Critical Analysis Paper
Macy's, Inc.
Macy's, Inc.- Financial and Strategic Analysis Review
Reference Code: GDRT34554FSA
Page 1
Macy's, Inc. - Financial and Strategic Analysis Review Publication Date: Aug-2016
Reference Code: GDRT34554FSA
Company Snapshot Key Information Macy's, Inc., Key Information Web Address www.macysinc.com Financial year-end January Number of Employees 157,900 NYSE M Source : GlobalData Key Ratios Macy's, Inc., Key Ratios
P/E 10.35
EV/EBITDA 10.24
Return on Equity (%) 25.22
Debt/Equity 1.80
Operating profit margin (%) 7.53
Dividend Yield 0.04
Note: Above ratios are based on share price as of 02-Aug-2016
Source : GlobalData
Share Data Macy's, Inc., Share Data
Price (USD) as on 02-Aug-2016 32.76
EPS (USD) 3.22
Book value per share (USD) 13.70
Shares Outstanding (in million) 333
Source : GlobalData
Performance Chart Macy's, Inc., Performance Chart (2012 - 2016)
Source : GlobalData
Company Overview Macy's, Inc. (Macy's) is a department store operator, based in the US. The product portfolio includes a comprehensive range of products under the categories such as home furnishing, bed and bath accessories, apparels, beauty and fashion and life style accessories.
SWOT Analysis Macy's, Inc., SWOT Analysis
Strengths Weaknesses Promotional and Marketing Activities
Support Services
Omni-Channel Selling
Lower Inventory Turnover Ratio
Dependence on Selected Region
Declining Financial Performance
Opportunities Threats
Private Label Gaining Momentum
Expanding Retail Market in the US
Corporate Restructuring
Increasing Manpower Costs in the US
Expansion Initiatives by Competitors
Changing Fashion Preferences
Source : GlobalData
Financial Performance The company reported revenues of (US Dollars) US$27,079 million for the fiscal year ended January 2016 (FY2016), a decrease of 3.7% over FY2015. In FY2016, the company’s operating margin was 7.5%, compared to an operating margin of 9.9% in FY2015. In FY2016, the company recorded a net margin of 4%, compared to a net margin of 5.4% in FY2015.
Macy's, Inc.
Macy's, Inc.- Financial and Strategic Analysis Review
Reference Code: GDRT34554FSA
Page 2
Key Information Macy's, Inc., Key Information Corporate Address 7 W 7th Street, Cincinnati, OH,
45202-2424, United States Ticker Symbol, Stock Exchange
M [New York Stock Exchange]
Telephone +1 513 5797000 No. of Employees 157,900 Fax +1 302 6365454 Fiscal Year End January URL www.macysinc.com Revenue (in USD Million) 27,079.0 Industry Consumer Markets, Consumer
Packaged Goods, Retailing
Locations United Arab Emirates, United States Source : GlobalData
Company Overview Macy's, Inc. (Macy's) is a department store operator, based in the US. The product portfolio includes a comprehensive range of products under the categories such as home furnishing, bed and bath accessories, apparels, beauty and fashion and life style accessories. The company offers these products under the licensed brands and company-owned brands such as Alfani, American Rag, Bar III, Belgique, Charter Club, Club Room, Epic Threads, first impressions, Giani Bernini, Greg Norman for Tasso Elba, Home Design, Hotel Collection, Hudson Park, Ideology, I-N-C, Jenni by Jennifer Moore, John Ashford, JM Collection, Karen Scott, Martha Stewart Collection, Maison Jules, Material Girl, Morgan Taylor, Studio Silver, Style & Co., Style & Co. Sport, Sutton Studio, Tasso Elba, the Cellar, Tools of the Trade, Via Europa, Aqua and Thalia Sodi. The company operates stores under five banners, Macy’s, Macy's Backstage Bloomingdale’s, Bloomingdale's Outlet and Bluemercury. It merchandises products online at www.macys.com. www.bluemercury.com and www.bloomingdales.com. Macy's also provides services such as home delivery, store pick up, discount cards, credit card facility, skincare treatments. aesthetic treatments, bodycare treatments, spa, rewards programs and mobile applications. The company has operations in the US, District of Columbia, Guam and Puerto Rico. Macy’s is headquartered in Cincinnati, Ohio, the US.
Macy's, Inc.
Macy's, Inc.- Financial and Strategic Analysis Review
Reference Code: GDRT34554FSA
Page 3
Macy's, Inc. - SWOT Analysis SWOT Analysis - Overview Macy's, Inc. (Macy’s) operates department stores in the US, District of Columbia, Puerto Rico and Guam. Omni-channel selling, support services and promotional and marketing activities are the company’s main strengths, whereas declining financial performance, high debt, dependence on selected region and lower inventory turnover ratio remains as a major area of concern. In the future, changing fashion preferences, expansion initiatives by competitors and increasing manpower costs in the US may affect its growth. However, corporate restructuring, expanding retail market in the US and private label gaining momentum are likely to provide growth opportunities to the company. Macy's, Inc. - Strengths Strength - Promotional and Marketing Activities The company’s focus on promotional campaigns helped it in reaching diversified customer base. Macy’s with a focus to broaden the appeal of its brand has taken up various marketing initiatives targeting regular visitors. Macy’s marketing activities include approaching customers by conducting events such as Macy's Thanksgiving Day Parade, theatrical show Glamorama, Macy's Flower Show, Independence Day fireworks and Macy's Holiday Events. It does not rely on conventional advertising, but focuses more on web-based marketing to maximize sales, traffic and customer loyalty. The company advertises through television, mobile alerts, direct mail, print media, internet and social media sires such as Facebook, Twitter, Youtube, Pinterest and Instagram. It also manages a fashion blogging site Mblog, which offers ideas, tips and latest offerings. In FY2016, the company’s advertising and promotional costs, net of cooperative advertising allowances, amounted to US$1,173 million. As these promotional activities demonstrate the benefits of the company's products and services to prospective customers, focus on such campaigns may effectively influence its consumers' purchasing behavior. Strength - Support Services Macy’s through its 24 subsidiaries offers various support services. Its FDS Bank and Macy’s Credit and Customer Service, Inc. (MCCS) subsidiary provide credit processing, collections and customer service and credit marketing services for all credit card accounts that are owned by Department Stores National Bank (DSNB), which is a subsidiary of Citibank, NA, or FDS Bank. The company’s subsidiary Macy’s Systems and Technology, Inc. (MST) offers electronic data processing and management information services. Macy’s Merchandising Group, Inc. (MMG) subisidiary designs, develops and advertises private labels brands and Macy’s Logistics and Operations (Macy’s Logistics) provides warehouse and offers distribution services. It also manages 23 logistics, and distribution and fulfillment centers (DC), to distribute the merchandise to the stores of which, 17 are owned by the company, remaining six are leased. The support service allows the company to achieve balanced revenue platform. Strength - Omni-Channel Selling The sale of merchandise through multiple channels increases the company’s direct-to-consumer business. Macy’s retails its products through a combination of in-stores and online business formats. As of January 2016, the company operated a store network of 870 stores in the US, District of Columbia, Guam and Puerto Rico. It also retails merchandise online at Macys.com bluemercury.com and Bloomingdales.com, whose quality and functionality are continually upgraded by the company. The company provides shopping facility through mobile applications. Macy’s advertises and markets through direct mail, in-store marketing, customer loyalty programs and social media websites. Due to which, it tags itself as the ‘Omni-channel retail organization’. Such, diverse retail and marketing channels helps to increase brand awareness, store traffic and sales. Macy's, Inc. - Weaknesses Weakness - Lower Inventory Turnover Ratio The company reported lower inventory turnover ratio during the review year. In FY2016, Macy’s reported inventory turnover ratio of 3 compared to inventory turnover ratio of one of its key competitors, Target Corporation (Target) which reported value of 6 in FY2016. Lower inventory turnover than competitors indicates that the company takes more days to clear its inventory in comparison with its competitors. With the given turnover ratio, Macy’s takes 118 days to sale its inventory compared to 61 days by Target. The decline in the turnover ratio and higher inventory turnover days signify that the company incurs high inventory carrying costs, which affect its operating performance. Weakness - Dependence on Selected Region Although Macy has a strong presence in the US, its insignificant international presence puts the company at a disadvantage when compared to some of its more geographically diverse competitors. In FY2016, all the 870 retail stores of the company are in the US, Puerto Rico and Guam. Its warehouses and distribution centers are also confined to the US whereas one of its key competitor, Sears Holdings Corporation, operates 1,672 stores in the US and Canada. Such concentration in a single area makes the company vulnerable to regional risks including changes in the economy, climate,
Macy's, Inc.
Macy's, Inc.- Financial and Strategic Analysis Review
Reference Code: GDRT34554FSA
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demographics and population of the US. As a result, Macy’s loses out on diverse revenue sources and opportunities, arising in other growth markets. Hence, this limits the customer reach and growth prospects that may lower the company’s competitiveness. Weakness - Declining Financial Performance The company reported a weaker financial performance during the review year. It reported a revenue of US$27,079 million in FY2016 as compared to US$28,105 million in FY2015. The revenue declined by 3.7% in FY2016 over the previous year. This decline was due to decrease in comparable store sales by 2.5% on an owned plus licensed basis and a decline in comparable store sales by 3% on an owned basis over the previous year. The company reported an operating margin of 7.5% in FY2016, which was lower than the operating margin of one of its close competitor, L Brands, Inc. which reported a value of 18% in FY2016. The company could not able to generate sufficient cash flows to fund its expansion or protect it from competitive pressures with declining financial performance. Macy's, Inc. - Opportunities Opportunity - Private Label Gaining Momentum The company stands to benefit from the increasing demand for private label products. Following a period of slow and negative economic growth, private label sales are rising as consumers increasingly shop to a budget. While price is a prime factor driving private label sales, improvements in packaging and quality have helped to remove the stigma attached to buying store brands. As the company sells a wide range of private label brands such as Alfani, American Rag, Bar III, Belgique, Charter Club, Club Room, Epic Threads, first impressions, Giani Bernini, Greg Norman for Tasso Elba, Home Design, Hotel Collection, Hudson Park, Ideology, I-N-C, Jenni by Jennifer Moore, John Ashford, JM Collection, Karen Scott, Martha Stewart Collection, Maison Jules, Material Girl, Morgan Taylor, Studio Silver, Style & Co., Style & Co. Sport, Sutton Studio, Tasso Elba, the Cellar, Tools of the Trade, Via Europa, Aqua and Thalia Sodi, Macy’s has a strong opportunity to increase its profit margins in the future. Opportunity - Expanding Retail Market in the US The company is likely to benefit from the growing US retail market. According to in-house research, the retail sales in the US grew by 2.9% in 2014 and expected to reach US$3,630.1 billion in 2019 growing at a CAGR of 3.1% during 2014-2019. Health and beauty, footwear, jewelry, watches and accessories, electrical and electronics, luggage and leather goods, and sports and leisure equipment are projected to register higher growth than those of overall retail sales. Food and grocery is expected to lead with a share of 47.9% of overall retail sales, followed by apparel, accessories, luggage and leather goods (16%), home and garden products (14.7%), electrical and electronics (9.3%), furniture and floor coverings (3.5%), Books, news and stationery (2.7%), Sports and leisure equipment (2.7%), health and beauty (2.5%), and Music, video and entertainment software (0.9%) in 2019. Macy’s has taken initiatives to strengthen its presence in the US. For instance in FY2016, the company invested approximately US$900 million for opening of new stores, store remodels, maintenance, the continued renovation of Macy's Brooklyn location, technology and omnichannel investments, distribution network improvements and new growth initiatives. In FY2016, the company opened 26 new stores. In FY2017, it announced to open a new Macy's store in Kapolei and 42 new Bluemercury locations including 24 freestanding locations and 18 stores within Macy's stores. It also plans to open 16 new Macy's Backstage locations. The company announced to open a new Bloomingdale's store in Norwalk, Connecticut in 2018. These investments will enhance the company’s capabilities to explore expanding US retail market. Opportunity - Corporate Restructuring The company stands to benefit from its recent corporate restructuring initiatives. In FY2016, the company closed 41 underperforming Macy’s stores. This initiative could help the company to reduce its operating expenses. It also sold the underutilized upper floors of the Macy’s store in downtown Seattle for US$65 million. The company entered into a deal worth US$270 million with Tishman Speyer to remodel the Macy’s Brooklyn store during the same period. Such restructuring initiatives would enable the company to better deploy its resources, which result in increase in operational profitability. Macy's, Inc. - Threats Threat - Increasing Manpower Costs in the US Labor costs in the US have been increasing in the recent past. The tight labor markets, government mandated increase in minimum wages and a higher proportion of full-time employees are resulting in an increase in labor costs. The federal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA). The minimum wage rate in the US remained at US$7.3 per hour in January 2015. The 29 states and the District of Columbia have minimum wages more than federal rate. These wages range from US$7.5 per hour in Arkansas, Maine, and New Mexico to US$9.5 per hour in
Macy's, Inc.
Macy's, Inc.- Financial and Strategic Analysis Review
Reference Code: GDRT34554FSA
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Washington and US$9.5 per hour in Washington, DC. In FY2015, Macy’s had approximately 166,900 regular full-time and part-time employees are covered under the purview of minimum wages. It has taken several initiatives to expand its stores, which requires increasing its employee base. Therefore rising manpower cost may impact its stability and operational efficiency of the company. Threat - Expansion Initiatives by Competitors Macy’s faces intense competition from both domestic and international companies in the retail market, which is based on store size, products and services offering, store format and channel offering. The company faces competition from national, regional and local operators of department stores, specialty stores, general merchandise stores, off-price and discount stores, and manufacturers’ outlets. It also competes with retail stores who offer its merchandise through online, mail order catalogs and television shopping. Its key competitors include Dillard's, Inc., J. C. Penney Company, Inc., Nordstrom, Inc., L Brands, Inc., Target Corporation and Belk, Inc., among others. While major competitors undertook expansion programs to match the growth rate, the market also registered consolidation involving mergers and acquisitions. In February 2016, DSW Inc announced to acquire Ebuys, Inc., an e-commerce off-price footwear and accessories retailer with presence in North America, Europe, Australia and Asia. This transaction could enable the company to improve its market share in the US and International markets. In FY2016, L Brands opened 36 new stores. This initiative would enable L Brands to reach a wide customer base and improve revenue. Threat - Changing Fashion Preferences The company’s performance may be impacted by the frequent evolution in the fashion trends. The rate of change in fashion trends has been increasing over the years, thereby forcing companies such as Macy’s to constantly update its product offerings with the latest market trends. To adopt the latest fashion trends, customers often shift their loyalties to those brands that offer these trendy merchandises. Inability of the company to change or update its collection, according to the fashion trends and varying customer preferences, could negatively affect its brand image. Threat - Increase in Manpower Costs in the US Labor costs in the US have been increasing in the recent past. The tight labor markets, government mandated increase in minimum wages and a higher proportion of full-time employees result in an increase in labor costs. The federal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA). The minimum wage rate in the US remained at US$7.3 per hour in January 2016. The 29 states and the District of Columbia have minimum wages more than federal rate. These wages range from US$7.5 per hour in Maine and New Mexico to US$10.5 per hour in Washington D.C. The minimum wage in California increased to US$10 per hour starting 1 January 2016. In FY2016, the company employed 157,900 associates. Macy’s has taken several initiatives to expand its stores, which requires increasing its employee base. Therefore rising manpower cost may impact its stability and operational efficiency of the company.. NOTE: The above strategic analysis is based on in-house research and reflects the publishers opinion only