Financial Analysis of Macy’s Inc. and Nordstrom

Financial Analysis of Macy’s Inc. and Nordstrom Macy’s Inc. has established itself as a strong player in the retail industry, with over 850 Macy’s and Bloomingdale’s stores in 45 states. Macy’s competes against retail giants like Nordstrom, Kohl’s, JC penny and Saks Fifth Avenue for market 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 annual report and 10-K filings were obtained from Yahoo! Finance.The financial statements for both companies used in this report are Consolidated Statement of Income, Consolidated Balance Sheets, and Consolidated Statement of Cash Flow from 2010 to 2012. All tables are included in appendix. 1. Company background & Overview Macy's Department Stores, Inc. is a U. S. chain of mid-range department stores. In addition to its internationally renowned flagship Herald Square location in Midto wn Manhattan, New York City, the company operates over 850 other stores in the United States as of September 12, 2012. Nordstrom, Inc. is an upscale fashion specialty retailer chain in the United States.Originally it is a shoe retailer, nowadays 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 impacted department store liquidity, consumer spending and credit market conditions. Companies were able to cut operations and supply chain costs, and most have utilized the savings to improve their liquidity and the strength of their balance sheet.Also, developments in mobile phone technology are drawing more consumers away from brick-and-mortar stores toward online retail platforms. As a result, over the five year s to 2012, the number of companies is expected to decrease at an annualized rate of 31. 8% to an estimated 65 operators. 2. Financial analysis 2. 1 Horizontal analysis 2. 1. 1 Horizontal analysis of Balance Sheet In this section, we will look at the comparative statements of balance sheet of Macy’s Inc. for a three-year period. Macy’s fiscal 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 account in 2010, and fiscal 2010 is the base year for computing the change in 2011. From table 1, two accounts stand out: 2010 cash and cash equivalent decreased by 13% over 2009, while in 2011 it increased by 93% over 2010. Short/Current Long Term Debt increased by 87. 6% in 2010, and kept on increased by 143% in 2011. This huge increased short term debt mainly came from 616 million 5. 35% S enior 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 sales 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 company's Internet businesses in 2011.The successive increase in the net sales in the three year trends shows that Macy’s continues to benefit from the successful execution of the My Macy's localization strategy. In 2011, the Gain on sale of properties, impairments, store closing costs and division consolidation costs account increased 200% over 2010. This is because Macy’s had a $54 milli on gain from the sale of store leases related to the 2006 divestiture of Lord ; Taylor in 2011; while the company only announced 25 million Impairments and store closing costs for 2010. In 2011, Macy’s had the 5. 6% increase in sales.Because the management was able to control its cost of goods sold (6. 17% increase) and SG;A expenses (0. 25% increase), plus the big gain from sales of property, the company resulted a 27. 3% increase in operating income. In 2010, Macy’s 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 Vertical analysis 2. 2. 1 Vertical analysis of Balance Sheet From table 3, we can see that accounts receivables, inventory and other current assets accounts, their percentage of total assets didn’t 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%). Macy’s total current liabilities represent a slightly higher 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. Macy’s gross profit ratio was very stable and consistent over the three year trends, less than 0. 5% difference among three years. Macy’s profit margin ratio kept growing over three years: from 1. 4% in 2009 to 3. 4% in 2010, and this ratio increased to 4. 8% in 2011. The increasing profit margin indicated that Macy’s management has strong ability to control its expenses. 2. 3 Cash flow analysisTable 5 is the most recent cash flow statement for Macy’s. Net cash provided by operating activities in 2011 was $2,093 million, compared to $1,506 million provided in 2010, reflecting higher net income and a lower pension contribution in 2011. In 2011, Macy’s pension funding contributions was $375 million, which was much lower than $825 million in 2010. The capital expenditure for property and equipment and capitalized software during 2011 was $764 million, the dividends paid was $148 million. Macy’s generated sufficient amounts of cash from operations in 2011 to cover its capital expenditures and dividends.Net cash used by investing activities and financing activities was $617 and $113million respectively for 2011. Investing activities for 2011 include purchases of property and equipment totaling $555 million and capitalized software of $209 million. Cash flows from investing activities included $114 million from the disposition of property and equipment for 2011. For financing activities, Macy’s issued $800 million of debt in 2011, but it is partially offset by the acquisition of company’s 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 Macy’s generated in 2011, management budgeted $850 million capital expenditures for 2012, primarily related to new stores, store remodels, maintenance, the renovation of Macy's Herald Square, technology and omnichannel investments, and distribution network 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 Macy’s and Nordstrom over a three year period. At the beginning of 2012, Macy’s had $1. 4 of current assets for every $1 current liabilities.Compared to Nordstrom, both companies have more than enough assets to cover short-term debts, but Nordstrom is more liquid than Macy’s. Macy’s 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 Macy’s, which suggests that it is more liquid than Macy’s in the short term. In 2011, Macy’s only 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. Macy’s accounts receivable turnover ratio in the three year period is much higher than Nordstrom, which implies  Macy’s extension of credit and collection of accounts receivable is more efficient. From 2009 to 2011, Macy’s kept on decreasing the days took to sell inventory, from 133 days in 2009 to 124 and 120 days in 2010 and 2011, respectively.Macy’s efficiency in managing inventory improved over years. But Nordstrom was much more efficient in selling its inventory than Macy’s. In the past three years, each year Nordstrom used half of the days that took Macy’s 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 expe nditure ratios for both Macy’s and Nordstrom from 2009 to 2011.Macy’s debt to equity ratio was under 1 for FY 2009 and 2010, which suggested for these two years Macy’s 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 Macy’s. Compared to Macy’s, 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.Macy’s management is more effective custodians of their shareholder's investments than Nordstrom. A company's 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 better is the debt serving capacity. Macy’s DSCR increased from 1. 42 times in 2010 to 3. 91 times in 2011, which showed the improvement of its debt serving capacity. Nordstrom’s DSCR was higher than Macy’s in the three year period, suggested stronger debt serving capacity than Macy’s.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. Nordstrom’s capital expenditure was very close to Macy’s, although it generated less cash from operations than Macy’s, it paid more dividends than Macy’s every year. This is the reason that Nordstrom’s ratio was lower than Macy’s. 2. 4. 3 Profitability Analysis Profitability ratios are used to determine the company's bottom line and its return to its investors.Table 8 is the profit margin ratio, rate of return on assets and return on sales ratio for both Macyâ€⠄¢s and Nordstrom from 2009 to 2011. The profit margin is an overall indicator of management’s ability to control expenses, reflects the amount of income for each dollar of sales. Note the increase in Macy’s profit margin: from 1. 40% in 2009 to 3. 39% in 2010 and 4. 76% in 2011. Nordstrom has higher profit margin ratio than Macy’s in the three years. A higher profit margin indicates a more profitable company that  has better control over  its costs compared to  its competitors.Macy’s 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 Macy’s generated more profits for each $1 asset. The lower the profit per dollar of assets, the more asset-intensive a business is. Macy’s 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 20 09, 1010 and 2011 respectively, which were all higher than Macy’s. The higher the return, the more efficient management is in utilizing its asset base.Nordstrom’s management does a better job than Macy’s in this case. Macy’s return on sales ratio also kept on growing over 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 Macy’s still lower than Nordstrom over three years period, suggested Nordstrom’s business operations are more satisfactory than Macy’s. From the profitability analysis, we can see that Macy’s kept on having a healthy development over time, its profitability ability kept on improving.Compared to Nordstrom, the ratios suggest that Macy’s still a less profitable company than Nordstrom. 2. 4. 4 DuPont Analysis DuPont equation provides a broader picture of the return the company is earn ing on its equity. It tells where a company's strength lies and where there is a room for improvement. DuPont analysis  tells us that ROE is affected by  three things: Operating efficiency, which is  measured by profit margin; Asset use efficiency, which is measured by total asset turnover; and Financial leverage, which is  measured by the equity multiplier.So the formula will be: ROE = (Net Income/Revenue)*(Revenue/Assets)*(Assets/Equity) Table 9 is the DuPont analysis for both Macy’s 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 Macy’s 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 Macy’s ROE were lower than N ordstrom’s, 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 Macy’s management kept on improving its performance and the company developed in a healthy and growing direction. 3. Conclusions From above analysis, Macy's, 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 adequate to service the debt. Accounts Receivable is typical for the industry, with 4. 8 days worth of sales outstanding. Also, Macy's, Inc. is among the most efficient companies in its in dustry 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, Macy's, Inc. has been able to grow revenues. Most impressively, the company has been able to reduce 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, Macy’s is in a weaker financial position. In short run, as mentioned earlier, the liquidity ratios suggest that Macy’s is less liquid in the short term.In the long run, although Macy’s management is more effective custodians of their shareholder's investments than Nordstrom, Nordstrom still has stronger debt serving capacity than Macy’s and affording to pay more dividends to its shareholders. From the profitability analysis, Macy’s has smaller profit margin ratio, rate of return on assets and rate of return on sales ratio than Nordstrom, indicates that Nordstrom’s management is better at generating more profit and operating assets efficiency than Macy’s. And this result is consistent with the DuPont analysis.Appendix Table 1 Horizontal Analysis of Balance Sheet Macy's Inc. Comparative Balance SheetsPeroid Ending: End of Jan 2010-2012(all amount in thousands of dollars)| | 2012| 2011| 2010| Cash And Cash Equivalents| 2827000| 93%| 1464000| -13. 17%| 1686000| —| Accounts Receivables| 368000| 9%| 338000| -5. 59%| 358000| —| Inventory| 5117000| 8%| 4758000| 3. 10%| 4615000| —| Other 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 | 593 3000| 7%| 5530000| 18. 85%| 4653000| —| Table 2 Horizontal analysis of Income StatementMacy's 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| —| Gross 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 before 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 Macy's 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%| 42200 00| 20%| Short/Current Long Term 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 Macy's Inc. Common-Size Comparative Income StatementPeroid Ending: End of Jan 2010-2012(m illions, except per share data)| | 2012| 2011| 2010| dollars| percent| dollars| percent| Dollars| Percent| Net Sales| 26405| 100. 00%| 25003| 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 operatin g activities:| Net income| 1256. 00 | 847. 00 | Depreciation 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. 0 0)| 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 | Macy's| Nordstrom| | 2011| 2010| 2009| 2011| 2010| 2009| current ratio| 1. 4| 1. 38| 1. 54| 2. 2| 2. 6| 2| ash flow from operations 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 | Macy's| 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 | Macy's| 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 | Macy's| 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%| 28. 04%|