Macy's, Inc. (M) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to promote understanding of the results of operations and financial condition of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K).  This section generally discusses the results of operations for 2021 compared to 2020 and 2019.  The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for the fiscal years ended January 29, 2022 to January 30, 2021 and February 1, 2020. For a full discussion of changes from the fiscal year ended January 30, 2021 to the fiscal year ended February 1, 2020, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 2021 (filed March 29, 2021). This section also 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, websites and mobile applications under three brands (Macy's, Bloomingdale's and bluemercury) that sell a wide range of merchandise, including apparel and accessories (men's, women's and kids'), cosmetics, home furnishings and other consumer goods. As of January 29, 2022, the Company's operations were conducted through Macy's, Market by Macy’s, Macy’s Backstage, Bloomingdale’s, Bloomingdale’s The Outlet, Bloomies and bluemercury, which are aggregated into one reporting segment in accordance with the FASB Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting.

Bloomingdale's in Dubai, United Arab Emirates and Al Zahra, Kuwait are operated under a license agreement with Al Tayer Insignia, a company of the Al Tayer Group, LLC.

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States. The COVID-19 pandemic had a negative impact on the Company's 2020 operations and financial results, and the full financial impact of the pandemic cannot be reasonably estimated at this time due to uncertainty as to the severity and duration of the pandemic. 2020 was a year of unprecedented challenges and required the Company to adapt its business to address the disruption caused by the COVID-19 pandemic.  Faced with the temporary closure of stores and changes in consumer shopping behaviors, the Company had to right-size its cost base and operating model, offer new fulfillment options to customers, focus on product categories with higher consumer demand, and accelerate its focus on digital shopping and underlying investments to support these trends.  Financial results in the first and second quarter of 2020 were significantly impacted by the COVID-19 pandemic but the Company saw sequential improvement in its operating results during the third and fourth quarters of 2020.  Although uncertainty surrounds the continued impact of the COVID-19 pandemic, the Company positioned itself to focus on the recovery of its business in 2021 and execute on its corporate strategy for profitable growth in the future.

Although the Company has experienced strong recovery in operating results during 2021 as compared to 2020, the Company continues to monitor the impact of COVID-19 on the macro economy as well as on the Company’s and its vendor partners’ operations. The full impact of the pandemic will continue to depend on future developments, including the continued spread and duration of the pandemic, the emergence of future variant strains of COVID-19, the availability and distribution of effective medical treatments or vaccines as well as any related federal, state or local governmental orders or restrictions, or mandates. In addition, numerous uncertainties continue to surround the pandemic and its ultimate impact on the Company, including the timing and extent of any recovery in consumer traffic and spending, potential delays, interruptions and disruptions in the Company’s supply chain, maintenance of temporary government stimulus programs, labor shortages and intense competition for talent, all of which are highly uncertain and cannot be predicted. Modifications to work environment policies could also impact the use of certain corporate assets, and as such could lead to additional long-lived tangible and right of use corporate asset impairment.

In evaluating the performance of 2021, the Company considered its results against 2020 as well as 2019 given the impact of the pandemic and the closure of the Company’s stores during 2020. Certain financial highlights are as follows:

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See pages 34 to 36 for reconciliations of the non-GAAP financial measures presented above to the most comparable U.S. generally accepted accounting principles ("GAAP") financial measures and other important information.

Polaris Strategy

During 2021, the Company continued to execute its Polaris strategy and these actions impacted its operating results for the year, notably:

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As a result of the execution of its Polaris strategy, the Company also recognized improvement in customer engagement. The Company saw Platinum, Gold and Silver Star Rewards customers continue to engage with the Macy’s brand during 2021, with the average customer spend up 12% compared to 2019.  During 2021, Macy’s brand active customer count increased 18% over 2020 and 1% over 2019 to 44 million. For 2021, after eliminating repeat visits between quarters, the Company’s new customers increased 40% over 2020 and 26% over 2019 to 19.4 million.

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Analysis of Results of Operations

See pages 34 to 36 for a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measure and for other important information.

Comparison of 2021 and 2020

Net sales for 2020 were significantly impacted by the pandemic and the temporary closure of stores during the first and second quarters. The Company’s 2021 net sales showed recovery across all three brands – Macy’s, Bloomingdale’s and bluemercury. The Company experienced strength across nearly all of its major merchandise categories, most significantly in home, jewelry and fragrances, driven by continued customer strength, the continued recovery of its stores as well as continued growth in its digital channel.

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The increase in net credit card revenues was driven by higher credit sales and the continuation of the strong credit health of the credit card portfolio's customers leading to lower levels of bad debt, partially offset by a decrease in proprietary credit card sales penetration.

The increase in the gross margin rate was driven primarily by continued recovery of the Company’s stores, inventory productivity, lower markdowns and the execution of the Polaris strategy. Inventory turnover improved 21% over 2020 mainly due to further evolving and scaling the Company’s data science in terms of pricing and promotional initiatives as well as maintaining disciplined buying behavior.

SG&A expenses increased in 2021 but decreased as a percent to net sales. The increase in SG&A expense dollars corresponds with higher net sales but the improvement in the SG&A expense rate reflects the expense management strategies implemented by the Company in response to the COVID-19 pandemic as part of the Polaris strategy and the number of open job positions during the year.

2021 asset sale gains mainly consist of gains from the sale of 18 properties, an increase from approximately 12 properties sold at a gain in 2020, due to the recovery in the macroeconomic environment.

Impairment, restructuring and other costs in 2021 primarily related to the write-off of capitalized software assets. For 2020, these costs included goodwill and asset impairment charges, severance and other human resource related costs associated with organizational changes and store closures, driven by the impacts of the COVID-19 pandemic.

The Company records non-cash net benefit plan income relating to the Company's defined benefit plans. This income includes the net amount of interest cost, expected return on plan assets and amortization of prior service costs or credits and actuarial gains and losses. The increase in benefit plan income from 2020 to 2021 was mainly driven by a reduction in interest and amortization of prior service costs, offset by a decrease in the expected return on assets.

The settlement charges in 2021 were primarily driven by the transfer of fully funded pension obligations for certain retirees and beneficiaries through the purchase of a group annuity contract with an insurance company. The charges in 2020 related to the pro-rata recognition of net actuarial losses associated with the Company’s defined benefit retirement plans as the result of lump sum distributions associated with retiree distribution elections and restructuring activity.

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The decrease in net interest expense, excluding losses on early retirement of debt, was primarily driven by interest savings associated with the redemption of $1.3 billion 2025 Notes in August 2021.

In 2021, losses on early retirement of debt were recognized primarily due to the redemption of the entire outstanding $1.3 billion amount of the 2025 Notes in the third quarter as well as a $500 million tender offer executed in the first quarter.

The effective tax rate varies from the Company’s federal income tax statutory rate of 21% in both periods. In 2021, the rate differential was driven primarily by the impact of state and local taxes. In 2020, the rate differential was driven primarily by the non-tax deductible component of the Company’s goodwill impairment charge, which was largely offset by the benefit associated with the carryback of net operating losses permitted under the CARES Act.

Guidance

On February 22, 2022, the Company disclosed in its release of preliminary earnings its performance expectations for 2022, while acknowledging the significant uncertainty surrounding consumer behavior and economic conditions in the current environment, as well as the continued uncertainty of the COVID-19 pandemic.  For a more complete discussion of the COVID-19 pandemic related risks facing the Company's business, refer to Item 1A, “Risk Factors.”

Liquidity and Capital Resources

The Company's principal sources of liquidity are cash from operations, cash on hand and the asset-based credit facility described below. Material contractual obligations arising in the normal course of business primarily consist of long-term debt and related interest payments, lease obligations, merchandise purchase obligations, retirement plan benefits, and self-insurance reserves. See Notes 4, 6 and 9 to the consolidated financial statements included in Item 8 of this Report for amounts outstanding on January 29, 2022, related to leases, debt, and retirement plans, respectively.

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Merchandise purchase obligations represent future merchandise payables for inventory purchased from various suppliers through contractual arrangements and are expected to be funded through cash from operations.

Capital Allocation

The Company’s capital allocation goals include maintaining a healthy balance sheet and investment-grade credit metrics, followed by investing in growth initiatives and returning capital to shareholders through modest yet predictable dividends and meaningful share repurchases.

In 2020, in response to COVID-19, the Company suspended its share repurchase program and its quarterly dividend. In August 2021, as the Company recovered with strong performance throughout the year, it redeemed $1.3 billion of secured notes and announced that its Board of Directors authorized a new $500 million share repurchase program and that it reinstated its regular quarterly dividend.

The Company ended the year with a cash and cash equivalents balance of $1,712 million, an increase from $1,679 million in 2020. Also, the Company is party to the ABL Credit Facility with certain financial institutions providing for a $2,941 million Revolving ABL Facility. As of January 29, 2022, available borrowing capacity of the ABL Credit Facility was $2,536 million, which considers a $116 million reduction due to standby letters of credit outstanding.

Operating Activities

Net cash provided by operating activities was $2,712 million in 2021 compared to $649 million in 2020. The increase was driven by higher adjusted EBITDA and a $582 million income tax refund as a result of the CARES Act. This was offset by higher cash interest and a net decrease in working capital, mainly driven by an increase in merchandise inventories. Merchandise inventory increased from $3,774 million in 2020 to $4,383 million in 2021 as sales recovered from 2020.

The Company’s future contractual obligations and commitments as it relates to operating activities as of January 29, 2022 are approximately $6.8 billion of operating lease obligations primarily due after 2026 and $3.2 billion of other obligations, primarily consisting of merchandise purchase obligations due in less than one year. Note 4 and Note 14 to the Financial Statements provide additional information on operating leases and other obligations, respectively.

Investing Activities

The Company’s 2021 capital expenditures were $597 million, mainly driven by its technology-based initiatives, including those that support the digital business, data science initiatives and the simplification of its technology structure. The Company also opened nine new stores in 2021 and continued to invest in its current stores.

The Company expects capital expenditures to be approximately $1 billion during 2022. The Company’s spend will be primarily allocated towards technology architecture, data science applications for retail operations, digital platform enhancements, fulfilment capabilities in store and further upstream, and personalization efforts. These expenditures are expected to be financed with cash from operations and existing cash and cash equivalents. There can be no assurance that current expectations will be realized and plans are subject to change upon further review of capital expenditure needs or based on the current economic environment.

Financing Activities

Dividends

The Company paid dividends totaling $90 million 2021 and $117 million in 2020. The Board of Directors declared regular quarterly dividend of 15 cents per share on the Company’s common stock, paid on October 1, 2021 and January 3, 2022, to Macy’s shareholders of record at the close of business on September 15, 2021 and December 15, 2021, respectively.

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On February 22, 2022, the Company's Board of Directors declared a regular quarterly dividend of 15.75 cents per share on its common stock, payable April 1, 2022, to shareholders of record at the close of business on March 15, 2022. Subsequent dividends will be subject to approval of the Board of Directors, which will depend on market and other conditions.

Stock Repurchases

The Company completed its 2021 $500 million share repurchase program by January 29, 2022.  During 2021, the Company repurchased 20.5 million shares of its common stock, which represents more than 6.5% of shares outstanding, at an average cost of $24.40 per share.

On February 22, 2022, the Company’s announced that its Board of Directors authorized a new $2.0 billion share repurchase program, which does not have an expiration date. Repurchases may be made from time to time in the open market or through privately negotiated transactions in accordance with applicable securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, on terms determined by the Company.

Debt Transactions

The Company completed the following debt transactions in 2021:

Subsequent to 2021 and prior to the issuance of this report, the Company completed the following debt transactions:

At January 29, 2022, no notes or debentures contained provisions requiring acceleration of payment upon a debt rating downgrade. However, the terms of approximately $2,574 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 if there is both a change of control (as defined in the applicable indenture) of the Company and the notes are rated by specified rating agencies at a level below investment grade.

The Company’s future contractual obligations and commitments as it relates to financing activities as of January 29, 2022 are $3.3 billion of long-term debt obligations and $1.6 billion of related interest, $116 million of standby letters of credit and $27 million of finance lease obligations. Note 6 and Note 4 to the Financial Statements provide additional information on debt and finance leases, respectively. As a result of the subsequent event financing activities noted above, interest obligations were increased to $1.9 billion.

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As of January 29, 2022, the Company's credit rating and outlook were as described in the table below.

Subsequent to January 29, 2022, Moody’s upgraded the Company’s long-term debt rating to Ba1, Standard & Poor’s upgraded the Company’s long-term debt rating to BB, and Fitch upgraded the Company’s long-term debt rating to BBB-.

Guarantor Summarized Financial Information

The Company has senior unsecured notes and senior unsecured debentures (collectively the “Unsecured Notes”) outstanding with an aggregate principal amount of $2,935 million outstanding as of January 29, 2022, with maturities ranging from 2022 to 2043. The Unsecured Notes constitute debt obligations of MRH ("Subsidiary Issuer"), a 100%-owned subsidiary of Macy's, Inc. ("Parent" together with the "Subsidiary Issuer" are the "Obligor Group"), and are fully and unconditionally guaranteed on a senior unsecured basis by Parent.  The Unsecured Notes rank equally in right of payment with all of the Company’s existing and future senior unsecured obligations, senior to any of the Company’s future subordinated indebtedness, and are structurally subordinated to all existing and future obligations of each of the Company’s subsidiaries that do not guarantee the Unsecured Notes.  Holders of the Company’s secured indebtedness, including the Notes and any borrowings under the ABL Credit Facility, will have a priority claim on the assets that secure such secured indebtedness; therefore, the Unsecured Notes and the related guarantee are effectively subordinated to all of the Subsidiary Issuer’s and Parent and their subsidiaries’ existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness.

The following tables include combined financial information of the Obligor Group.  Investments in subsidiaries of $7,975 million as of January 29, 2022 have been excluded from the Summarized Balance Sheets. Equity in the earnings of non-Guarantor subsidiaries of $2,208 million have been excluded from the Summarized Statement of Operations. The combined financial information of the Obligor Group is presented on a combined basis with intercompany balances and transactions within the Obligor Group eliminated.

Summarized Balance Sheet

Summarized Statement of Operations

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Important Information Regarding Non-GAAP Financial Measures

The Company reports its financial results in accordance with 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. Management believes that providing supplemental changes in comparable sales on an owned plus licensed basis, which includes the impact of growth in comparable sales of departments licensed to third parties, assists in evaluating the Company's ability to generate sales growth, whether through owned businesses or departments licensed to third parties, on a comparable basis, and in evaluating the impact of changes in the manner in which certain departments are operated. Earnings (loss) before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP financial measure which the company believes provides meaningful information about its operational efficiency by excluding the impact of changes in tax law and structure, debt levels and capital investment. In addition, management believes that excluding certain items that are not associated with the Company's core operations and that may vary substantially in frequency and magnitude period-to-period from net income (loss), diluted earnings (loss) per share attributable to Macy's, Inc. shareholders and EBITDA provide 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 return on invested capital (ROIC) is a useful supplemental measure in evaluating how efficiently the Company employs its capital. The Company uses certain non-GAAP financial measures as performance measures for components of executive compensation.

The Company does not provide reconciliations of the forward-looking non-GAAP measures of adjusted EBITDA, adjusted diluted earnings per share, comparable owned-plus-licensed sales three-year CAGR, and adjusted tax rate to the most directly comparable forward-looking GAAP measures because the timing and amount of excluded items are unreasonably difficult to fully and accurately estimate. For the same reasons, the Company is unable to address the probable significance of the unavailable information, which could be material to future results.

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 or cash flows and should therefore be considered in assessing the Company's actual and future financial condition and performance. Additionally, the amounts received by the Company on account of sales of departments licensed to third parties are limited to commissions received on such sales. 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.

Changes in Comparable Sales

The following is a tabular reconciliation of the non-GAAP financial measure of changes in comparable sales on an owned plus licensed basis, to GAAP comparable sales (i.e., on an owned basis), which the Company believes to be the most directly comparable GAAP financial measure.

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Adjusted Net Income (Loss) and Adjusted Diluted Earnings (Loss) Per Share

The following is a tabular reconciliation of the non-GAAP financial measures adjusted net income (loss) to GAAP net income (loss) and adjusted diluted earnings (loss) per share to GAAP diluted earnings (loss) per share, which the Company believes to be the most directly comparable GAAP measures.

EBITDA and Adjusted EBITDA

The following is a tabular reconciliation of the non-GAAP financial measure EBITDA and Adjusted EBITDA to GAAP net income, which the Company believes to be the most comparable GAAP measure.

ROIC

Historically, the Company defined ROIC as adjusted EBITDA, excluding net lease expense, as a percent to average invested capital. Average invested capital is comprised of an annual two-point (i.e., end of the year presented and the immediately preceding year) average of gross property and equipment, total lease right of use (“ROU”) assets, excluding variable rent which is still 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 calculation of the capitalized value of non-capitalized leases is consistent with industry and credit rating agency practice and the specified assets are subject to a four-point average to compensate for seasonal fluctuations.

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The following is a tabular reconciliation of the non-GAAP financial measure of ROIC to net income as a percent to property and equipment - net, which the Company believes to be the most directly comparable GAAP financial measure.

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Critical Accounting Estimates

The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on assumptions that we believe to be reasonable, and we continue to review and evaluate these estimates. For further information on significant accounting policies, see discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report.

Merchandise Inventories

Merchandise inventories are valued at the lower of cost or market using the last-in, first-out ("LIFO") retail inventory method. Under the retail inventory method, inventory is segregated into departments of merchandise having similar characteristics and is stated at its current retail selling value. The retail inventory method inherently requires management judgments and estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation as well as gross margins.

Permanent markdowns designated for clearance activity are recorded when the utility of the inventory has diminished. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise and fashion trends. When a decision is made to permanently mark down merchandise, the resulting gross margin reduction is recognized in the period the markdown is recorded.

Long-Lived Asset Impairment and Restructuring Charges

The carrying values of long-lived assets, inclusive of right of use (ROU) assets, are periodically reviewed by the Company whenever events or changes in circumstances indicate that the carrying value may not be recoverable, such as historical operating losses or plans to close stores before the end of their previously estimated useful lives. Additionally, on an annual basis, the recoverability of the carrying values of individual stores is evaluated. A potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows includes management's assumptions of cash inflows and outflows directly resulting from the use of those assets in operations. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long-lived asset exceeds its fair value. The Company believes its estimated cash flows are sufficient to support the carrying value of its long-lived assets. If estimated cash flows significantly differ in the future, the Company may be required to record asset impairment write-downs.

If the Company commits to a plan to dispose of a long-lived asset before the end of its previously estimated useful life or changes its use of corporate assets, estimated cash flows are revised accordingly, and the Company may be required to record an asset impairment charge. Additionally, related liabilities arise such as severance, contractual obligations and other accruals associated with store closings from decisions to dispose of assets. The Company estimates these liabilities based on the facts and circumstances in existence for each restructuring decision. The amounts the Company will ultimately realize or disburse could differ from the amounts assumed in arriving at the asset impairment and restructuring charge recorded.

Goodwill and Intangible Assets

The Company reviews the carrying value of its goodwill and other intangible assets with indefinite lives at least annually, as of the end of fiscal May, or more frequently if an event occurs or circumstances change, for possible impairment in accordance with ASC Topic 350, Intangibles - Goodwill and Other. For impairment testing, goodwill has been assigned to reporting units which consist of the Company's retail operating divisions. Macy's and bluemercury are the only reporting units with goodwill as of January 29, 2022, and 98% of the Company's goodwill is allocated to the Macy's reporting unit.

The Company may elect to evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit or fair value of indefinite lived intangible assets is less than its carrying value. If the qualitative evaluation indicates that it is more likely than not that the fair value of a reporting unit or indefinite lived intangible asset is less than its carrying amount, a quantitative impairment test is required. Alternatively, the Company may bypass the qualitative assessment for a reporting unit or indefinite lived intangible asset and directly perform the quantitative assessment. This determination can be made on an individual reporting unit or asset basis, and performance of the qualitative assessment may resume in a subsequent period.

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The quantitative impairment test involves estimating the fair value of each reporting unit and indefinite lived intangible asset and comparing these estimated fair values with the respective reporting unit or indefinite lived intangible asset carrying value. If the carrying value of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to such excess, limited to the total amount of goodwill allocated to the reporting unit. If the carrying value of an individual indefinite lived intangible asset exceeds its fair value, such individual indefinite lived intangible asset is written down by an amount equal to such excess.

Estimating the fair values of reporting units and indefinite lived intangible assets involves the use of significant assumptions, estimates and judgments with respect to a variety of factors, including sales, gross margin and SG&A expense rates, capital expenditures, cash flows and the selection and use of an appropriate discount rate and market values and multiples of earnings and revenues of similar public companies. Projected sales, gross margin and SG&A expense rate assumptions and capital expenditures are based on the Company's annual business plan or other forecasted results. Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting unit or indefinite lived intangible asset.

The use of different assumptions, estimates or judgments in the goodwill impairment testing process, including with respect to the estimated future cash flows of the Company's reporting units, the discount rate used to discount such estimated cash flows to their net present value, and the reasonableness of the resultant implied control premium relative to the Company's market capitalization, could materially increase or decrease the fair value of the reporting unit and/or its net assets and, accordingly, could materially increase or decrease any related impairment charge.

During the first quarter of 2020, as a result of the sustained decline in the Company's market capitalization and changes in the Company's long-term projections driven largely by the impacts of the COVID-19 pandemic, the Company determined a triggering event had occurred that required an interim impairment assessment for all of its reporting units and indefinite lived intangible assets. The Company determined the fair value of each of its reporting units using a market approach or a combination of a market approach and income approach, as appropriate. Relative to the prior assessment, as part of this interim 2020 assessment, it was determined that an increase in the discount rate applied in the valuation was required to align with market-based assumptions and company-specific risk. The revised long-term projections, in conjunction with this higher discount rate, resulted in lower fair values of the reporting units. As a result, the Company recognized $2,982 million and $98 million of goodwill impairment for the Macy's and bluemercury reporting units, respectively, during 2020, the majority of which was recognized during the first quarter of 2020.

For the Company's annual impairment assessment as of the end of fiscal May 2020 and 2021, the Company elected to perform a qualitative impairment test on its goodwill and intangible assets with indefinite lives and concluded that it is more likely than not that the fair values exceeded the carrying values and goodwill and intangible assets with indefinite lives were not impaired.

The Company continues to monitor the key inputs to the fair values of its reporting units. A decline in market capitalization or future declines in macroeconomic factors or business conditions may result in additional impairment charges in future periods.

Income Taxes

Income taxes are estimated based on the tax statutes, regulations and case law of the various jurisdictions in which the Company operates. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets are evaluated for recoverability based on all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. Deferred income tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred income tax assets will not be realized.

Uncertain tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Uncertain tax positions meeting the more-likely-than-not recognition threshold are then measured to determine the amount of benefit eligible for recognition in the financial statements. Each uncertain tax position is measured at the largest amount of benefit that is more likely than not to be realized upon ultimate settlement.

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Uncertain tax positions are evaluated and adjusted as appropriate, while taking into account the progress of audits of various taxing jurisdictions. Resolution of these matters could have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Significant judgment is required in evaluating the Company's uncertain tax positions, provision for income taxes, and any valuation allowance recorded against deferred tax assets. Although the Company believes that its judgments are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the Company's historical income provisions and accruals.

Pension and Supplementary Retirement Plans

The Company has a funded defined benefit pension plan (the “Pension Plan”) and an unfunded defined benefit supplementary retirement plan (the “SERP”). The Company accounts for these plans in accordance with ASC Topic 715, Compensation - Retirement Benefits. Under ASC Topic 715, an employer recognizes the funded status of a defined benefit postretirement plan as an asset or liability on the balance sheet and recognizes changes in that funded status in the year in which the changes occur through comprehensive income (loss). Additionally, pension expense is generally recognized on an accrual basis over the average remaining lifetime of participants. The pension expense calculation is generally independent of funding decisions or requirements.

The Pension Protection Act of 2006 provides the funding requirements for the Pension Plan which are different from the employer's accounting for the plan as outlined in ASC Topic 715. No funding contributions were required, and the Company made no funding contributions to the Pension Plan in 2021 and 2020. As of the date of this report, the Company does not anticipate making funding contributions to the Pension Plan in 2022.

The calculation of pension expense and pension liabilities requires the use of a number of assumptions. Changes in these assumptions can result in different expense and liability amounts, and future actual experience may differ significantly from current expectations. The Company believes that the most critical assumptions relate to the long-term rate of return on plan assets (in the case of the Pension Plan) and the discount rate used to determine the present value of projected benefit obligations.

The Company's assumed annual long-term rate of return for the Pension Plan's assets was 5.75% for 2021, 6.25% for 2020 and 6.50% for 2019 based on expected future returns on the portfolio of assets. As of January 29, 2022, the Company lowered the assumed annual long-term rate of return for the Pension Plan's assets from 5.75% to 4.60% based on expected future returns on the portfolio of assets, which considers a shift in the Company’s investment strategy to invest more heavily in fixed income securities. The Company develops its expected long-term rate of return assumption by evaluating input from several professional advisors taking into account the asset allocation of the portfolio and long-term asset class return expectations, as well as long-term inflation assumptions. Pension expense increases or decreases as the expected rate of return on the assets of the Pension Plan decreases or increases, respectively. Lowering or raising the expected long-term rate of return assumption on the Pension Plan's assets by 0.25% would increase or decrease the estimated 2022 pension expense by approximately $7 million.

The Company discounted its future pension obligations using a weighted-average rate of 3.06% at January 29, 2022 and 2.43% at January 30, 2021 for the Pension Plan and 3.10% at January 29, 2022 and 2.51% at January 30, 2021 for the SERP. The discount rate used to determine the present value of the Company's Pension Plan and SERP obligations is based on a yield curve constructed from a portfolio of high quality corporate debt securities with various maturities. Each year's expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate for Pension Plan and SERP obligations. As the discount rate is reduced or increased, the pension liability would increase or decrease, respectively, and future pension expense would decrease or increase, respectively. Lowering the discount rates by 0.25% would increase the projected benefit obligations at January 29, 2022 by approximately $67 million and would decrease estimated 2022 pension expense by approximately $3 million. Increasing the discount rates by 0.25% would decrease the projected benefit obligations at January 29, 2022 by approximately $64 million and would increase estimated 2022 pension expense by approximately $3 million.

The Company estimates the service and interest cost components of net periodic benefit costs for the Pension Plan and SERP. This method uses a full yield curve approach in the estimation of these components of net periodic benefit costs. Under this approach, the Company applies discounting using individual spot rates from the yield curve composed of the rates of return from a portfolio of high quality corporate debt securities available at the measurement date. These spot rates align to each of the projected benefit obligation and service cost cash flows.

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