Macy's Inc. financial decline and operational challenges

Macy's Inc. is an operator of department stores, owning both Macy's and Bloomingdale's. Macy's began in 1858 and operates 810 stores across the country. The company competes as a differentiated provider by attempting to provide "an experience that transcends shopping" (Macy's Inc.com, 2011). The company believes that its key success factors include talent development, marketing and technology. The merchandising and marketing is often conducted at the local level to tailor for a local audience.

Financially, Macy's earned $23.4 billion in fiscal 2010, continuing a four-year decline in revenue. The company earned a profit of $350 million on this revenue, again continuing a long-term trend of reduced earnings. In fiscal 2009, Macy's recorded a charge of $5.4 billion on its goodwill, reflecting a deterioration in the economic climate (Reuters, 2009) and its acquisition of May Department Stores (Taub, 2009). Other retailers made writedowns as well around the same time, though not to the same extent that Macy's did. As the result of its weak performance, the company's stock price declined as below $10 in early 2009 from highs over $45 in early 2007. Since that point, it has come back over $20 (MSN Moneycentral, 2011).

Financial Trends

There are a number of ways to analyze a company's financials, in particular trend analysis and ratio analysis. The trend analysis shows a general deterioration in the company's financials in the past few years. Revenue peaked at $26.97 billion in fiscal 2007, and has declined 12.9% since that point. Profit was at $1.406 billion in fiscal 2006 and was already declining by 2007. Since 2006, profit has declined 75%. Macy's was slow to reduce its cost structure in response to declining sales. The company had increased its sales/general/administrative expense by $2 billion in fiscal 2007, which was responsible for the decline in profit at a point when sales were increasing. When sales subsequently began to slip, the company maintained this cost structure for two further years before making a slight cut last year. The SGA expense has only been reduced 5% in the past four years, when revenues have declined by 12.9%. This indicates that the company's costs are stickier than the revenues -- the reasons for this are not known but should be investigated.

Over the past five years, the company's level of equity has been reduced substantially, from $13.5 billion in fiscal 2006 to $4.7 billion last year. Assets have been reduced from $33.16 billion in 2006 to $21.3 billion in 2010. The level of liabilities has not decreased as much, from $19.69 billion in 2006 to $16.6 billion in 2010. A general summary of the balance sheet trend is that the company is becoming smaller and more highly leveraged at the same time.

The cash flow statement shows that the cash flow from operations has decreased substantially over the past five years, from $4.208 billion in 2006 to $1.75 billion in 2010. In 2007 and 2008, the company tried to prop up the stock price with stock buybacks but has since ceased this practice and instead focused on reducing debt. The commitment to reduce debt, however, has not been steady over the past five years.

Conclusions

What this analysis indicates is that Macy's is handling the downturn in its business relatively well. However, the main sticking point at present is the SGA expense, which is too high. Faced with a challenging operating environment characterized by both economic stagnation and intensifying competition, Macy's has failed to enact a core strategy that appeals to consumers. As a result, the company has seen its sales decline steadily. This has caused the company to shrink its size. Overall, the main point of concern with respect to doing this is that Macy's expanded its cost structure in 2007 and has yet to contract it significantly in response to the market conditions. The company clearly believes that the causes for its decline are external and temporary, but the decline began at least as far back as 2007. That the company's cost structure has grown out of line with its revenues has had a number of impacts. Profitability is down, and if the trend continues Macy's could find itself losing money. This has made it difficult for the company to reduce its debt levels as it reduces assets, a situation that has cause the equity of the company to diminish quickly.

The decline in sales is not a short-term phenomenon. Macy's has a fairly uninspiring online presence, and traditional department stores are losing money to both online retailers and to discount stores. Macy's has not differentiated itself enough to maintain its business. The company therefore needs to adjust to the new business reality in order to maintain profitability. While there is little indication of immediate trouble at Macy's, the trends are almost entirely negative. In a few years, if these trends continue, the company's debt load will become too great such that liquidity and solvency are compromised. In addition, the company will be forced to shrink rapidly and painfully. Macy's needs to find ways to attract more customers or it needs to start cutting costs and addressing its debt levels while the company is still healthy enough to do these things. Once the situation becomes serious, Macy's will find the task of restructuring that much more difficult.

Works Cited:

Macy's Inc.com website. (2011). Retrieved February 10, 2011 from http://www.macysinc.com/macys/

MSN Moneycentral: Macy's (2011). Retrieved February 10, 2011 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?symbol=M

Reuters. (2009). Macy's books $5.4 billion impairment charge. Reuters. Retrieved February 10, 2011 from http://www.reuters.com/article/2009/03/31/us-macys-idUSTRE52U7TR20090331

Taub. S. (2009). In the impairment aisle, Macy's is tops. CFO Magazine. Retrieved February 10, 2011 from http://www.cfo.com/article.cfm/13176929/c_13175224?f=TodayInFinance_Inside