Stock Analysis: Macy’s
About the report
The report comprehensively discusses the discounted cash flow model and related assumptions used for calculating the intrinsic value of Macy’s stock. Since the objective of this report is to frame a prudent investment recommendation, we will also discuss the industry reports to forecast the future potential of the stock.
About the company
Founded in the year 1830, Macy’s is the largest department stores in the United States. The company has relied on multiple acquisitions over the years and has now united a conglomerate of regional brands under its flagship brands of Macy’s and Bloomingdale. Being one of the earliest department stores to start their web-based sale platform and because of the diversity of merchandise it sells in its stores, the company enjoys a dominating market share in the industry. By January, 2016, the company operated 870 stores in 45 countries.
Key Takeaways
a) Sustainable return to shareholders
The company has now added many regional brands to its portfolio and this has allowed to develop omni-channel capabilities and benefit from the synergies in the form of growth and removing excess costs. This strategy has also benefited the stakeholders, who has been rewarded with the return of more than 30% on a compounded basis for the past five years.
The company, is still trying to acquire more regional brands and add more merchandise to its portfolio. This will help it to maintain the margins and accelerate its top-line growth to provide returns to the shareholders.
b)Competitive Advantage
Owing to the sheer size compared to its competitor such as Kohl’s and Nordstorm, the company has the bargaining advantage with the suppliers in obtaining the exclusive merchandise. This is essentially visible in the company’s sale figure amounting to $28 billion, compared to $14 billion for Nordstorm and $19 billion for Kohl’s. One unique factor attributed to the company’s success is the private-label business that accounted for 20% of the total sales of the company. This indicates that the company’s inventory consists of those merchandise that cannot be obtained elsewhere and can thus protect the company from the e-commerce threat. Finally, even though Kohl’s has a higher number of stores than Macy’s, however, with flagship stores in New York and Chicago,the company is able to create more brand value amongst its customers. These stores have also helped the company to enable the convenience features related to online ordering, same-day delivery and in-store pickup. The company is also aggressively planning to expand same day delivery in more markets by the end of 2016.
Financial Ratios
a) Liquidity Ratios
-Current Ratio:
-Quick Ratio:
b) Leverage Ratios
-Debt/Equity Ratio
c)Profitability Ratios
-Operating Margin
DCF Model
Post performing the fundamental analysis for the company’s stock, we performed the valuation analysis using the DCF model as part of which, we used past five year financial statements to forecast ten years of free cash flow and then the intrinsic price for the company’s stock. While the DCF model is available in the excel sheet attached with this report, the assumptions relating to model input are discussed here under:
EBIT Growth Rate
Depreciation
The non-cash charges for the free cash model is assumed to be in proportion to the operating income of the company, which we have calculated on an average basis for past five years. The final calculation for the depreciation rate is calculated at 41.71%. The calculations are available in the excel sheet.
Capital Expenditure
The amount of capital expenditure is assumed to be in proportion to the operating income, which we have calculated on an average basis for past five years. The final calculation for the capital expenditure in proportion to operating income is calculated at 41.71%.
Working Capital
Owing to the nature of its operations, we have assumed that the working capital investment will remain constant at 30% of the operating income of the country.
Valuation
Performing the stock valuation using the aforesaid assumptions, we found that the stock has an intrinsic value of $142.09, i.e. it has a upward potential of 241.96% from the current level of $41.55. Even under the restrictive assumption of 3% short-term sales growth, 2.50% long-term sales growth rate and 1% terminal growth rate, the stock was forecasted to have a 172.90% appreciation from the current level.
Investment Risk
a) Growth largely based on acquisition success
Macy’s has largely relied on acquisition of regional brands to increase the merchandise portfolio, however, the potential seems limited now, and in case the company is not able to acquire target companies, the growth potential will turn limited and the company will not be able to maintain sufficient margins.
b) Losing market share
Despite of multiple acquisitions, the market share of the company has decreased from 4.8% to 3.2% in 2015. Therefore, if the consumers continue to switch to other discount stores or divert their discretionary spending on electronics, the company’s growth will most likely suffer.
c) Volatile consumer environment
The consumer spending continues to be volatile amid growing economic concerns again. With Federal Reserve re-adopting the path of increasing interest rates, the job market is likely to remain stagnant and this will affect consumer spending power and eventually, the company’s sales.
Final Recommendation: Hold
Despite of an optimistic price projection calculated by DCF model, we are going with a hold recommendation on the stock. Our recommendation is based on the risk factor that we have discussed in the preceding section because in case the company is unable to acquire target firms, it will most likely witness sluggish sales trends. Our recommendation also aligns with other market analyst following the stock:
References
Analyst Opinion: Macy's. n.d. 22 April 2016 <https://finance.yahoo.com/q/ao?s=M>.
Profile: Macy's. n.d. 22 April 2016 <https://finance.yahoo.com/q/pr?s=M+Profile>.
Weishaar, Bridget. "No-moat Macy's manages expenses and real estate portfolio while investing in top-line growth." Equity Research. 2015.
