Business Finance - Accounting assignment

Nova Southeastern University

H. Wayne Huizenga College of Business and Entrepreneurship

Assignment for Course: MGT-5170: Applying Strategy for Managers

Submitted to: Dr. Jason Cavich

Submitted by:

Date of Submission: April 23, 2024

Title of Assignment: Macy’s Case

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Executive Summary

Problem Statement

Macy’s, Inc. faces the challenge of sustaining its recent performance improvement amidst a rapidly evolving retail landscape exacerbated by the COVID-19 pandemic. Despite the initial success of its Polaris turnaround strategy, the company must address stagnant revenue growth, lingering weaknesses in its brick-and-mortar business model, and the persistent threat of online retail competition.

Analysis

· Macy's revenue declined sharply to $18.1 billion in 2020 due to the COVID-19 pandemic, exacerbating its ongoing struggle to adapt to online retail.

· The Polaris turnaround strategy, initiated in 2020 under CEO Jeff Gennette, focused on six key pillars: winning with fashion and style, delivering clear value, excelling in digital shopping, enhancing store experience, modernizing the supply chain, and enabling transformation.

· Despite challenges, Macy's rebounded in 2021 with increased online purchases and a strong performance in brick-and-mortar stores.

· Target Corporation and Nordstrom Inc. have adapted to the changing retail landscape through innovative strategies such as same-day fulfillment capabilities, store remodeling, and digital sales platforms.

Alternatives

1. Invest more heavily in digital shopping platforms and omnichannel capabilities to meet the growing demand for online shopping.

2. Further enhance the in-store experience through strategic partnerships, brand collaborations, and store redesigns to attract more customers.

3. Explore diversification strategies to expand into new product categories or invest in emerging markets to broaden the company's revenue streams.

Recommendation

Macy's should prioritize the continued implementation of its Polaris strategy, emphasizing excelling in digital shopping and enhancing the in-store experience. By leveraging technology and data analytics to understand consumer behavior and preferences better, Macy's can create personalized shopping experiences and improve customer loyalty.

Implementation

Macy's should allocate resources to upgrade its digital platforms, optimize the mobile shopping experience, and expand omnichannel capabilities. Additionally, the company should invest in employee training and development to ensure high-quality customer service in-store. Regular performance monitoring and adjustments to the strategy will be necessary to adapt to evolving market trends and consumer preferences.

Problem Statement

Macy’s, Inc. faces the challenge of sustaining its recent performance improvement amidst a rapidly evolving retail landscape exacerbated by the COVID-19 pandemic. Despite the initial success of its Polaris turnaround strategy, the company must address stagnant revenue growth, lingering weaknesses in its brick-and-mortar business model, and the persistent threat of online retail competition.

Financial Analysis

Macy’s experienced a decline in revenues from a peak of $28.1 billion in fiscal 2015 to $18.1 billion in fiscal 2020 due to the impact of the COVID-19 pandemic (Gamble & Badal, 2022). However, with the implementation of the Polaris strategy, the company rebounded, and its 2021 performance showed promising signs, including a sharp % increase in online sales by 45% compared to 2019. The company expects digital sales to reach $10 billion by the end of 2022 (Gamble & Badal, 2022). Despite these improvements, Macy’s shares at $19.02 are still trading significantly below their peak in 2015 (Yahoo Finance, 2024). The potential takeover bid by Arkhouse Management and Brigade Capital Management has raised concerns about the future of Macy’s under new leadership led by Tony Spring. Potentially leading to shareholder pressure for action (Loeb, 2024).

An analysis of Macy’s profitability metrics reveals a fluctuation pattern, indicating that the current strategic approach has yet to achieve consistent success. Notably, the Net Profit margins for consecutive years exhibit significant variability, starting at 2.23% in 2019, plunging to -22.07% in 2020, and rebounding to 5.65% in 2021 (Gamble & Badal, 2022). In contrast, the Gross Profit margin shows a more stable trend, maintaining 40.87%, 32.11%, and 40.11% for 2021, 2020, and 2019 respectively. This discrepancy between Net profit and Gross Profit suggests that Macy’s overhead costs are substantially higher, estimated at least 30%. The considerable expense of approximately $3.5 million on restructuring, impairment, and store closures in 2020 significantly impacted Net Income, consequently eroding market share. Reflecting on the return on equity, 2020 recorded a staggering -156.44%, while 2021 showed improvement at 39.49%. Ideally, a return on equity falls within the range of 15% to 20%; thus, a negative value in 2020 was anticipated. Additionally, in 2021, the return on asset (ROA) stood at 8%, categorized as 'good' rather than 'great' considering Macy’s extensive history spanning nearly two centuries (Birken & Curry, 2021).

Turning to liquidity ratios, particularly the quick ratio, it becomes evident that Macy’s ability to meet short-term obligations is precarious. With quick ratios of 0.44 in 2021 and 0.45 in 2020, figures below 1 imply difficulty in paying short-term debts, potentially resulting in higher interest rates on borrowing.

Regarding the debt metrics, Macy’s debt ratio was 36% in 2021 and 45% in 2020, with corresponding debt-to-equity ratios of 1.77 and 3.15, respectively. While a debt-to-equity ratio of 3.15 indicates heavier reliance on debt financing, concerns arise regarding the company's ability to service its debts, especially given the low quick ratio. Gallo (2015) suggests ratios between 2 and 5 are suitable for publicly traded companies like Macy’s, although the general guideline advises staying within the 1 to 1.5 range.

Finally, examining the Asset Turnover ratio, which is significant for portfolio investors, Macy’s recorded a figure of 1.43, indicating moderate efficiency in utilizing assets to generate sales. However, in the retail industry, where a turnover of 2.5 or higher is considered favorable, Macy’s performance falls short, suggesting potential inefficiencies in inventory management (Patin et al., 2020).

Internal Environment Analysis

Strengths

· Macy’s enduring brand presence since its inception in 1830 instills trust and recognition among consumers, fostering a sense of reliability and authenticity in the marketplace.

· With a diverse retailing portfolio encompassing Macy’s department stores, Bloomingdale’s luxury chain, Bluemercury beauty boutiques, and robust online divisions, Macy’s demonstrates resilience and adaptability to cater to varying consumer preferences and shopping behaviors (Gamble & Badal, 2022).

· Macy’s has demonstrated effective strategic planning by implementing the Polaris strategy, which has yielded notable improvements in digital sales.

Weaknesses

· Before implementing the Polaris strategy, Macy’s faced prolonged periods of stagnant revenue growth, indicating a lack of agility in responding to market shifts and consumer demands.

· Macy’s has encountered significant hurdles in transitioning its traditional brick-and-mortar operations to the online retail landscape, potentially missing out on opportunities for market expansion and customer engagement in the digital sphere (Lee, 2024).

· Over its history, Macy’s has grappled with challenges in optimizing its merchandising strategy to meet evolving consumer preferences and delivering consistently satisfactory customer experiences across its stores, hindering long-term customer loyalty and satisfaction.

External Environment Analysis

Opportunities

· The escalating trend of digital shopping presents a lucrative opportunity for Macy’s to capitalize on evolving consumer preferences for online convenience. Leveraging its established brand presence, Macy's could capture a larger share of the digital market.

· Macy’s has significant potential to expand its online sales and digital channels further, leveraging technological advancements and innovative strategies to enhance customer engagement and drive revenue growth in the digital sphere.

· Macy’s can explore opportunities for strategic partnerships and collaborations with industry players, influencers, and technology providers to enrich the customer experience, offering unique and compelling offerings that differentiate Macy’s from competitors and resonate with modern consumers.

Threats

· There is intense competition from online retailers like Amazon and discount retailers like Walmart and Target.

· The department store segment of the retail industry is experiencing a decline, exacerbated by changing consumer shopping habits and preferences favoring alternative retail formats (Lee, 2024).

· Uncertainties due to ongoing shifts in consumer demographics and preferences.

Strategy Alternatives

1. Double down on digital transformation: Invest further in enhancing the online shopping experience, expanding digital channels, and leveraging data analytics to personalize customer interactions.

2. Reinvent brick-and-mortar experience: Innovate store layouts, introduce experiential elements, and forge strategic partnerships to revitalize in-store foot traffic and enhance customer engagement (Loeb, 2024).

3. Diversify product offerings and brands: Expand private label brands, collaborate with exclusive partners, and explore new product categories to attract a broader customer base and differentiate from competitors.

Recommended Strategy

The recommended strategy for Macy’s is to prioritize digital transformation while simultaneously reinventing the brick-and-mortar experience. This entails continued investment in enhancing online channels, leveraging data analytics for personalized marketing, and improving logistics for seamless digital order fulfillment. Simultaneously, Macy’s should innovate its physical stores by introducing experiential elements, strategic partnerships, and a curated product mix to create compelling reasons for customers to visit.

Implementation of the Recommended Strategy

Based on a thorough analysis, Macy's should focus on digital transformation while innovating its brick-and-mortar stores. Leveraging its strong brand presence and successful Polaris strategy, Macy's can expand online sales, capitalizing on the growing trend of digital shopping. Meanwhile, addressing historical weaknesses like challenges transitioning to online retail, Macy's should revamp in-store experiences with innovative layouts and strategic partnerships. By enhancing digital infrastructure and creating compelling in-store experiences, Macy's can ensure sustained success in an evolving retail landscape while continuously monitoring market trends and performance metrics for adaptation.

References

Birken, E. G., & Curry, B. (2021). Understanding Return on Assets (ROA). Forbes. https://www.forbes.com/advisor/investing/roa-return-on-assets/#:~:text=What%20Is%20a%20Good%20ROA,the%20same%20industry%20and%20sectr

Gallo, A. (2015). A Refresher on Debt-to-Equity Ratio. Harvard Business Review. https://hbr.org/2015/07/a-refresher-on-debt-to-equity-ratio

Gamble, J. E., Badal, A. (2022). Macy’s, Inc. in 2022: Has the Implementation of its Polaris Strategy Produced a Successful Turnaround? Mc Graw Hill: Essentials of Strategic Management: The Quest for Competitive Advantage. https://www.mheducation.com/content/dam/mhe/highered/documents/product/strategic-management/author-vetted-cases-gamble-8e.pdf

Kapner, S. (2024, February 27). Macy’s to Close 150 Stores, Puts San Francisco Flagship Up for Sale New CEO Tony Spring wants department-store chain to give customers a chance to ‘shop the way they want’. The Wall Street Journal. https://www.wsj.com/business/retail/macys-closing-stores-earnings-report-83721a8d

Lee, J. (2024, April 5). The Hot Sale Going on at Department Stores: Their Shares

Private buyers might have more stomach for the struggling retail sector than jaded stock investors. The Wall Street Journal. https://www.wsj.com/business/retail/the-hot-sale-going-on-at-department-stores-their-shares-bf5c01ca

Loeb, W. (2024). How Will Macy’s Survive – A Sign of Hard Times For Department Stores. Forbes. https://www.forbes.com/sites/walterloeb/2024/04/01/how-will-macys-survivea-sign-of-hard-times-for-department-stores/?sh=2fc288ae52cc

Patin, J. C., Rahman, M., & Mustafa, M. (2020). Impact of Total Asset Turnover Ratios on Equity Returns: Dynamic Panel Data Analyses. Journal of Accounting, Business and Management (JABM), 27(1), 19-29. http://dx.doi.org/10.31966/jabminternational.v27i1.559

Yahoo Finance (2024, April 22). https://finance.yahoo.com/quote/M/history?period1=1556061866&period2=1713914631

Appendix: Financial Ratio Calculations

	2021	2020	2019
PROFITABILITY RATIOS
Net Profit Margin	5.65%	-22.07%	2.23%
Gross Profit Margin	40.87%	32.11%	40.11%
Operating Profit Margin	7.38%	-26.47%	2.87%
Return on Assets	8.10%
Return on Equity	39.49%	-156.44%
LIQUIDITY RATIOS
Current Ratio	1.25	1.15
Quick Ratio	0.44	0.45
LEVERAGE RATIOS
Debt Ratio	36.34%	45.43%
Debt to Equity	1.77	3.15
EFFICIENCY RATIOS
Inventory Ratio	3.67
Turnover Ratio	2.90
Asset Turnover	1.43
Days' Sales in Inventory	7	8