Macy\'s Inc. Is an Operator

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.

Ratio Analysis

The liquidity and solvency ratios provide insight into the company's long and short-term financial health. It would be expected that the company's weakening financial performance over the past five years would have a negative impact on most ratios. The current ratio is 1.54, compared with 1.17 in 2008 and 1.33 in 2006. The quick ratio is 0.45, compared with 0.19 in 2008 and 0.36 in 2006. The unusually high amount of cash on the balance sheet at the end of fiscal 2010 declined over the course of the year, such that at the end of Q3 the quick ratio was 0.15. However, this corresponds with the annual build-up of inventory in advance of the holiday shopping season, so only the year end figure for 2011 should the quarterly figure (which was at the end of October) should not be taken as a sign of deterioration -- the current ratio was still 1.21.

Macy's debt to equity ratio 3.53 in 2010, compared with 1.80 in 2008 and 1.45 in 2006. This reflects a decrease in the equity, more than an increase in debt. Indeed, the debt level has decreased over this period of time, but the equity has decreased substantially including the $5.4 billion goodwill writedown in 2009. The long-term debt ratio is 39.7%, compared with 32.7% in 2008 and 26.7% in 2006, again indicating that while the level of long-term debt has remained roughly unchanged, the company has become much smaller. Overall, Macy's is solvent, but still has long-term debt issues. The company's leverage climbs higher because the company is shrinking, but cannot find a way to reduce its overall debt.

The gross margin in 2010 was 40.5%, compared with 40.4% in 2008 and 40.7% in 2006. The operating margin is 4.5%, compared with 7.1% in 2008 and 10.8% in 2006. The net margin is 1.5%, compared with 3.4% in 2008 and 6.3% in 2006. The lack of significant change in the gross margin indicates that Macy's has maintained its pricing power both with respect to its suppliers and its customers over the past five years. However, it has allowed its own cost structure to increase at a time when revenues were decreasing. The result of this is a decline in the operating margin and consequently the net margin. The company can restore its margins by bringing its costs in line with its revenues -- the expansion of 2007 must be undone and the company simply has not moved strongly enough in that direction since then.

The inventory turnover in 2010 was 3.02 times, compared with 3.09 in 2008 and 2.43 in 2006. This indicates that the company has been able to successfully manage inventory levels despite the slowdown in business. Accounts receivable turnover is 65 times in 2010, compared with 56 times in 2008 and 8.9 times in 2006. Since 2007, Macy's has carried a very low level of receivables on its balance sheet, perhaps indicating a change in credit policy. The result of this is that receivables turn is very high, which may explain some of the change in the current ratio as well. The asset turnover is 1.1 times, compared with 0.94 times in 2008 and 0.67 times in 2006. This indicates that the company is doing a better job of generating revenues from its assets -- the decline in revenues is not as great as the decline in the size of the company overall.

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.