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Fiscal 2007
Comparison of the 52 Weeks Ended February 2, 2008 and the 53 Weeks
Ended February 3, 2007.
Net income for 2007 decreased to $893 million compared to $995
million for 2006. The net income for 2007 includes income from
continuing operations of $909 million and a loss from discontinued
operations of $16 million. The income from continuing operations
in 2007 includes the impact of $219 million of May integration
costs. The loss from discontinued operations in 2007 includes the
loss on disposal of the After Hours Formalwear business. The net
income for 2006 included income from continuing operations
of $988 million and income from discontinued operations of $7
million. The income from continuing operations in 2006 included
the impact of $628 million of May integration costs and the impact
of $191 million of gains on the sale of accounts receivable. The
income from discontinued operations for 2006 included the loss on
disposal of the Lord & Taylor division and the loss on disposal of the
David's Bridal and Priscilla of Boston businesses.
Net Sales
Net sales for 2007 totaled $26,313 million, compared to net sales
of $26,970 million for 2006, a decrease of $657 million or 2.4%. On
a comparable store basis (sales from Bloomingdale's and Macy's
stores in operation throughout 2006 and 2007 and all Internet sales
and mail order sales from continuing businesses and adjusting
for the impact of the 53rd week in 2006), net sales decreased
1.3% in 2007 compared to 2006. Sales in 2007 were strongest at
Bloomingdale's and macys.com. Sales of the Company's private
label brands in total outperformed the national brands for 2007
and increased to approximately 19% of net sales in Macy's-branded
stores. By family of business, sales in 2007 were strongest
in handbags, young men's apparel, coats, watches, luggage
and mattresses. The weaker business during 2007 was ladies'
sportswear.
Cost of Sales
Cost of sales was $15,677 million or 59.6% of net sales for 2007,
compared to $16,019 million or 59.4% of net sales for 2006, a
decrease of $342 million. The cost of sales rate for 2007 reflects
higher net markdowns as a percent of net sales intended to keep
inventories current. In addition, gross margin in 2006 included
$178 million of inventory valuation adjustments related to the
integration of May and Macy's merchandise assortments. The
valuation of department store merchandise inventories on the last-in,
first-out basis did not impact cost of sales in either period.
Selling, General and Administrative Expenses
Selling, General and Administrative (SG&A) expenses were $8,554
million or 32.5% of net sales for 2007, compared to $8,678 million
or 32.2% of net sales for 2006, a decrease of $124 million. SG&A
expenses for 2007 benefited from the achievement of cost savings
and merger synergies, primarily related to merchandising, logistics
and general management expenses. In addition, SG&A expenses
benefited from lower retirement expenses and lower stock-based
compensation expenses, partially offset by lower credit revenue
resulting from the sale of the May Credit Assets in 2006, higher
depreciation and amortization expenses and higher advertising
expenses. SG&A expenses, as a percent to sales was higher in
2007 primarily because of the decrease in sales. Depreciation and
amortization expense was $1,304 million for 2007, compared to
$1,265 million for 2006. Pension and supplementary retirement
plan expense amounted to $132 million for 2007, compared to
$158 million for 2006. Stock-based compensation expense was
$60 million for 2007, compared to $91 million for 2006. Advertising
expense was $1,194 million for 2007, compared to $1,171 million
for 2006.
May Integration Costs
May integration costs for 2007 amounted to $219 million.
Approximately $121 million of these costs relate to impairment
charges in connection with store locations and distribution facilities
planned to be closed and disposed of, including $74 million related
to nine underperforming stores identified in the fourth quarter
of 2007 for closure. The remaining $98 million of May integration
costs for 2007 included additional costs related to closed locations,
severance, system conversion costs, impairment charges associated
with acquired indefinite lived intangible assets and costs related to
other operational consolidations, partially offset by approximately
$41 million of gains from the sale of previously closed distribution
center facilities. May integration costs for 2006 amounted to $450
million, primarily related to store and distribution center closings
and the re-branding-related marketing and advertising costs,
partially offset by gains from the sale of Macy's locations.
Gains on Sale of Accounts Receivable
Pre-tax gains of approximately $191 million were recorded in 2006
in connection with the sale of certain credit card accounts and
receivables.
Net Interest Expense
Net interest expense was $543 million for 2007, compared to
$390 million for 2006, an increase of $153 million. The increase
in net interest expense for 2007, as compared to 2006, resulted
from increased levels of borrowings during 2007, primarily
associated with the Company's share repurchase program, a gain
of approximately $54 million related to the completion of a debt
tender offer in the fourth quarter of 2006, and the effect of $17
million of interest income in 2006 related to the settlement of a
federal income tax examination.
Income Taxes
The Company's effective income tax rates of 31.1% for 2007 and
31.7% for 2006 differ from the federal income tax statutory rate
of 35.0%, and on a comparative basis, principally because of the
settlement of tax examinations and the effect of state and local
income taxes. Federal, state and local income tax expense for
2007 includes a benefit of approximately $78 million related to
the settlement of a federal income tax examination, primarily
attributable to losses related to the disposition of a former
subsidiary. Federal, state and local income tax expense for 2006
included a benefit of approximately $80 million related to the
settlement of a federal income tax examination, also primarily
attributable to losses related to the disposition of a former
subsidiary.
Discontinued Operations
For 2007, the loss from the discontinued operations of the acquired
After Hours Formalwear business, net of income taxes, was $16
million on sales of approximately $27 million. The loss from
discontinued operations includes the loss on disposal of the After
Hours Formalwear business of $7 million on a pre-tax and post-tax
basis. For 2006, income from the discontinued operations of the
acquired Lord & Taylor and bridal group businesses, net of income
taxes, was $7 million on sales of approximately $1,741 million. For
2006, discontinued operations also included the loss on disposal
of the Lord & Taylor division of $38 million after income taxes and
the loss on disposal of the David's Bridal and Priscilla of Boston
businesses of $18 million after income taxes.
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