Financial Analysis of Macy’s Inc. and Nordstrom

Financial Analysis of Macys Inc. and Nordstrom Macys Inc. has established itself as a unfluctuating player in the retail industry, with all over 850 Macys and Bloomingdales stores in 45 states. Macys competes against retail giants like Nordstrom, Kohls, JC penny and Saks Fifth Avenue for mart share in the increasingly competitive department store industry. This financial report will choose Nordstrom as the major competitor, and serves as the comparison company. The one-year report and 10-K filings were obtained from Yahoo Finance.The financial argumentations for both companies used in this report are Consolidated disputation of Income, Consolidated eternal sleep Sheets, and Consolidated Statement of notes Flow from 2010 to 2012. All tables are included in appendix. 1. Company background & Overview Macys Department Stores, Inc. is a U. S. chain of mid-range department stores. In addition to its internationally notable flagship Herald Square location in Midtown Manhattan, New Y ork City, the company ope stations over 850 other stores in the United States as of September 12, 2012. Nordstrom, Inc. is an upscale fashion enduringness retailer chain in the United States.Originally it is a shoe retailer, at a timeadays the company also sells clothing, accessories, handbags, jewelry, cosmetics, fragrances and home furnishings in some locations. There are now 231 stores operating in 31 states across the U. S. Beginning in 2008, department stores faced financial challenges partially attributed to the global economic crisis. The downturn negatively impact department store liquidity, consumer spending and credit market conditions. Companies were able to cut opeproportionns and supply chain cost, and most make utilized the savings to mitigate their liquidity and the strength of their balance sheet.Also, developments in mobile phone technology are drawing to a greater extent(prenominal) consumers away from brick-and-mortar stores toward online retail platforms. A s a result, over the five years to 2012, the number of companies is expected to drop at an annualized rate of 31. 8% to an estimated 65 operators. 2. Financial epitome 2. 1 Horizontal digest 2. 1. 1 Horizontal analysis of Balance Sheet In this section, we will look at the comparative statements of balance sheet of Macys Inc. for a triad-year period. Macys monetary year ends on the Saturday closest to January 31.Fiscal years 2011, 2010 and 2009 ended on January 28, 2012, January 29, 2011 and January 30, 2010, respectively. Fiscal 2009 is chosen as the base year for computing the percentage change in each written report in 2010, and fiscal 2010 is the base year for computing the change in 2011. From table 1, two accounts stand out 2010 funds and coin equivalent decreased by 13% over 2009, while in 2011 it join ond by 93% over 2010. short-circuit/Current bulky enclosure Debt step-upd by 87. 6% in 2010, and kept on increased by 143% in 2011. This huge increased of a sudden term debt mainly came from 616 meg 5. 35% Senior notes due 2012, 298 million 5. 75% Senior notes due 2013, and 173 million 8. 0% Senior debentures due 2012. The huge increase in short term debt in FY 2011 maybe part of the reason of the big increase in the cash and cash equivalent account. 2. 1. 2 Horizontal analysis of Income Statement From table 2, we can see that net gross gross revenue for 2011 totaled $26,405 million, compared to net sales of $25,003 million for 2010, an increase of $1,402 million or 5. 6%. Part of this increase is due to an increase on the comparable store basis, and part of it is due to the 39. 6% increases from the companys Internet disdaines in 2011.The successive increase in the net sales in the lead year trends shows that Macys continues to benefit from the successful execution of the My Macys localization strategy. In 2011, the Gain on sale of properties, impairments, store settlement costs and division consolidation costs account increased 200% ove r 2010. This is because Macys had a $54 million gain from the sale of store leases link up to the 2006 divestiture of Lord Taylor in 2011 while the company yet announced 25 million Impairments and store closing costs for 2010. In 2011, Macys had the 5. 6% increase in sales.Because the management was able to control its cost of goods sold (6. 17% increase) and SGA expenses (0. 25% increase), plus the big gain from sales of property, the company resulted a 27. 3% increase in operating income. In 2010, Macys net sales increased 6. 45% over 2009, part of it is due to the huge decrease in the impairments, store closing costs and division consolidation costs account. The interest expense increased in 2010 over 2009, while the same account decreased 22. 8% in 2011 over 2010. This decreases benefited from lower levels of borrowings during fiscal 2010 and the repayment of debt at maturity. . 2 perpendicular analysis 2. 2. 1 Vertical analysis of Balance Sheet From table 3, we can see that accounts receivables, inventory and other current additions accounts, their percentage of total assets didnt have big difference over the three years trend. The increase of cash and cash equivalent from 7. 1% of total assets in 2010 to 13% in 2011 is the main reason that total current asset in terms of the percentage of total assets had significant increase (from 33% to 40%). Macys total current liabilities represent a slightly high percentage of total liabilities and stockholders equity at FY 2011 than FY 2010 and 2009.This increase is balanced by a slight decrease in the relative percentages of long-term debt. 2. 2. 2 Vertical analysis of Income Statement In table 4, the base on which all other items in the income statement are compared is net sales. Macys gross get ahead proportionality was very stable and consistent over the three year trends, less(prenominal) than 0. 5% difference among three years. Macys realize allowance proportionality kept growing over three years fr om 1. 4% in 2009 to 3. 4% in 2010, and this ratio increased to 4. 8% in 2011. The increasing gain ground margin indicated that Macys management has strong readiness to control its expenses. 2. 3 currency flow analysisTable 5 is the most recent cash flow statement for Macys. kale cash provided by operating activities in 2011 was $2,093 million, compared to $1,506 million provided in 2010, reflecting high net income and a lower pension contribution in 2011. In 2011, Macys pension funding contributions was $375 million, which was much lower than $825 million in 2010. The big(p) expenditure for property and equipment and superiorized software package during 2011 was $764 million, the dividends paid was $148 million. Macys generated sufficient essences of cash from trading operations in 2011 to cover its crownwork expenditures and dividends.Net cash used by investing activities and financing activities was $617 and $113million respectively for 2011. Investing activities for 20 11 include purchases of property and equipment totaling $555 million and capitalized software of $209 million. funds flows from investing activities included $114 million from the disposition of property and equipment for 2011. For financing activities, Macys issued $800 million of debt in 2011, but it is partially offset by the attainment of companys common stock at cost of $500 million and the repayment of $454 million debt, and the payment of $148 million of cash dividends.With the excess amounts of cash from operations Macys generated in 2011, management budgeted $850 million capital expenditures for 2012, primarily related to new stores, store remodels, maintenance, the renovation of Macys Herald Square, technology and omnichannel investments, and distribution profit improvements, including construction of a new fulfillment center. 2. 4 Ratio analysis 2. 4. 1 liquidity Analysis Table 6 is the liquidity ratios for both Macys and Nordstrom over a three year period. At the beg inning of 2012, Macys had $1. 4 of current assets for every $1 current liabilities.Compared to Nordstrom, both companies have more(prenominal)(prenominal) than enough assets to cover short-term debts, but Nordstrom is more liquid than Macys. Macys cash flow from operations to current liabilities ratio has increased from 2010 to 2011, from 31. 90% to 37. 20%. It is mainly because cash generated from operations during 2011 was 40% more than it was during 2010. Both companies cash flow from operations to current liabilities ratio is less than one, it means that both companies have generated less cash over the year than it needs to pay off short term liabilities as at the year end. This may signal a need to raise money to meet liabilities.But Nordstrom still has higher ratio than Macys, which suggests that it is more liquid than Macys in the short term. In 2011, Macys whole needs 4. 8 days for an account to be outstanding. And the number of days sale in receivable for the past three years were all less than a week. Macys accounts receivable turnover ratio in the three year period is much higher than Nordstrom, which impliesMacys extension of credit and disposition of accounts receivable is more efficient. From 2009 to 2011, Macys kept on decreasing the days took to sell inventory, from 133 days in 2009 to 124 and 120 days in 2010 and 2011, respectively.Macys ability in managing inventory improved over years. But Nordstrom was much more efficient in selling its inventory than Macys. In the past three years, each year Nordstrom used half of the days that took Macys to sell its inventory. 2. 4. 2 Solvency Analysis The solvency of a company is the ability to repay long term debts when due. The more solvent a company is the more protected the owners and partners are from bankruptcy. Table 7 is the debt to equity ratios debt service coverage ratios and cash flow from operations to capital expenditure ratios for both Macys and Nordstrom from 2009 to 2011.Macys debt to equity ratio was under 1 for FY 2009 and 2010, which suggested for these two years Macys assets are primarily financed through equity. This ratio was 1. 06 in 2011. When the debt to equity ratio was over 1, implied the majority of assets are financed through debt, which was a red flag for Macys. Compared to Macys, Nordstrom had a much higher debt to equity ratio which was above 2 for all three years. A high ratio of 2 or more exposes a company to risk such as interest rate increases and causing creditors uneasiness.Macys management is more effective custodians of their shareholders investments than Nordstrom. A companys debt service coverage ratio refers to its ability to meet periodic obligations on outstanding liabilities with respect to its net operating revenue. Higher this figure break off is the debt serving capacity. Macys DSCR increased from 1. 42 clock in 2010 to 3. 91 times in 2011, which showed the improvement of its debt serving capacity. Nordstroms DSCR was higher than Macys in the three year period, suggested stronger debt serving capacity than Macys.Although the cash flow from operations to capital expenditures ratios for two companies decreased over time in three years, both companies generated enough cash from operations to finance their capital expenditures and covered dividend payments. Nordstroms capital expenditure was very close to Macys, although it generated less cash from operations than Macys, it paid more dividends than Macys every year. This is the reason that Nordstroms ratio was lower than Macys. 2. 4. 3 Profitability Analysis Profitability ratios are used to determine the companys bottom line and its mother to its investors.Table 8 is the profit margin ratio, rate of fork up on assets and return on sales ratio for both Macys and Nordstrom from 2009 to 2011. The profit margin is an overall indicator of managements ability to control expenses, reflects the amount of income for each dollar of sales. Note the increase in Macys profit margin from 1. 40% in 2009 to 3. 39% in 2010 and 4. 76% in 2011. Nordstrom has higher profit margin ratio than Macys in the three years. A higher profit margin indicates a more profitable company thathas better control overits costs compared toits competitors.Macys effective tax rate from 2009 to 2011 was 30. 9%, 35. 8% and 36. 2%. Its return on assets rations increased from 2. 31% in 2009 to 4. 82% in 2010, and 6. 64% in 2011. It suggests Macys generated more profits for each $1 asset. The lower the profit per dollar of assets, the more asset-intensive a business is. Macys ROA suggested it is very asset-heavy. Nordstrom used a statutory Federal income tax rate 35%, and its ROA was 8. 01%, 9. 37% and 9. 14% for 2009, 1010 and 2011 respectively, which were all higher than Macys. The higher the return, the more efficient management is in utilizing its asset base.Nordstroms management does a better job than Macys in this case. Macys return on sales ratio also kept on growing ov er three years, from 2. 16% in 2009 to 4. 12% and 5. 35% in 2010 and 2011 respectively. It implies the company makes more profit for every $1 sales over time. But this ratio for Macys still lower than Nordstrom over three years period, suggested Nordstroms business operations are more satisfactory than Macys. From the profitability analysis, we can see that Macys kept on having a healthy development over time, its profitability ability kept on improving.Compared to Nordstrom, the ratios suggest that Macys still a less profitable company than Nordstrom. 2. 4. 4 DuPont Analysis DuPont equation provides a broader picture of the return the company is earning on its equity. It tells where a companys strength lies and where there is a room for improvement. DuPont analysistells us that hard roe is affected bythree things Operating susceptibility, which is deliberate by profit margin Asset use efficiency, which is measured by total asset turnover and Financial leverage, which ismeasured by the equity multiplier.So the manifestation will be roe = (Net Income/Revenue)*(Revenue/Assets)*(Assets/ candour) Table 9 is the DuPont analysis for both Macys and Nordstrom from 2009 to 2011. Looking at the components of ROE for both companies helps explain the changes in ROE over time. Since Nordstrom had higher profit margin ratio, asset turnover rate and leverage factors, its overall ROE was much higher than Macys in the three year trend. It shows Nordstrom is more effective at generating profits, managing assets and finding an optimal amount of leverage, this is why it can boost its ROE.Although Macys ROE were lower than Nordstroms, its own ROE still kept on growing over years, from 7. 05% in 2009 to 15. 05% and 21. 25% in 2010 and 2011 respectively. It is result of improving its operating efficiency and asset use efficiency, which suggests Macys management kept on improving its performance and the company developed in a healthy and growing direction. 3. Conclusions From abov e analysis, Macys, Inc. may have more financial risk than other companies in the Multiline Retail industry.It has smaller current ratio and cash from operations to current liabilities ratio than its competitors, implies less liquid in the industry. However, an examination of near-term assets and liabilities shows that, even though there are not enough liquid assets to satisfy current obligations, operating profits are more than commensurate to service the debt. Accounts Receivable is typical for the industry, with 4. 8 days worth of sales outstanding. Also, Macys, Inc. is among the most efficient companies in its industry at managing inventories, and it is getting better.The company only has 120 days of its Cost of Goods Sold tied up in inventory. Year over year, Macys, Inc. has been able to grow revenues. Most impressively, the company has been able to decrease the percentage of sales devoted to selling, general and administrative costs. This was a driver that led to a net income growth from $847. 0M in 2010 to $1. 3B in 2011. Compared to its main competitor, Nordstrom, Macys is in a weaker financial position. In short run, as mentioned earlier, the liquidity ratios suggest that Macys is less liquid in the short term.In the long run, although Macys management is more effective custodians of their shareholders investments than Nordstrom, Nordstrom still has stronger debt serving capacity than Macys and affording to pay more dividends to its shareholders. From the profitability analysis, Macys has smaller profit margin ratio, rate of return on assets and rate of return on sales ratio than Nordstrom, indicates that Nordstroms management is better at generating more profit and operating assets efficiency than Macys. And this result is consistent with the DuPont analysis.Appendix Table 1 Horizontal Analysis of Balance Sheet Macys Inc. Comparative Balance SheetsPeroid Ending End of Jan 2010-2012(all amount in thousands of dollars) 2012 2011 2010 Cash And Cash Eq uivalents 2827000 93% 1464000 -13. 17% 1686000 Accounts Receivables 368000 9% 338000 -5. 59% 358000 Inventory 5117000 8% 4758000 3. 10% 4615000 separate Current Assets 465000 37% 339000 52. 02% 223000 TOTAL CURRENT ASSETS 8777000 27% 6899000 0. 25% 6882000 Property Plant and Equipment 8420000 -4% 8813000 -7. 0% 9507000 Goodwill 3743000 0% 3743000 0. 00% 3743000 Intangible Assets 598000 -6% 637000 -6. 05% 678000 Other Assets 557000 3% 539000 10. 00% 490000 TOTAL ASSETS 22095000 7% 20631000 -3. 14% 21300000 Accounts Payable 5160000 14% 4537000 7. 51% 4220000 Short/Current Long Term Debt 1103000 143% 454000 87. 60% 242000 TOTAL CURRENT LIABILITIES 6263000 25% 4991000 11. 86% 4462000 Long Term Debt 6655000 -5% 6971000 -17. 56% 8456000 Other Liabilities 2103000 8% 1939000 -25. 4% 2597000 Deferred Long Term Liability Charges 1141000 -5% 1200000 6. 01% 1132000 TOTAL LIABILITIES 16162000 7% 15101000 -9. 29% 16647000 Common Stock 5000 0% 5000 0. 00% 5000 Retained Earnings 4015000 34% 2990000 34. 26% 2227000 Treasury Stock -2434000 0% -2431000 -3. 34% -2515000 Capital Surplus 5408000 -5% 5696000 0. 12% 5689000 Other Stockholder Equity -1061000 45% -730000 -3. 05% -753000 TOTAL STOCKHOLDER EQUITY 5933000 7% 5530000 18. 85% 4653000 Table 2 Horizontal analysis of Income StatementMacys Inc. Comparative Income StatementPeroid Ending End of Jan 2010-2012(millions, except per share data) 2012 2011 2010 Net Sales 26405 5. 61% 25003 6. 45% 23489 Cost of sales 15738 6. 17% 14824 6. 09% 13973 tax revenue margin 10667 4. 79% 10179 6. 97% 9516 Selling, general and administrative expenses 8281 0. 25% 8260 2. 46% 8062 Gain on sale of properties, impairments, store closing costs and division consolidation costs 25 -200. 00% -25 -93. 61% -391 Operating income 2411 27. 30% 1894 78. 17% 1063 Interest expense 447 -22. 0% 579 3. 02% 562 Interest income 4 -20. 00% 5 -16. 67% 6 Income in the lead tax 1968 49. 09% 1320 160. 36% 507 Federal, state and local income tax benefit (expense) 712 50. 53% 473 165. 73% 178 Net income 1256 48. 29% 847 157. 45% 329 Table 3 Vertical analysis of Balance Sheet Macys Inc. Common-Size Comparative Balance SheetsPeroid Ending End of Jan 2010-2012(all amount in thousands of dollars) 2012 2011 2010 Dollars Percent Dollars Percent Dollars Percent Cash And Cash Equivalents 2827000 13% 1464000 7. 0% 1686000 7. 92% Accounts Receivables 368000 2% 338000 1. 64% 358000 1. 68% Inventory 5117000 23% 4758000 23. 06% 4615000 21. 67% Other Current Assets 465000 2% 339000 1. 64% 223000 1. 05% TOTAL CURRENT ASSETS 8777000 40% 6899000 33. 44% 6882000 32. 31% Property Plant and Equipment 8420000 38% 8813000 42. 72% 9507000 44. 63% Goodwill 3743000 17% 3743000 18. 14% 3743000 17. 57% Intangible Assets 598000 3% 637000 3% 678000 3. 18% Other Assets 557000 3% 539000 2. 61% 490000 2. 0% TOTAL ASSETS 22095000 100% 20631000 100. 00% 21300000 100. 00% Accounts Payable 5160000 23% 4537000 22% 4220000 20% Short/Current Long T erm Debt 1103000 5% 454000 2% 242000 1% TOTAL CURRENT LIABILITIES 6263000 28% 4991000 24% 4462000 21% Long Term Debt 6655000 30% 6971000 34% 8456000 40% Other Liabilities 2103000 10% 1939000 9% 2597000 12% Deferred Long Term Liability Charges 1141000 5% 1200000 6% 1132000 5% TOTAL LIABILITIES 16162000 73% 15101000 73% 16647000 78% Common Stock 5000 0% 5000 0% 5000 0%Retained Earnings 4015000 18% 2990000 14% 2227000 10% Treasury Stock -2434000 -11% -2431000 -12% -2515000 -12% Capital Surplus 5408000 24% 5696000 28% 5689000 27% Other Stockholder Equity -1061000 -5% -730000 -4% -753000 -4% TOTAL STOCKHOLDER EQUITY 5933000 27% 5530000 27% 4653000 22% TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 22095000 100% 20631000 100% 21300000 100% Table 4 Vertical analysis of Income Statement Macys Inc. Common-Size Comparative Income StatementPeroid Ending End of Jan 2010-2012(millions, except per share data) 2012 2011 2010 dollars percent dollars percent Dollars Percent Net Sales 26405 100. 00% 25 003 100. 00% 23489 100. 00% Cost of sales 15738 59. 60% 14824 59. 29% 13973 59. 49% Gross margin 10667 40. 40% 10179 40. 71% 9516 40. 51% Selling, general and administrative expenses 8281 31. 36% 8260 33. 04% 8062 34. 32% Gain on sale of properties, impairments, store closing costs and division consolidation costs 25 0. 09% -25 -0. 10% -391 -1. 66% Operating income 2411 9. 13% 1894 7. 58% 1063 4. 53% Interest expense 447 1. 9% 579 2. 32% 562 2. 39% Interest income 4 0. 02% 5 0. 02% 6 0. 03% Income before tax 1968 7. 45% 1320 5. 28% 507 2. 16% Federal, state and local income tax benefit (expense) 712 2. 70% 473 1. 89% 178 0. 76% Net income 1256 4. 76% 847 3. 39% 329 1. 40% Table 5 Consolidated Statements of Cash Flows (Dollars in millions) 2011 2010 Cash flows from operating activities Net income 1256. 00 847. 00 wear and tear and amortization 1085. 00 1150. 00 Gain on sale of properties, impairments and store closing costs (25. 0) 25. 00 Decrease in working capital and other, net (223. 00) (516. 00) Net cash provided by operating activities 2093. 00 1506. 00 Cash flows from investing activities Capital expenditures for property and equipment and capitalized software (764. 00) (505. 00) Disposition of property and equipment 114. 00 74. 00 Other, net 33. 00 (34. 00) Net cash used by investing activities (617. 00) (465. 00) Cash flows from financing activities Debt issued 800. 00 - Debt repaid (454. 00) (1245. 00) Dividends paid (148. 0) (84. 00) Acquisition of treasury stock (502. 00) (1. 00) Issuance of common stock 162. 00 43. 00 Other, net 29. 00 24. 00 Net cash used by financing activities (113. 00) (1263. 00) Net increase (decrease) in cash and cash equivalents 1363. 00 (222. 00) Cash and cash equivalents at beginning of period 1464. 00 1686. 00 Cash and cash equivalents at end of period 2827. 00 1464. 00 Table6 Liquidity Ratios Macys Nordstrom 2011 2010 2009 2011 2010 2009 current ratio 1. 4 1. 38 1. 54 2. 2 2. 6 2 ash flow from oper ations to current liabilities 37. 20% 31. 90% 36. 50% 52. 90% 60. 50% 69. 20% number of days sale in receivables 4. 8 5 6. 1 65. 5 72 80 number of days sale in inventory 120 124 133 58 57 61 Table7 Solvency Ratios Macys Nordstorm 2011 2010 2009 2011 2010 2009 debt to equity 1. 06 0. 9 0. 96 3. 34 2. 69 3. 19 debt service coverage ratio 3. 91 1. 42 1. 6 10. 4 3. 48 3. 73 cash flow from operations to capital expenditure 350% 390% 469% 192% 253% 309% Table 8 Profitability Ratios Macys Nordstrom 2011 2010 2009 2011 2010 2009 profit margin ratio 4. 76% 3. 39% 1. 40% 6. 28% 6. 32% 5. 11% return on assets 6. 64% 4. 92% 2. 31% 9. 14% 9. 37% 8. 01% return on sales 5. 35% 4. 12% 2. 16% 6. 70% 6. 78% 5. 68% Table 9 DuPont Analysis Macys Nordstrom DuPont analysis factors 2011 2010 2009 2011 2010 2009 profit margin 4. 76% 3. 39% 1. 40% 6. 28% 6. 32% 5. 11% asset turnover 1. 2 1. 21 1. 1 1. 28 1. 3 1. 31 leverage 3. 72 3. 73 4. 58 4. 34 3. 69 4. 19 ROE 21. 25% 15. 30% 7. 05% 34. 89% 30. 32% 2 8. 04%