Highlights of Progress in 2015

Macy’s, Inc. came into 2015 with an exceptional winning streak of five consecutive years of growth in sales, earnings, cash flow and return on invested capital. Macy’s and Bloomingdale’s became widely recognized as the industry leader for our omnichannel approach to fashion retailing, and we moved fast to adjust our operations to serve the evolving shopping preferences of customers.

In 2015, however, we experienced a convergence of negative factors that impacted our sales, margins and profitability – some external to our company, some of our own making. Our inventory flow early in the year was sidetracked by a labor slowdown in West Coast ports. Holiday season sales of cold-weather goods suffered in the historically warm weather of early winter. A strong dollar deterred spending by international visitors in our flagship stores that are popular tourist destinations. We implemented some key organizational changes at the end of fiscal 2014 that took longer than expected to settle.

The end result was disappointing financial performance in 2015. On a year-over-year basis versus our record results in 2014, comparable sales in 2015 were down by 2.5 percent on an owned plus licensed basis and earnings per diluted share decreased 14.3 percent excluding impairments, store closing and other costs. (See Supplemental Operating Results on pages 32 and 33 which contain a reconciliation to the most comparable GAAP measure).

Retailing is a dynamic business that requires continuous reinvention. Our company has experienced great times and challenging times throughout its long history, but we have at all times embraced change. That is one of the reasons we experienced such great success and generated an impressive 412 percent total shareholder return over the last seven years. There is no question that 2015 was disruptive to our company and our industry. It presented challenges that caused us to pause, reflect, and hit the reset button on our priorities and ambitions. But it was also instructive, forcing us to let go of some of the things that worked in the past and pushing us to be more aggressive in the way we address the rapidly changing consumer market. Throughout that process, our belief in the vision for growth and leadership for Macy’s, Inc. remained steadfast. However, the way in which we plan on achieving our vision has changed.

In business a tough year can be a great teacher. Our company learned a lot in 2015 – we carefully studied our performance, looked at the changes in the consumer market, and gained many insights. It is clear that many of our existing strategies already focus on changing consumer preferences and buying behaviors, but we have placed a greater level of urgency on evolving them. For example, our omnichannel strategy at Macy’s and Bloomingdale’s continues to be best-in-class in the retail industry, but we have a renewed focus on driving the performance of these models. As part of this, we are testing and learning from various pilots that will allow us to serve new customers and in new ways over time. Regardless of whether it is online, mobile, or in store, our commitment to our customer continues to drive what we do and how we evolve.

Our work has just begun. Over the past year, we have taken steps to operate more effectively and efficiently with an organization that is flatter and faster because as the rate of change among our customers’ preference increases, so too must our speed to respond. In some cases, there has been short-term pain as we tightened our belt and realigned our resources, but our management team has resolved to stabilize the business in 2016 and lay the foundation for renewed growth in 2017 and beyond. Our eye is on a long-term vision of Macy’s, Inc. as a progressive retailer that serves existing customers and acquires new ones through innovative approaches to the marketplace. We look ahead with optimism and high hopes grounded in solid strategies and an intensified focus on agility within our organization.

Bluemercury Acquisition

In March 2015, Macy’s, Inc. completed its acquisition of Bluemercury, Inc., widely recognized as America’s largest and fastest-growing luxury beauty products and spa services retailer, for approximately $210 million in cash. Bluemercury was Macy’s, Inc.’s first acquisition in 10 years and provides an entirely new channel for growth. When acquired, Bluemercury operated 62 specialty stores in 18 states, typically in prime street-level locations and urban lifestyle centers, as well as an online business.

Macy’s, Inc. continues to support the expansion of freestanding Bluemercury stores in upscale neighbor-hoods (to a total of 115 by year-end 2017) while also improving its digital business and piloting Bluemercury shops within four Macy’s stores in 2015, with 18 additional in-store shops expected in 2016.

Reducing Expenses to Fund Growth

Beginning in 2015 and continuing in 2016, the company is reducing expenses and tightening capital spending so we can reinvest in growth initiatives. By doing so, we believe we can accelerate the top line while making progress toward the company’s goal of re-attaining over time an EBITDA rate as a percent of sales of 14 percent.

Our target is to reduce annual SG&A expense by $500 million (net of growth initiatives) from previously planned levels by 2018, with incremental progress in 2016 and 2017 toward that goal. Going into 2016, we already have identified and announced approximately $400 million in annualized reductions. Macy’s, Inc. will reduce capital spending to an estimated $900 million in 2016 from the $1.1 billion in capital spent in 2015 – which still provides us with ample resources for major investments in technology, digital advancement, physical improvements to top stores and other levers of growth.

Adjusting Our Customer Touchpoints

As customer shopping patterns continue to evolve across stores and digital, we have refined our touchpoints for interacting with shoppers.

Our websites and mobile apps have continued to improve, becoming more robust with merchandise offerings, content and functionality. Fulfillment capabilities are expanding with national availability of Buy Online Pickup in Store and Same Day Delivery in an increasing number of markets at Macy’s and Bloomingdale’s. In 2015, we opened our fifth direct-to-consumer fulfillment megacenter, a 1.3 million-square-foot facility in Tulsa, OK.

Meanwhile, we are committed to maintaining a healthy portfolio of stores in the best locations across America – both to serve shoppers who walk through the door and to fulfill orders that are shipped directly to customers around the country. The company closed 41 Macy’s underperforming stores (out of a previous total of about 770 Macy’s stores) in 2015. We will continue to add stores selectively while also being disciplined about closing stores that are unproductive or no longer robust shopping destinations because of changes in the local retail shopping landscape.

Pursuing Value from Real Estate

The company also is pursuing the creation of shareholder value through various initiatives to monetize the company’s significant real estate assets or through partnerships or joint venture transactions for the company’s owned mall-based properties, as well as Macy’s flagship real estate assets in Manhattan, San Francisco, Chicago and Minneapolis.

In 2015, for example, the company sold the underutilized upper floors of the Macy’s store in downtown Seattle for $65 million to a real estate developer that is converting it to office use. In Brooklyn, Macy’s, Inc. completed a $270 million deal with Tishman Speyer that will enable a re-creation of Macy’s Brooklyn store and further enliven one of New York City’s most dynamic neighborhoods.

We believe these types of transactions, as well as the potential partnerships and joint ventures being explored, can create significant value while also contributing to the success of our retail operations.

Enhancing Returns to Shareholders

Even taking into account the disappointment of 2015, Macy’s, Inc. has a track record of generating an impressive return for shareholders through price appreciation, share repurchases and dividends. Total Shareholder Return from the beginning of fiscal 2009 through the end of fiscal 2015 was 412 percent, compared with the Dow Jones Industrial Average’s increase of 148 percent and the S&P 500’s increase of 173 percent over that same period.

Since resuming our share repurchase program in August 2011, Macy’s, Inc. has bought back approximately 152.2 million shares for approximately $7.3 billion through Jan. 30, 2016. In early 2016, our board of directors increased the company’s share repurchase authorization by $1.5 billion. After giving effect to this increase, the remaining authorization outstanding, as of Jan. 30, 2016, was approximately $2 billion.

The Board increased the quarterly dividend on Macy’s common stock to 37.75 cents per share from 36 cents per share, effective with the July 1, 2016, dividend payment. The July dividend will be the sixth increase in the past five years and represents a more than seven-fold increase from 5 cents per share to 37.75 cents per share.