Macy's 2008 Annual Report Download - page 26

included income from continuing operations of $909 million and a loss from discontinued operations of $16
million. The income from continuing operations in 2007 included the impact of $219 million of May integration
costs. The loss from discontinued operations in 2007 included 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 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, net sales decreased 1.3% in 2007 compared to 2006. Sales
from the Company’s Internet businesses in 2007 increased 56.4% compared to 2006 and positively affected the
Company’s 2007 comparable store sales by 0.8%. 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. The Company calculated comparable store sales as sales from stores in operation
throughout 2006 and 2007 and all Internet sales and mail order sales from continuing businesses, as adjusted for
the impact of the 53rd week in 2006. Stores undergoing remodeling, expansion or relocation remain in the
comparable store sales calculation unless the store is closed for a significant period of time. Definitions and
calculations of comparable store sales differ among companies in the retail industry.
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 reflected 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.
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 higher depreciation and amortization expenses, lower credit revenue
resulting from the sale of the May Credit Assets in 2006 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 for 2007 amounted to $219 million. Approximately $121 million of these costs related
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.
Pre-tax gains of approximately $191 million were recorded in 2006 in connection with the sale of certain
credit card accounts and receivables.
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