August 2010 to February 2012, as President - Merchandising for Home from May 2009 to August 2010 and as President for furniture for Macy's Home Store from February 2006 to May 2009.
Peter Sachse has been Chief Stores Officer since February 2012; prior thereto he served as Chief Marketing Officer of the Company from February 2009 to February 2012, as Chairman of macys.com from April 2006 to February 2012, and as President of Macy’s Corporate Marketing from May 2007 to February 2009.
Martine Reardon has been Chief Marketing Officer since February 2012; prior thereto she served as Executive Vice President for Marketing from February 2009 to February 2012 and as Executive Vice President, national marketing strategy, events and public relations for Macy's Corporate Marketing from 2007 to February 2009.
Joel A. Belsky has been Executive Vice President and Controller of the Company since May 2009; prior thereto he served as Senior Vice President and Controller of the Company from October 1996 through April 2009.
Dennis J. Broderick has been Secretary of the Company since July 1993 and Executive Vice President and General Counsel of the Company since May 2009; prior thereto he served as Senior Vice President and General Counsel of the Company from January 1990 to April 2009.

4


Item 1A.
Risk Factors.
In evaluating the Company, the risks described below and the matters described in “Forward-Looking Statements” should be considered carefully. Such risks and matters are numerous and diverse, may be experienced continuously or intermittently, and may vary in intensity and effect. Any of such risks and matters, individually or in combination, could have a material adverse effect on the Company's business, prospects, financial condition, results of operations and cash flows, as well as on the attractiveness and value of an investment in the Company's securities.
The Company faces significant competition in the retail industry.
The Company conducts its retail merchandising business under highly competitive conditions. Although the Company is one of the nation’s largest retailers, it has numerous and varied competitors at the national and local levels, including conventional and specialty department stores, other specialty stores, category killers, mass merchants, value retailers, discounters, and Internet and mail-order retailers. Competition may intensify as the Company’s competitors enter into business combinations or alliances. Competition is characterized by many factors, including assortment, advertising, price, quality, service, location, reputation and credit availability. Any failure by the Company to compete effectively could negatively affect the Company's business and results of operations.
The Company’s sales and operating results depend on consumer preferences and consumer spending.
The fashion and retail industries are subject to sudden shifts in consumer trends and consumer spending. The Company’s sales and operating results depend in part on its ability to predict or respond to changes in fashion trends and consumer preferences in a timely manner. The Company develops new retail concepts and continuously adjusts its industry position in certain major and private-label brands and product categories in an effort to satisfy customers. Any sustained failure to anticipate, identify and respond to emerging trends in lifestyle and consumer preferences could negatively affect the Company’s business and results of operations. The Company’s sales are significantly affected by discretionary spending by consumers. Consumer spending may be affected by many factors outside of the Company’s control, including general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt and consumer behaviors towards incurring and paying debt, the costs of basic necessities and other goods and the effects of the weather or natural disasters. Any decline in discretionary spending by consumers could negatively affect the Company's business and results of operations.
The Company’s business is subject to unfavorable economic and political conditions and other developments and risks.
Unfavorable global, domestic or regional economic or political conditions and other developments and risks could negatively affect the Company’s business and results of operations. For example, unfavorable changes related to interest rates, rates of economic growth, fiscal and monetary policies of governments, inflation, deflation, consumer credit availability, consumer debt levels, consumer debt payment behaviors, tax rates and policy, unemployment trends, energy prices, and other matters that influence the availability and cost of merchandise, consumer confidence, spending and tourism could negatively affect the Company’s business and results of operations. In addition, unstable political conditions, civil unrest, terrorist activities and armed conflicts may disrupt commerce and could negatively affect the Company’s business and results of operations.
The Company’s revenues and cash requirements are affected by the seasonal nature of its business.
The Company’s business is seasonal, with a high proportion of revenues and operating cash flows generated during the second half of the fiscal year, which includes the fall and holiday selling seasons. A disproportionate amount of the Company's revenues fall in the fourth fiscal quarter, which coincides with the holiday season. In addition, the Company incurs significant additional expenses in the period leading up to the months of November and December in anticipation of higher sales volume in those periods, including for additional inventory, advertising and employees.
The Company’s business could be affected by extreme weather conditions, regional or global health pandemics or natural disasters.
Extreme weather conditions in the areas in which the Company’s stores are located could negatively affect the Company’s business and results of operations. For example, frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather conditions over a prolonged period could make it difficult for the Company’s customers to travel to its stores and thereby reduce the Company’s sales and profitability. The Company’s business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could reduce demand for a portion of the Company’s inventory and thereby reduce the Company's sales and profitability.

5


The Company's business and results of operations could also be negatively affected if a regional or global health pandemic were to occur, depending upon its location, duration and severity. To halt or delay the spread of disease, local, regional or national governments might limit or ban public gatherings or customers might avoid public places, such as the Company's stores. A regional or global health pandemic might also result in disruption or delay of production and delivery of materials and products in the Company's supply chain and cause staffing shortages in the Company's stores.
In addition, natural disasters such as hurricanes, tornadoes and earthquakes, or a combination of these or other factors, could damage or destroy the Company’s facilities or make it difficult for customers to travel to its stores, thereby negatively affecting the Company’s business and results of operations.
The Company’s pension funding could increase at a higher than anticipated rate.
Significant changes in interest rates, decreases in the fair value of plan assets and investment losses on plan assets could affect the funded status of the Company’s plans and could increase future funding requirements of the pension plans. A significant increase in future funding requirements could have a negative impact on the Company’s cash flows, financial condition or results of operations.
Increases in the cost of employee benefits could impact the Company’s financial results and cash flow.
The Company’s expenses relating to employee health benefits are significant. Unfavorable changes in the cost of such benefits could negatively affect the Company’s financial results and cash flow. Healthcare costs have risen significantly in recent years, and recent legislative and private sector initiatives regarding healthcare reform could result in significant changes to the U.S. healthcare system. Due to the breadth and complexity of the healthcare reform legislation, the lack of implementing regulations and interpretive guidance and the phased-in nature of the implementation of the legislation, the Company is not able at this time to fully determine the impact that healthcare reform will have on the Company-sponsored medical plans.
Inability to access capital markets could adversely affect the Company’s business or financial condition.
Changes in the credit and capital markets, including market disruptions, limited liquidity and interest rate fluctuations, may increase the cost of financing or restrict the Company’s access to this potential source of future liquidity. A decrease in the ratings that rating agencies assign to the Company’s short and long-term debt may negatively impact the Company’s access to the debt capital markets and increase the Company’s cost of borrowing. In addition, the Company’s bank credit agreements require the Company to maintain specified interest coverage and leverage ratios. The Company’s ability to comply with the ratios may be affected by events beyond its control, including prevailing economic, financial and industry conditions. If the Company’s results of operations or operating ratios deteriorate to a point where the Company is not in compliance with its debt covenants, and the Company is unable to obtain a waiver, much of the Company’s debt would be in default and could become due and payable immediately. The Company’s assets may not be sufficient to repay in full this indebtedness, resulting in a need for an alternate source of funding. The Company cannot make any assurances that it would be able to obtain such an alternate source of funding on satisfactory terms, if at all, and its inability to do so could cause the holders of its securities to experience a partial or total loss of their investments in the Company.
The Company periodically reviews the carrying value of its goodwill for possible impairment; if future circumstances indicate that goodwill is impaired, the Company could be required to write down amounts of goodwill and record impairment charges.
In the fourth quarter of fiscal 2008, the Company reduced the carrying value of its goodwill from $9,125 million to $3,743 million and recorded a related non-cash impairment charge of $5,382 million. The Company continues to monitor relevant circumstances, including consumer spending levels, general economic conditions and the market prices for the Company’s common stock, and the potential impact that such circumstances might have on the valuation of the Company’s goodwill. It is possible that changes in such circumstances, or in the numerous variables associated with the judgments, assumptions and estimates made by the Company in assessing the appropriate valuation of its goodwill, could in the future require the Company to further reduce its goodwill and record related non-cash impairment charges. If the Company were required to further reduce its goodwill and record related non-cash impairment charges, the Company’s financial position and results of operations would be adversely affected.

6


The Company depends on its ability to attract and retain quality employees.
The Company’s business is dependent upon attracting and retaining quality employees. The Company has a large number of employees, many of whom are in entry level or part-time positions with historically high rates of turnover. The Company’s ability to meet its labor needs while controlling the costs associated with hiring and training new employees is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics. In addition, as a large and complex enterprise operating in a highly competitive and challenging business environment, the Company is highly dependent upon management personnel to develop and effectively execute successful business strategies and tactics. Any circumstances that adversely impact the Company’s ability to attract, train, develop and retain quality employees throughout the organization could negatively affect the Company’s business and results of operations.
The Company depends upon designers, vendors and other sources of merchandise, goods and services. The Company's business could be affected by disruptions in, or other legal, regulatory, political or economic issues associated with, our supply network.
The Company’s relationships with established and emerging designers have been a significant contributor to the Company’s past success. The Company’s ability to find qualified vendors and access products in a timely and efficient manner is often challenging, particularly with respect to goods sourced outside the United States. The Company’s procurement of goods and services from outside the United States is subject to risks associated with political or financial instability, trade restrictions, tariffs, currency exchange rates, transport capacity and costs and other factors relating to foreign trade, including costs and uncertainties associated with efforts to identify and disclose sources of "conflict minerals" used in products that the Company causes to be manufactured and potential sell-through difficulties and reputational damage that may be associated with the inability of the Company to determine that such products are "DRC conflict-free." In addition, the Company’s procurement of all its goods and services is subject to the effects of price increases which the Company may or may not be able to pass through to its customers. All of these factors may affect the Company’s ability to access suitable merchandise on acceptable terms, are beyond the Company’s control and could negatively affect the Company’s business and results of operations.
The Company's sales and operating results could be adversely affected by product safety concerns.
If the Company's merchandise offerings do not meet applicable safety standards or our consumers' expectations regarding safety, the Company could experience decreased sales, experience increased costs and/or be exposed to legal and reputational risk. Events that give rise to actual, potential or perceived product safety concerns could expose the Company to government enforcement action and/or private litigation. Reputational damage caused by real or perceived product safety concerns could negatively affect the Company's business and results of operations.
The Company depends upon the success of its advertising and marketing programs.
The Company’s advertising and promotional costs, net of cooperative advertising allowances, amounted to $1,181 million for 2012. The Company’s business depends on effective marketing and high customer traffic. The Company has many initiatives in this area, and often changes its advertising and marketing programs. There can be no assurance as to the Company’s continued ability to effectively execute its advertising and marketing programs, and any failure to do so could negatively affect the Company’s business and results of operations.
Parties with whom the Company does business may be subject to insolvency risks or may otherwise become unable or unwilling to perform their obligations to the Company.
The Company is a party to contracts, transactions and business relationships with various third parties, including vendors, suppliers, service providers, lenders and participants in joint ventures, strategic alliances and other joint commercial relationships, pursuant to which such third parties have performance, payment and other obligations to the Company. In some cases, the Company depends upon such third parties to provide essential leaseholds, products, services or other benefits, including with respect to store and distribution center locations, merchandise, advertising, software development and support, logistics, other agreements for goods and services in order to operate the Company’s business in the ordinary course, extensions of credit, credit card accounts and related receivables, and other vital matters. Current economic, industry and market conditions could result in increased risks to the Company associated with the potential financial distress or insolvency of such third parties. If any of these third parties were to become subject to bankruptcy, receivership or similar proceedings, the rights and benefits of the Company in relation to its contracts, transactions and business relationships with such third parties could be terminated, modified in a manner adverse to the Company, or otherwise impaired. The Company cannot make any assurances that it would be able to arrange for alternate or replacement contracts, transactions or business relationships on terms as favorable as the Company’s existing contracts, transactions or business relationships, if at all. Any inability on the part of the Company to do so could negatively affect the Company’s cash flows, financial condition and results of operations.

7


A material disruption in the Company’s computer systems could adversely affect the Company’s business or results of operations.
The Company relies extensively on its computer systems to process transactions, summarize results and manage its business. The Company’s computer systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyber-attack or other security breaches, catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes, acts of war or terrorism, and usage errors by the Company’s employees. If the Company’s computer systems are damaged or cease to function properly, the Company may have to make a significant investment to fix or replace them, and the Company may suffer loss of critical data and interruptions or delays in its operations. Any material interruption in the Company’s computer systems could negatively affect its business and results of operations.
A privacy breach could result in negative publicity and adversely affect the Company’s business or results of operations.
The protection of customer, employee, and company data is critical to the Company. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements across business units. In addition, customers have a high expectation that the Company will adequately protect their personal information from cyber-attack or other security breaches. A significant breach of customer, employee, or company data could attract a substantial amount of media attention, damage the Company’s customer relationships and reputation and result in lost sales, fines, or lawsuits.
Litigation, legislation or regulatory developments could adversely affect the Company’s business and results of operations.
The Company is subject to various federal, state and local laws, rules, regulations, inquiries and initiatives in connection with both its core business operations and its credit card and other ancillary operations (including the Credit Card Act of 2009 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”)). Recent and future developments relating to such matters could increase the Company's compliance costs and adversely affect the profitability of its credit card and other operations. The Company is also subject to customs, child labor, truth-in-advertising and other laws, including consumer protection regulations and zoning and occupancy ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise and the operation of retail stores and warehouse facilities. Although the Company undertakes to monitor changes in these laws, if these laws change without the Company's knowledge, or are violated by importers, designers, manufacturers or distributors, the Company could experience delays in shipments and receipt of goods or be subject to fines or other penalties under the controlling regulations, any of which could negatively affect the Company's business and results of operations. In addition, the Company is regularly involved in various litigation matters that arise in the ordinary course of its business. Adverse outcomes in current or future litigation could negatively affect the Company’s financial condition, results of operations and cash flows.
Factors beyond the Company’s control could affect the Company’s stock price.
The Company’s stock price, like that of other retail companies, is subject to significant volatility because of many factors, including factors beyond the control of the Company. These factors may include:
general economic and stock and credit market conditions;
risks relating to the Company’s business and its industry, including those discussed above;
strategic actions by the Company or its competitors;
variations in the Company’s quarterly results of operations;
future sales or purchases of the Company’s common stock; and
investor perceptions of the investment opportunity associated with the Company’s common stock relative to other investment alternatives.
In addition, the Company may fail to meet the expectations of its stockholders or of analysts at some time in the future. If the analysts that regularly follow the Company’s stock lower their rating or lower their projections for future growth and financial performance, the Company’s stock price could decline. Also, sales of a substantial number of shares of the Company’s common stock in the public market or the appearance that these shares are available for sale could adversely affect the market price of the Company’s common stock.

Item 1B.
Unresolved Staff Comments.
None.
 

8


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 2, 2013, the operations of the Company included 841 stores in 45 states, the District of Columbia, Puerto Rico and Guam, comprising a total of approximately 150,600,000 square feet. Of such stores, 462 were owned, 269 were leased and 110 stores were operated under arrangements where the Company owned the building and leased the land. Substantially 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.
Additional information about the Company’s stores as of February 2, 2013 is as follows:
 
Geographic Region
 
Total
Stores
 
Owned
Stores
 
Leased
Stores
 
Stores
Subject to
a Ground
Lease
Mid-Atlantic
 
105

 
55

 
33

 
17

Midwest
 
94

 
56

 
27

 
11

North
 
82

 
64

 
14

 
4

Northeast
 
106

 
55

 
42

 
9

Northwest
 
128

 
39

 
71

 
18

South Central
 
103

 
76

 
18

 
9

Southeast
 
110

 
72

 
18

 
20

Southwest
 
113

 
45

 
46

 
22

 
 
841

 
462

 
269

 
110


The eight 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. Store count activity was as follows:
 
 
2012
 
2011
 
2010
Store count at beginning of fiscal year
842

 
850

 
850

Stores opened and other expansions
7

 
4

 
7

Stores closed
(8
)
 
(12
)
 
(7
)
Store count at end of fiscal year
841

 
842

 
850



9


 Additional information about the Company’s logistics network as of February 2, 2013 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
 
600

Hayward, CA
 
Stores
 
Owned
 
386

Houston, TX
 
Stores
 
Owned
 
1,453

Joppa, MD
 
Stores
 
Owned
 
850

Kapolei, HI
 
Stores
 
Owned
 
260

Los Angeles, CA
 
Stores
 
Owned
 
1,178

Martinsburg, WV
 
Direct to customer
 
Owned
 
1,300

Miami, FL
 
Stores
 
Leased
 
535

Portland, TN
 
Direct to customer
 
Owned
 
950

Raritan, NJ
 
Stores
 
Owned
 
560

Sacramento, CA
 
Direct to customer
 
Leased
 
96

Secaucus, NJ
 
Stores
 
Leased
 
675

South Windsor, CT
 
Stores
 
Owned
 
668

St. Louis, MO
 
Stores
 
Owned
 
661

Stone Mountain, GA
 
Stores
 
Owned
 
1,000

Tampa, FL
 
Stores
 
Owned
 
670

Tukwila, WA
 
Stores
 
Leased
 
500

Youngstown, OH
 
Stores
 
Owned
 
851



Item 3.
Legal Proceedings.
On October 3, 2007, Ebrahim Shanehchian, an alleged participant in the Macy’s, Inc. Profit Sharing 401(k) Investment Plan (the “401(k) Plan”), filed a lawsuit in the United States District Court for the Southern District of Ohio on behalf of persons who participated in the 401(k) Plan and The May Department Stores Company Profit Sharing Plan (the “May Plan”) between February 27, 2005 and the present. The lawsuit has been conditionally certified as a class action. The complaint alleges that the Company, as well as members of the Company’s board of directors and certain members of senior management, breached various fiduciary duties owed under the Employee Retirement Income Security Act (“ERISA”) to participants in the 401(k) Plan and the May Plan, by making false and misleading statements regarding the Company’s business, operations and prospects in relation to the integration of the acquired May operations, resulting in supposed “artificial inflation” of the Company’s stock price and “imprudent investment” by the 401(k) Plan and the May Plan in Macy’s stock. The plaintiff seeks an unspecified amount of compensatory damages and costs. The parties have reached an agreement to settle the matter, subject to the court's final approval of the settlement terms.
The Company and its subsidiaries are also 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.
 
Item 4.
Mine Safety Disclosures.

Not Applicable.

10


PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Common Stock is listed on the NYSE under the trading symbol “M.” As of February 2, 2013, the Company had approximately 20,000 stockholders of record. The following table sets forth for each fiscal quarter during 2012 and 2011 the high and low sales prices per share of Common Stock as reported on the NYSE Composite Tape and the dividend declared with respect to each fiscal quarter on each share of Common Stock.
 
 
2012
 
2011
 
Low
 
High
 
Dividend
 
Low
 
High
 
Dividend
1st Quarter
33.18

 
41.50

 
0.2000

 
21.69

 
25.99

 
0.0500

2nd Quarter
32.31

 
42.17

 
0.2000

 
23.98

 
30.62

 
0.1000

3rd Quarter
34.89

 
41.24

 
0.2000

 
22.66

 
32.35

 
0.1000

4th Quarter
36.30

 
41.98

 
0.2000

 
28.69

 
35.92

 
0.1000


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 2012.
 
 
Total
Number
of Shares
Purchased
 
Average
Price per
Share ($)
 
Number of Shares
Purchased under
Program (1)
 
Open
Authorization
Remaining (1)($)
 
(thousands)
 
 
 
(thousands)
 
(millions)
October 28, 2012 – November 24, 2012
1,144

 
39.55

 
1,144

 
315

November 25, 2012 – December 29, 2012
6,823

 
38.46

 
6,823

 
1,553

December 30, 2012 – February 2, 2013
1,349

 
37.80

 
1,349

 
1,502

 
9,316

 
38.50

 
9,316

 
 
 ___________________
(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 $12,000 million of Common Stock. All authorizations are cumulative and do not have an expiration date. As of February 2, 2013, $1,502 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.

11


The following graph compares the cumulative total stockholder return on the Common Stock with the Standard & Poor’s 500 Composite Index and the Standard & Poor’s Retail Department Store Index for the period from February 2, 2008 through February 2, 2013, assuming an initial investment of $100 and the reinvestment of all dividends, if any.

The companies included in the S&P Retail Department Store Index are Macy’s, J.C. Penney, Kohl’s and Nordstrom.


12


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.
 
 
2012*
 
2011
 
2010
 
2009
 
2008
 
(millions, except per share)
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
27,686

 
$
26,405

 
$
25,003

 
$
23,489

 
$
24,892

Cost of sales
(16,538
)
 
(15,738
)
 
(14,824
)
 
(13,973
)
 
(15,009
)
Gross margin
11,148

 
10,667

 
10,179

 
9,516

 
9,883

Selling, general and administrative expenses
(8,482
)
 
(8,281
)
 
(8,260
)
 
(8,062
)
 
(8,481
)
Impairments, store closing costs, gain on sale of leases
and division consolidation costs
(5
)
 
25

 
(25
)
 
(391
)
 
(398
)
Goodwill impairment charges

 

 

 

 
(5,382
)
Operating income (loss)
2,661

 
2,411

 
1,894

 
1,063

 
(4,378
)
Interest expense
(425
)
 
(447
)
 
(513
)
 
(562
)
 
(588
)
Premium on early retirement of debt
(137
)
 

 
(66
)
 

 

Interest income
3

 
4

 
5

 
6

 
28

Income (loss) before income taxes
2,102

 
1,968

 
1,320

 
507

 
(4,938
)
Federal, state and local income tax benefit (expense)
(767
)
 
(712
)
 
(473
)
 
(178
)
 
163

Net income (loss)
$
1,335

 
$
1,256

 
$
847

 
$
329

 
$
(4,775
)
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
3.29

 
$
2.96

 
$
2.00

 
$
0.78

 
$
(11.34
)
Diluted earnings (loss) per share
$
3.24

 
$
2.92

 
$
1.98

 
$
0.78

 
$
(11.34
)
Average number of shares outstanding
405.5

 
424.5

 
423.3

 
421.7

 
421.2

Cash dividends paid per share
$
.8000

 
$
.3500

 
$
.2000

 
$
.2000

 
$
.5275

Depreciation and amortization
$
1,049

 
$
1,085

 
$
1,150

 
$
1,210

 
$
1,278

Capital expenditures
$
942

 
$
764

 
$
505

 
$
460

 
$
897

Balance Sheet Data (at year end):
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,836

 
$
2,827

 
$
1,464

 
$
1,686

 
$
1,385

Total assets
20,991

 
22,095

 
20,631

 
21,300

 
22,145

Short-term debt
124

 
1,103

 
454

 
242

 
966

Long-term debt
6,806

 
6,655

 
6,971

 
8,456

 
8,733

Shareholders’ equity
6,051

 
5,933

 
5,530

 
4,653

 
4,620

 ___________________
*
53 weeks






13


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 our 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 and websites under two brands (Macy's and Bloomingdale's) 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 in 45 states, the District of Columbia, Guam and Puerto Rico. As of February 2, 2013, the Company's operations were conducted through Macy's, macys.com, Bloomingdale's, bloomingdales.com and Bloomingdale's Outlet 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 is focused on three key strategies for continued growth in sales, earnings and cash flow in the years ahead: (i) maximizing the My Macy's localization initiative; (ii) driving the omnichannel business; and (iii) embracing customer centricity, including engaging customers on the selling floor through the MAGIC Selling program.
Through the My Macy's localization initiative, the Company has invested in talent, technology and marketing which ensures that core customers surrounding each Macy's store find merchandise assortments, size ranges, marketing programs and shopping experiences that are custom-tailored to their needs. My Macy's has provided for more local decision-making in every Macy's community, and involves tailoring merchandise assortments, space allocations, service levels, visual merchandising, marketing and special events on a store-by-store basis.
The Company's omnichannel strategy allows customers to shop seamlessly in stores, online and via mobile devices. A pivotal part of the omnichannel strategy is the Company's ability to allow associates in any store to sell a product that may be unavailable locally by selecting merchandise from other stores or online fulfillment centers for shipment to the customer's door. Likewise, the Company's online fulfillment centers can draw on store inventories nationwide to fill orders that originate on the Internet or via mobile devices. As of February 2, 2013, 292 Macy's stores were fulfilling orders from other stores and/or from the Internet and mobile devices, as compared to 23 Macy's stores as of January 28, 2012. By the end of fiscal 2013, approximately 500 Macy's stores are expected to be fulfilling orders from other stores and/or from the Internet and mobile devices.
Macy's MAGIC Selling program is an approach to customer engagement that helps Macy's to better understand the needs of customers, as well as to provide options and advice. This comprehensive ongoing training and coaching program is designed to improve the in-store shopping experience.
In fiscal 2010, the Company piloted a new Bloomingdale's Outlet store concept. Bloomingdale's Outlet stores are each approximately 25,000 square feet and offer a range of apparel and accessories, including women's ready-to-wear, men's, children's, women's shoes, fashion accessories, jewelry, handbags and intimate apparel.
Additionally, in February 2010, Bloomingdale's opened in Dubai, United Arab Emirates under a license agreement with Al Tayer Insignia, a company of Al Tayer Group, LLC, under which the Company is entitled to a license fee in accordance with the terms of the underlying agreement, generally based upon the greater of the contractually earned or guaranteed minimum amounts.
During 2011, the Company opened three new Bloomingdale's Outlet stores and re-opened one Macy's store that had been closed in 2010 due to flood damage. During 2012, the Company opened two new Macy's stores in Salt Lake City, UT; and Greendale, WI; and five new Bloomingdale's Outlet stores in Livermore, CA, Merrimack, NH; Garden City, NY; Grand Prairie, TX; and Dallas, TX. Also during 2012 the Company opened its new 1.3 million square foot fulfillment center in Martinsburg, WV. The Company has announced that in 2013 it intends to open three new Macy's stores; a Macy's replacement store; a new Bloomingdale's store; and a Bloomingdale's Outlet store. In addition, 2014 will include three new Macy's stores; and a Bloomingdale's replacement store.

14


The Company's operations are impacted by competitive pressures from department stores, specialty stores, mass merchandisers, Internet websites 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, a slowly improving housing market, a rising stock market, uncertainty regarding governmental spending and tax policies, high unemployment levels and tightened consumer credit. 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.
The effects of economic conditions have been, and may continue to be, experienced differently, or 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 the Company's Macy's-branded and Bloomingdale's-branded operations. All economic conditions, however, ultimately affect the Company's overall operations.
2012 Highlights
The Company had its fourth consecutive year of improved financial performance in 2012 despite the continued challenging macroeconomic environment and high level of unemployment. These improvements have been driven by successful implementation of the Company's key strategies.
Selected highlights of 2012 include:
Comparable sales increased 3.7% which represents the third consecutive year of comparable sales growth in excess of 3.5%.
Operating income for fiscal 2012 was $2.666 billion or 9.6% of sales, excluding impairments, store closing costs and gain on sale of leases, an increase of 12% and 60 basis points as a percent of sales over 2011 on a comparable basis. See pages 16 to 18 for a reconciliation of this non-GAAP financial measure to the most comparable GAAP financial measure and other important information.
Diluted earnings per share, excluding certain items, grew 20% to $3.46 in 2012. See pages 16 to 18 for a reconciliation of this non-GAAP financial measure to the most comparable GAAP financial measure and other important information.
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, excluding premium on early retirement of debt and impairments, store closing costs and gain on sale of leases) as a percent to net sales reached 13.4% in 2012, reflecting steady improvement toward the Company's goal of a 14% Adjusted EBITDA rate. See pages 16 to 18 for a reconciliation of this non-GAAP financial measure to the most comparable GAAP financial measure and other important information.
Return on invested capital ("ROIC") a key measure of operating productivity, reached 21.2%, continuing an improvement trend over the past four years. See pages 16 to 18 for a reconciliation of this non-GAAP financial measure to the most comparable GAAP financial measure and other important information.
The Company repurchased 35.6 million shares of its common stock for $1,350 million in 2012, and doubled its annualized dividend rate to 80 cents per share.


15


Important Information Regarding Non-GAAP Financial Measures
The Company reports its financial results in accordance with generally accepted accounting principles ("GAAP"). However, management believes that certain non-GAAP financial measures provide users of the Company's financial information with additional useful information in evaluating operating performance. In particular, management believes that excluding certain items that may vary substantially in frequency and magnitude from diluted earnings per share and from operating income and EBITDA as percentages to sales are useful supplemental measures that assist in evaluating the Company's ability to generate earnings and leverage sales, respectively, and to more readily compare these metrics between past and future periods. Management also believes that EBITDA and adjusted EBITDA are frequently used by investors and securities analysts in their evaluations of companies, and that such supplemental measures facilitate comparisons between companies that have different capital and financing structures and/or tax rates. In addition, management believes that ROIC is a useful supplemental measure in evaluating how efficiently the Company employs its capital. The Company uses Adjusted EBITDA as a percent to net sales (with sales excluding certain items for this purpose) and ROIC as performance measures for certain components of executive compensation.
Non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, the Company's financial results prepared in accordance with GAAP. Certain of the items that may be excluded or included in non-GAAP financial measures may be significant items that could impact the Company's financial position, results of operations and cash flows and should therefore be considered in assessing the Company's actual financial condition and performance. 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.
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.
 
 
2012
 
2011
 
2010
 
2009
 
 
(millions, except percentages)
Net sales
 
$
27,686

 
$
26,405

 
$
25,003

 
$
23,489

 
 
 
 
 
 
 
 
 
Operating income
 
$
2,661

 
$
2,411

 
$
1,894

 
$
1,063

 
 
 
 
 
 
 
 
 
Operating income as a percent to net sales
 
9.6
%
 
9.1
%
 
7.6
%
 
4.5
%
 
 
 
 
 
 
 
 
 
Operating income
 
$
2,661

 
$
2,411

 
$
1,894

 
$
1,063

Add back (deduct) impairments, store closing costs,
gain on sale of leases and division consolidation costs
 
5

 
(25
)
 
25

 
391

Operating income, excluding certain items
 
$
2,666

 
$
2,386

 
$
1,919

 
$
1,454

Operating income, excluding certain items, as a percent to net sales
 
9.6
%
 
9.0
%
 
7.7
%
 
6.2
%
Diluted Earnings Per Share, Excluding Certain Items
The following is a tabular reconciliation of the non-GAAP financial measure diluted earnings per share, excluding certain items, to GAAP diluted earnings per share, which the Company believes to be the most directly comparable GAAP measure.
 
 
2012
 
2011
 
2010
 
2009
Diluted earnings per share
 
$
3.24

 
$
2.92

 
$
1.98

 
$
0.78

Add back the impact of premium on early retirement of debt
 
0.21

 

 
0.09

 

Deduct the impact of gain on sale of leases
 

 
(0.08
)
 

 

Add back the impact of impairments and store closing costs
 
0.01

 
0.04

 
0.04

 
0.18

Add back the impact of division consolidation costs
 

 

 

 
0.40

Diluted earnings per share, excluding the impact of premium on
early retirement of debt, impairments, store closing costs, gain
on sale of leases and division consolidation costs
 
$
3.46

 
$
2.88

 
$
2.11

 
$
1.36



16


Adjusted EBITDA as a Percent to Net Sales
The following is a tabular reconciliation of the non-GAAP financial measure earnings before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted to exclude premium on early retirement of debt and impairments, store closing costs and gain on sales of leases ("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.
 
 
2012
 
2011
 
2010
 
2009
 
 
(millions, except percentages)
Net sales
 
$
27,686

 
$
26,405

 
$
25,003

 
$
23,489

 
 
 
 
 
 
 
 
 
Net income
 
$
1,335

 
$
1,256

 
$
847

 
$
329

 
 
 
 
 
 
 
 
 
Net income as a percent to net sales
 
4.8
%
 
4.8
%
 
3.4
%
 
1.4
%
 
 
 
 
 
 
 
 
 
Net income
 
$
1,335

 
$
1,256

 
$
847

 
$
329

Add back interest expense - net
 
422

 
443

 
508

 
556

Add back premium on early retirement of debt
 
137

 

 
66

 

Add back federal, state and local income tax expense
 
767

 
712

 
473

 
178

Add back (deduct) impairments, store closing costs,
gain on sale of leases and division consolidation costs
 
5

 
(25
)
 
25

 
391

Add back depreciation and amortization
 
1,049

 
1,085

 
1,150

 
1,210

Adjusted EBITDA
 
$
3,715

 
$
3,471

 
$
3,069

 
$
2,664

Adjusted EBITDA as a percent to net sales
 
13.4
%
 
13.1
%
 
12.3
%
 
11.3
%


17


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 previous year 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 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.
 
 
2012
 
2011
 
2010
 
2009
 
 
(millions, except percentages)
Operating income
 
$
2,661

 
$
2,411

 
$
1,894

 
$
1,063

 
 
 
 
 
 
 
 
 
Property and equipment - net
 
$
8,308

 
$
8,617

 
$
9,160

 
$
9,975

 
 
 
 
 
 
 
 
 
Operating income as a percent to property and equipment - net
 
32.0
%
 
28.0
%
 
20.7
%
 
10.7
%
 
 
 
 
 
 
 
 
 
Operating income
 
$
2,661

 
$
2,411

 
$
1,894

 
$
1,063

Add back (deduct) impairments, store closing costs,
gain on sale of leases and division consolidation costs
 
5

 
(25
)
 
25

 
391

Add back depreciation and amortization
 
1,049

 
1,085

 
1,150

 
1,210

Add back rent expense, net
 
 
 
 
 
 
 
 
Real estate
 
258

 
243

 
235

 
229

Personal property
 
11

 
10

 
10

 
12

Deferred rent amortization
 
7

 
8

 
7

 
7

Adjusted operating income
 
$
3,991

 
$
3,732

 
$
3,321

 
$
2,912

 
 
 
 
 
 
 
 
 
Property and equipment - net
 
$
8,308

 
$
8,617

 
$
9,160

 
$
9,975

Add back accumulated depreciation and amortization
 
5,967

 
6,018

 
5,916

 
5,620

Add capitalized value of non-capitalized leases
 
2,208

 
2,088

 
2,016

 
1,984

Add (deduct) other selected assets and liabilities:
 
 
 
 
 
 
 
 
Receivables
 
322

 
294

 
317

 
305

Merchandise inventories
 
5,754

 
5,596

 
5,211

 
5,170

Prepaid expenses and other current assets
 
390

 
409

 
283

 
231

Other assets
 
579

 
528

 
526

 
497

Merchandise accounts payable
 
(2,362
)
 
(2,314
)
 
(2,085
)
 
(1,978
)
Accounts payable and accrued liabilities
 
(2,333
)
 
(2,309
)
 
(2,274
)
 
(2,320
)
Total average invested capital
 
$
18,833

 
$
18,927

 
$
19,070

 
$
19,484

 
 
 
 
 
 
 
 
 
ROIC
 
21.2
%
 
19.7
%
 
17.4
%
 
14.9
%



18


Results of Operations
 
 
2012 *
 
 
2011
 
 
2010
 
 
 
 
Amount
 
% to Sales
 
 
Amount
 
% to Sales
 
 
Amount
 
% to Sales
 
 
 
 
(dollars in millions, except per share figures)
 
 
Net sales
 
$
27,686

 
 
 
 
$
26,405

 
 
 
 
$
25,003

 
 
 
 
Increase in sales
 
4.9

%
 
 
5.6

%
 
 
 
 
 
 
 
Increase in comparable sales
 
3.7

%
 
 
5.3

%
 
 
 
 
 
 
 
Cost of sales
 
(16,538
)
 
(59.7
)
%
(15,738
)
 
(59.6
)
%
(14,824
)
 
(59.3
)
%
 
Gross margin
 
11,148

 
40.3

%
10,667

 
40.4

%
10,179

 
40.7

%
 
Selling, general and administrative expenses
 
(8,482
)
 
(30.7
)
%
(8,281
)
 
(31.4
)
%
(8,260
)
 
(33.0
)
%
 
Impairments, store closing costs and
gain on sale of leases
 
(5
)
 

%
25

 
0.1

%
(25
)
 
(0.1
)
%
 
Operating income
 
2,661

 
9.6

%
2,411

 
9.1

%
1,894

 
7.6

%
 
Interest expense - net
 
(422
)
 
 
 
 
(443
)
 
 
 
 
(508
)
 
 
 
 
Premium on early retirement of debt
 
(137
)
 
 
 
 

 
 
 
 
(66
)
 
 
 
 
Income before income taxes
 
2,102

 
 
 
 
1,968

 
 
 
 
1,320

 
 
 
 
Federal, state and local income tax expense
 
(767
)
 
 
 
 
(712
)
 
 
 
 
(473
)
 
 
 
 
Net income
 
$
1,335

 
4.8

%
$
1,256

 
4.8

%
$
847

 
3.4

%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
3.24

 
 
 
 
$
2.92

 
 
 
 
$
1.98

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental Non-GAAP Financial Measures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income, excluding certain items
 
$
2,666

 
9.6

%
$
2,386

 
9.0

%
$
1,919

 
7.7

%
 
Diluted earnings per share, excluding certain items
 
$
3.46

 
 
 
 
$
2.88

 
 
 
 
$
2.11

 
 
 
Adjusted EBITDA as a percent to net sales
 
13.4

%
 
 
13.1

%
 
 
12.3

%
 
 
ROIC
 
21.2

%
 
 
19.7

%
 
 
17.4

%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See pages 16 to 18 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
 
841

 
 
 
 
842

 
 
 
 
850

 
 
 
 
Square footage (in millions)
 
150.6

 
 
 
 
151.9

 
 
 
 
154.2

 
 
 
 
 ___________________
 *    53 weeks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


19


Comparison of 2012 and 2011
Net Income
Net income for 2012 increased compared to 2011, reflecting the benefits of the key strategies at Macy's, the continued strong performance at Bloomingdale's, higher income from credit operations, and the 53rd week in 2012.
Net Sales
Net sales for 2012 increased $1,281 million or 4.9% compared to 2011. On a comparable basis, net sales for 2012 were up 3.7% compared to 2011. Sales from the Company's Internet businesses in 2012 increased 41.0% on a comparable basis to 2011 and positively affected the Company's 2012 comparable sales by 2.2%. The Company continues to benefit from the successful execution of the My Macy's localization, Omnichannel and MAGIC Selling strategies. Geographically, sales in 2012 were strongest in the southern regions as well as some markets in other parts of the country such as Western New York, Oregon and Colorado. By family of business, sales in 2012 were strongest in watches, handbags, cosmetics, textiles, furniture and mattresses. Sales of the Company's private label brands continued to be strong with particular growth coming from millennial, classic apparel and home textile brands. Sales of the Company's private label brands represented approximately 20% of net sales in the Macy's-branded stores in 2012. Sales in 2012 were less strong in juniors. The Company calculates comparable sales as sales from stores in operation throughout 2011 and 2012 and all net Internet sales, adjusting for the 53rd week in 2012. Stores undergoing remodeling, expansion or relocation remain in the comparable sales calculation unless the store is closed for a significant period of time. Definitions and calculations of comparable sales differ among companies in the retail industry.
Cost of Sales
Cost of sales for 2012 increased $800 million from 2011. The cost of sales rate as a percent to net sales was higher in 2012, as compared to 2011, primarily due to growth of the omnichannel businesses and the resulting impact of free shipping. The application of the last-in, first-out (LIFO) retail inventory method did not result in the recognition of any LIFO charges or credits affecting cost of sales in either period.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses for 2012 increased $201 million from 2011. The SG&A rate as a percent to net sales was 70 basis points lower in 2012, as compared to 2011, reflecting increased net sales. SG&A expenses in 2012 were impacted by higher selling costs as a result of stronger sales, higher retirement expenses (including Pension Plan, SERP and 401(k) expenses), and greater investments in the Company's omnichannel operations, partially offset by higher income from credit operations and lower depreciation and amortization expense. Retirement expenses were $232 million in 2012 as compared to $160 million in 2011, primarily due to the lower discount rate. Advertising expense, net of cooperative advertising allowances, was $1,181 million for 2012 compared to $1,136 million for 2011. Advertising expense, net of cooperative advertising allowances, as a percent to net sales was 4.3% for both 2012 and 2011. Income from credit operations was $663 million in 2012 as compared to $582 million in 2011. Depreciation and amortization expense was $1,049 million for 2012, compared to $1,085 million for 2011.
Impairments, Store Closing Costs and Gain on Sale of Leases
Impairments, store closing costs and gain on sale of leases for 2012 includes $4 million of asset impairment charges primarily related to the store closings announced in January 2013 and $1 million of other costs and expenses primarily related to the announced store closings. Impairments, store closing costs and gain on sale of leases for 2011 included a $54 million gain from the sale of store leases related to the 2006 divestiture of Lord & Taylor, partially offset by $22 million of asset impairment charges primarily related to the store closings announced in January 2012 and $7 million of other costs and expenses primarily related to the announced store closings.
Net Interest Expense
Net interest expense for 2012 decreased $21 million from 2011. Net interest expense for 2012 benefited from lower levels of borrowings and lower rates on outstanding borrowings as compared to 2011.

20


Premium on Early Retirement of Debt
On November 28, 2012, the Company repurchased $700 million aggregate principal amount of its outstanding senior unsecured notes, which had a net book value of $706 million. The repurchased senior unsecured notes had stated interest rates ranging from 5.9% to 7.875% and maturities in 2015 and 2016. The Company recorded the redemption premium and other costs related to these repurchases as additional interest expense of $133 million in 2012. On March 29, 2012, the Company redeemed the $173 million of 8.0% senior debentures due July 15, 2012, as allowed under the terms of the indenture. The price for the redemption was calculated pursuant to the indenture and resulted in the recognition of additional interest expense of $4 million in 2012. The additional interest expense resulting from these transactions is presented as premium on early retirement of debt on the Consolidated Statements of Income.
 
Effective Tax Rate
The Company's effective tax rate of 36.5% for 2012 and 36.2% for 2011 differ from the federal income tax statutory rate of 35%, and on a comparative basis, principally because of the effect of state and local income taxes, including the settlement of various tax issues and tax examinations.
Comparison of 2011 and 2010
Net Income
Net income for 2011 increased compared to net income for 2010, reflecting the benefits of the key strategies at Macy's, the continued strong performance at Bloomingdale's and higher income from credit operations.
Net Sales
Net sales for 2011 increased $1,402 million or 5.6% compared to 2010. On a comparable basis, net sales for 2011 were up 5.3% compared to 2010. Sales from the Company's Internet businesses in 2011 increased 39.6% compared to 2010 and positively affected the Company's 2011 comparable sales by 1.5%. The Company continued to benefit from the successful execution of the My Macy's localization, Omnichannel and MAGIC Selling strategies. Geographically, sales in 2011 were strongest in the southern regions. By family of business, sales in 2011 were strongest in cosmetics and fragrances, handbags, watches, men's, home textiles and furniture. Sales of the Company's private label brands continued to be strong and represented approximately 20% of net sales in the Macy's-branded stores in 2011. Sales in 2011 were less strong in women's traditional casual apparel, juniors and cold weather merchandise. The Company calculates comparable sales as sales from stores in operation throughout 2010 and 2011 and all net Internet sales. Stores undergoing remodeling, expansion or relocation remain in the comparable sales calculation unless the store is closed for a significant period of time. Definitions and calculations of comparable sales differ among companies in the retail industry.
Cost of Sales
Cost of sales for 2011 increased $914 million compared to 2010. The cost of sales rate as a percent to net sales was higher in 2011, as compared to 2010, primarily due to the expansion of free shipping on macys.com and in stores since the fourth quarter of 2010. The application of the last-in, first-out (LIFO) retail inventory method did not result in the recognition of any LIFO charges or credits affecting cost of sales in either period.
SG&A Expenses
SG&A expenses for 2011 increased $21 million compared to 2010. The SG&A rate as a percent to net sales was 160 basis points lower in 2011, as compared to 2010, reflecting increased net sales. SG&A expenses in 2011 were impacted by higher selling costs as a result of stronger sales, higher advertising expense, and greater investments in the Company's omnichannel operations, partially offset by higher income from credit operations and lower depreciation and amortization expense. Advertising expense, net of cooperative advertising allowances, was $1,136 million for 2011 compared to $1,072 million for 2010. Advertising expense, net of cooperative advertising allowances, as a percent to net sales was 4.3% for both 2011 and 2010. Income from credit operations was $582 million in 2011 as compared to $332 million in 2010. Depreciation and amortization expense was $1,085 million for 2011, compared to $1,150 million for 2010.
Impairments, Store Closing Costs and Gain on Sale of Leases
Impairments, store closing costs and gain on sale of leases for 2011 included a $54 million gain from the sale of store leases related to the 2006 divestiture of Lord & Taylor, partially offset by $22 million of asset impairment charges primarily related to the store closings announced in January 2012 and $7 million of other costs and expenses primarily related to the announced store closings. Impairments and store closing costs for 2010 amounted to $25 million and included $18 million of asset impairment charges primarily related to the store closings announced in January 2011 and $7 million of other costs and expenses primarily related to the announced store closings.

21


Net Interest Expense
Net interest expense for 2011 decreased $65 million compared to 2010. Net interest expense for 2011 benefited from lower levels of borrowings as compared to 2010, resulting from both the early retirement of outstanding debt during fiscal 2010 and the repayment of debt at maturity.
Premium on Early Retirement of Debt
Premium on early retirement of debt in 2010 included $66 million of expenses associated with the repurchase of $1,000 million indebtedness prior to maturity.
Effective Tax Rate
The Company's effective tax rate of 36.2% for 2011 and 35.8% for 2010 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.
Guidance
Based on its assessment of current and anticipated market conditions and its recent performance, the Company's 2013 assumptions include:
Comparable sales increase in 2013 of approximately 3.5% from 2012 levels;
Diluted earnings per share of $3.90 to $3.95;
Funding contribution to the Pension Plan of $150 million; and
Capital expenditures of approximately $925 million.
The Company's budgeted capital expenditures are primarily related to store remodels, maintenance, the renovation of Macy's Herald Square, technology and omnichannel investments, and distribution network improvements. The Company has announced that in 2013 it intends to open new Macy's stores in Victorville, CA, Gurnee, IL, and Las Vegas, NV, a Macy's replacement store in Bay Shore, NY, a new Bloomingdale's store in Glendale, CA, and a Bloomingdale's Outlet store in Rosemont, IL. In addition, 2014 will include new Macy's stores in the Bronx, NY, Sarasota, FL, Las Vegas, NV, and a Bloomingdale's replacement store in Palo Alto, CA. Management presently anticipates funding such expenditures with cash on hand and cash from operations.


22


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 $2,261 million in 2012 compared to $2,093 million in 2011, reflecting higher net income and a lower pension contribution in 2012. During 2012, the Company made a pension funding contribution totaling $150 million, compared to pension funding contributions made during 2011 of $375 million.
The Company is currently planning to make a pension funding contribution of approximately $150 million in 2013.
Investing Activities
Net cash used by investing activities for 2012 was $863 million, compared to net cash used by investing activities of $617 million for 2011. Investing activities for 2012 includes purchases of property and equipment totaling $698 million and capitalized software of $244 million, compared to purchases of property and equipment totaling $555 million and capitalized software of $209 million for 2011. Purchases of property and equipment during 2012 includes the purchase of two parcels of the Macy's flagship Union Square location in San Francisco and the first year of the planned four year renovation of Macy's Herald Square. Cash flows from investing activities included $66 million and $114 million from the disposition of property and equipment for 2012 and 2011, respectively.
During 2012, the Company opened two new Macy's stores and five new Bloomingdale's Outlet stores. Also during 2012 the Company opened its new 1.3 million square foot fulfillment center in Martinsburg, WV. During 2011, the Company opened three new Bloomingdale's Outlet stores and re-opened one Macy's store that had been closed in 2010 due to flood damage.
Financing Activities
Net cash used by the Company for financing activities was $2,389 million for 2012, including the acquisition of the Company's common stock under its share repurchase program at an approximate cost of $1,350 million, the repayment of $1,803 million of debt, the payment of $324 million of cash dividends and a decrease in outstanding checks of $88 million, partially offset by the issuance of $1,000 million of debt and the issuance of $234 million of common stock, primarily related to the exercise of stock options.
On November 28, 2012, the Company repurchased $700 million aggregate principal amount of its outstanding senior unsecured notes, which had a net book value of $706 million. The repurchased senior unsecured notes had stated interest rates ranging from 5.9% to 7.875% and maturities in 2015 and 2016. The Company recorded the redemption premium and other costs related to these repurchases as additional interest expense of $133 million in 2012. On March 29, 2012, the Company redeemed the $173 million of 8.0% senior debentures due July 15, 2012, as allowed under the terms of the indenture. The price for the redemption was calculated pursuant to the indenture and resulted in the recognition of additional interest expense of $4 million in 2012. On November 20, 2012, the Company issued $750 million aggregate principal amount of 2.875% senior unsecured notes due 2023 and $250 million aggregate principal amount of 4.3% senior unsecured notes due 2043. This debt was used to pay for the notes repurchased on November 28, 2012 described above, and to retire $298 million of 5.875% senior unsecured notes that matured in January 2013. The debt repaid in 2012 also includes $616 million of 5.35% senior notes at maturity. Through these transactions, the Company has improved its debt maturity profile, decreased its ongoing interest expense by taking advantage of the current low interest rate environment and reduced its refinancing and interest rate risk over the next few years. The favorable impact of these transactions on the Company's annual interest expense is approximately $30 million on a full year basis.
Net cash used by the Company for financing activities was $113 million for 2011 and included the acquisition of the Company's common stock under its share repurchase program at an approximate cost of $500 million, the repayment of $454 million of debt and the payment of $148 million of cash dividends, partially offset by the issuance of $800 million of debt, the issuance of $162 million of common stock, primarily related to the exercise of stock options, and an increase in outstanding checks of $49 million. The debt issued during 2011 included $550 million of 3.875% senior notes due 2022 and $250 million of 5.125% senior notes due 2042, the proceeds of which were used to retire indebtedness maturing during the first half of 2012. The debt repaid during 2011 included $330 million of 6.625% senior notes due April 1, 2011 and $109 million of 7.45% senior debentures due September 15, 2011.

23


The Company is a party to a credit agreement with certain financial institutions providing for revolving credit borrowings and letters of credit in an aggregate amount not to exceed $1,500 million (which amount 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. The agreement is set to expire June 20, 2015. As of February 2, 2013 and throughout all of 2012, the Company had no borrowings outstanding under its credit agreement.
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 2012 was 8.41 and its leverage ratio at February 2, 2013 was 1.81, in each case as calculated in accordance with the credit agreement. The interest coverage ratio is defined as EBITDA over net interest expense and the leverage ratio is defined as debt over 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 $400 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 2, 2013, no notes or debentures contain provisions requiring acceleration of payment upon a debt rating downgrade. However, the terms of approximately $3,300 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.
As a result of upgrades of the notes by specified rating agencies, the rate of interest payable in respect of $407 million in aggregate principal amount of the Company's senior notes outstanding at February 2, 2013 decreased by .25 percent per annum to 8.125% effective in May 2011 and decreased by .25 percent per annum to 7.875%, its stated interest rate, effective in January 2012. The rate of interest payable in respect of these senior notes outstanding at February 2, 2013 could increase by up to 2.0 percent per annum from its current level in the event of one or more downgrades of the notes by specified rating agencies.
The Company's board of directors approved additional authorizations to purchase Common Stock of $1,000 million on January 5, 2012 and $1,500 million on December 7, 2012. During 2012, the Company repurchased approximately 35.6 million shares of its common stock for a total of $1,350 million. As of February 2, 2013, the Company had $1,502 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 22, 2013, the Company's board of directors declared a quarterly dividend of 20 cents per share on its common stock, payable April 1, 2013 to Macy's shareholders of record at the close of business on March 15, 2013.

24


Contractual Obligations and Commitments
At February 2, 2013, 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
$
121

 
$
121

 
$

 
$

 
$

Long-term debt
6,583

 

 
942

 
948

 
4,693

Interest on debt
5,127

 
394

 
729

 
606

 
3,398

Capital lease obligations
67

 
5

 
7

 
6

 
49

Operating leases
2,714

 
257

 
460

 
348

 
1,649

Letters of credit
34

 
34

 

 

 

Other obligations
3,942

 
2,342

 
493

 
339

 
768

 
$
18,588

 
$
3,153

 
$
2,631

 
$
2,247

 
$
10,557


“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 $127 million of long-term liabilities for unrecognized tax benefits for various tax positions taken or $27 million of related accrued federal, state and local interest and penalties. These liabilities may increase or decrease over time as a result of tax examinations, and given the status of examinations, the Company cannot reliably estimate the period of any cash settlement with the respective taxing authorities. The Company has included in the contractual obligations table $20 million of liabilities for unrecognized tax benefits that the Company expects to settle in cash in the next year. The Company has not included in the contractual obligation table the