Macy’s Inc. has been struggling with debt issues for a while now. The high rate of debts has remained present and made it difficult for the balance sheet to look realistic. However, the measures in place aimed at minimizing liabilities in the coming years. In this light, the company has made official announcements of the expiration and provision of final results of the exchange. This is regarding some of the outstanding debt securities of Macy’s retail holding. Decreasing amounts of sales made by the company over the last months have fueled the disadvantages associated with debts the company is having.
Overview (~100-150 words)
•State your position (Buy, Sell, or Hold), the target price, and upside/downside percent.
•Identify the key reasons for your opinion – don’t overexplain, these will be covered below.
FOR EXAMPLE :
We issue a BUY recommendation on Hanesbrand Inc. with a current stock price of $14.13 and a target price of $24.4 with a plus or minus of approximately 10%. This was found with the price-to-earnings ratio presenting a 73% increase. Hanesbrands focuses on innerwear and activewear segments.Their global portfolio includes megabrands with strong heritage and deep household penetration in their respective markets: Hanes is one of the world leaders in inner wear and in the upper position of apparel brands in the United States market and is found in nine out of 10 U.S. households. Bonds is the number one brand of underwear in Australia, and DIM is a mass leader in intimate apparel in France. We expect Hanesbrands margin expansion because of their ability to quickly adapt due to the COVID-19 pandemic, continued increases in operating profits and earning ratios, and their persistent global expansion while maintaining to deliver products based on consumer needs.
Investment Summary
Current earnings of Macy’s Inc projects that EV/EBIT ratio will be inversed. The data depicts that the firm is expected to gain returns of up to 10%, a move that will be unique in the history of the company. The competitive advantage that the company enjoys invests a relatively more straightforward task. Although the benefits are being weakened year in year out, they are still valid, and they can support any investment. The first one is the cost advantage. The company is focused on minimizing its expenditures. For example, they are closing some of its stores which are not earning enough profit. Brand value is another advantage that investors look at. Yes, the brand is declining each day. However, it is still strong in the industry.
•Investment Summary (~300-450 words)
•For each of your key reasons identified above, explain what is driving your assumptions about the future.
FOR EXAMPLE:
On March 11, 2020 the World Health Organization declared a global pandemic that decreased customer traffic in retail stores, changed consumers’ spending habits, and slowed down the U.S. and global economies. 2020 will be negatively impacted but the company continues to generate sales through channels of trade that have remained open during the pandemic, including online and mass retail. In response to the pandemic Hanesbrand has quickly adapted to making over 320 million reusable fabric face masks and more than 20 million medical gowns for the U.S. government and on track to deliver more. Their swift change of production helped meet a critical product in need and kept thousands of garment industry employees working and paid.
Hanes for Good, Hanesbrands corporate social responsibility program has significantly reduced their environmental footprint. They earned a leadership level A for two consecutive years in the CDP Climate Change Report and have been a U.S. Environmental Protection Agency Energy Star Sustained Excellence Award winner for ten consecutive years. With a lot more people becoming more eco-friendly in today's climate they target brands accountable for what steps they’ve taken to be more sustainable. Because Hanesbrands primarily operates its own manufacturing facilities and owns the majority of their supply chain they have more direct control over their high standards. This is a huge plus for Hanes brand and self manufacturing can control costs and increase efficiency. Approximately 80% of all apparel that is sold by them is produced in plants they own or by contractors. Consumers’ knowledge of Hanesbrands efforts for humanity will continue to make Hanesbrand a key producer in the textile business.
Hanesbrand stated that prior mid-March the U.S. innerwear segment sales and profits were significantly better than expected and we suspect sales to increase after the global pandemic is over. HanesBrands products are sold everywhere: company owned retail stores, mass merchandise, mid-tier, department stores, college bookstores, dollar stores, as well as directly to consumers online. Champion brand is one segment that is doing extraordinarily well for Hanes. They are currently focused on opening 200 Champion stores across Asia. Along with satisfying consumers’ needs the increasing popularity of their Champion brand makes it a legitimate contender in athletic and fashion apparel.
Financial Analysis
Macy’s Inc. stock price performance in the last five years show fluctuations in the trend they are taking. Despite this fact, the projection for the next five years is a steady increase. Looking at the financial information provided and comparing the company with other firms engaged in stores departments, it is evident that Macy’s Inc performance of the year 2020 is the worst. A similar conclusion can be made if the company performance can be compared with the averages of entire U.s companies.
•Financial Analysis (~200-300 words)
•Explain how your key reasons are driving your financial forecasts, particularly with regards to revenue, profitability, capital spending, working capital management and leverage.
FOR EXAMPLE:
HanesBrands global footprint and in-house manufacturing are keys to its success. Net income has steadily grown and 2019 was a good year seeing increases from $79 million in q1 to $188 million in q3. International sales can be a major contributor here resulting in a year to year increase of 7% in international growth. This growth has offset a lack of sales recently in the innerwear segment, reflecting a tough environment right now. EPS and operating income have seen the most positive sides for Hanesbrand. Both have increased substantially and we do not see this changing. A steady stream of sales and operating profit are forecasted for Hanes in the upcoming years. Our sales growth projections take into account the expansion of one part of the company and also the struggling side of the other with retail stores performing poorly in this climate.
Valuation
Different valuation approaches were utilized to support P/E, P/S and EV/EBITDA positions of the company. All the locations comprise of enough data, that if well calculated gives the right estimate of what is expected out of the company. The estimates reveal a constant growth if all issues are taken into consideration. Macy’s Inc can grow and expand as it acquires more brands of the products being sold. Presence of multiple position models helps in determining the best model, which can offer the right market estimates based on the known assumptions. The company assumes that with the decreasing debts, profits will prevail in future as the earnings are expected to grow. Taking all these into consideration, it can state categorically that gains in the coming years are set to go high.
•Valuation (~200-300 words)
•Identify the methodologies used which support your position and the resulting values.
•Discuss the inputs and outputs for each method you refer to, and how they connect to your overall value hypothesis.
FOR EXAMPLE:
The projected sales growth in 2021 is expected to drop from 2.5% to 1.6% because of reduced needs for personal protective equipment and the decrease of consumer spending due to the economical shock of the pandemic. However the increased popularity of the Champion brand and sales of inner wear products there is no cause for concern for Hanes. We forecast that the expansion of Champion brand stores in Asia will not happen immediately but will surely benefit the company immensely in the coming years. We calculated a $24.4 value per share based on discounted equity cash flows model assuming an unlevered cost of capital of 1.03% and terminal growth rate of 2.89%. We used different valuation methods to support our stance. All include P/E, P/S, and EV/EBITIDA multiples. The increases over past year are a strong sign in this current climate. The discounted free cash flows used the WACC percentage of 7.10%, which involves the use of the market value of debt, something that the discounted equity cash flow does not.
Investment Risks
In the past years, Macy’s Inc has been a typical company that has been hitting the headlines about the profits the company is making. Uncertainty of the US business in recent years has made it difficult for investors to trust the business. These uncertainties have mitigated different investors into channeling their investments to organizations like Macy’s Inc. The high volatility and dynamic nature of the markets have made it difficult for brand loyalty to grow. People no longer trust Macy’s Inc products as they used to do. COVID-19 challenges have also been into the market. More resources have been channeled towards addressing the issues, leaving the business world open. Besides some products have been forced to be cheaper because few people are ordering them. All these are subjecting the company to risks of investments as returns are not guaranteed.
Investment Risks (~200-300 words)
•Explain what might make the price move differently than you predict, and how you accommodated this in your analysis.
FOR EXAMPLE :
Hanes must deal with the economic fallout of COVID-19, the crisis put many of its wholesale partners at risk of downsizing or going out of business. The high volatility in the apparel market leads to minimal brand loyalty. Competitors such as lifestyle brands, new clothing companies, and duplicated products available at cheaper prices pose a serious threat to Hanesbrands. Due to the COVID-19 pandemic consumers’ spending can continue to be low and consumers may choose to purchase fewer of Hanesbrands products or purchase lower-priced products of competitors. Fairly high amount of net debt on the balance sheet for Hanes brand is also a risk. However it is only a risk if they are not able to pay off the liabilities they are incurring. 2019 net debt was $3.81b so Hanes Brand is clearly relying on these loans to further their ventures. Time will tell if this will help or hurt the bottom line. Another risk ecommerce. With shares of the clothing manufacturer doubling off their March lows and regaining all the ground lost due to the pandemic; its operations were just as much at risk as the competitions' during the pandemic because three-quarters of its revenue came from third-party retailers, most of which were forced to close down. However, because it also sells to mass merchandisers like Walmart and Target, which combined account for 25% of total revenue, and they were able to remain operational during the pandemic, it was not completely shut off from retail sales. In fact, those two retailers were among the best performers during the crisis.
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