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M AT A GLANCE

P/E ► -1.44   EV/EBITDA ► -4.83   ROA ► -16.9% LOW ROE ► -68.9% LOW Debt to Equity ► 3.97 VERY HIGH Current Ratio ► 1.29 LOW Interest Coverage Ratio ► -7.94 LOW

 

 

 

 

 

 

Macy’s Inc. (NYSE:M), formerly known as Federated Department Stores, Inc., is a national clothing retailer. It sells men's, women's and children's clothes and accessories. The company is divided into mid-tier Macy's and Bloomingdale's, an upper-tier store that sells more exclusive items. The company posted a net loss of over $4 million in fiscal 2009^[1], a symptom of a challenging retail industry caused by the 2007 Credit Crunch as well as the Subprime lending crisis.

The credit crunch has led to a decrease in consumer confidence, causing decreases in store sales and profits for this fiscal year. Bloomingdale's, as the higher-end chain, was hit especially hard during the third and fourth quarters of the fiscal year. Private label brands constituted 19% of total 2008 sales. Private brands have been receiving increased attention from retailers due to the increased control they have over the production and distribution of their own line. Also, they tend to have a higher profit margin than third-party goods. The credit crunch has also led to an increase in credit card balances and subsequently delinquent accounts. Macy's, as one of many retailers that extend a line of credit to their consumers, is thus susceptible to the risks inherent in a higher percentage of delinquent credit card balances. However, in October 2005 Macy's sold its credit business to Citigroup (C). As part of their agreement, the companies share any profits and losses related to the credit business. Therefore, Macy's exposure to increased credit card debt is mitigated through its partnership.

Business Overview

Macy's 2008 sales by segment^[2]

Macy's net sales vs. net income for FY 2004-2008^[1]

Macy's and upscale Bloomingdale's sell men's, women's and children's apparel and accessories, cosmetics and home furnishings. Aside from its brick-and-mortar stores Macy's also operates macys.com, bloomingdales.com and Bloomingdale's by Mail in addition to an online bridal registry.^[2] Macy's mostly sells products from third-party manufacturers, however the company also produces a number of private brands, such as Alfani and Club Room.^[2] These private brands were responsible for 19% of sales in 2008.^[3]

Result of Operations

Macy's reported an overall loss of over $4 million for fiscal 2008(ended January 31, 2009)^[1], due in large part to the tough retail environment brought about by the recession in the American economy. Consumers who are worried about losing their jobs and their financial security have cut back on spending on nondiscretionary items such as clothing and accessories, leading to an overall decrease in demand across all price points. The company has tried to influence more foot traffic through markdowns, however those markdowns have also eroded its profits. The company has even begun to consider the possibility of starting outlet stores in order to get rid of some of its inventory and bolster sales.^[4] Comparable stores sales decreased by 4.6% in 2008 and sales at macys.com and bloomingdales.com increased. Bloomingdale's performed the weakest during the third and fourth quarters of 2008.^[5] Those quarters included the holiday season, which is a major time for retailers as customers shop for the holidays. However, the holiday season of 2008 was slower than usual for retailers as consumers cut back on their spending. Bloomingdale's, as the higher-end component of Macys Inc., faced a sharper decrease in sales compared to its mid-range counterpart.

For the second quarter of fiscal 2009, Macy's reported earnings of $7.0 million, or $0.02 per share. This was a substantial decrease from 2008's $73 million in earnings. Earnings include one-time restructuring charges of $34 million. If those charges are ignored, the company earned $0.20 per share, exceeding industry estimates of $0.15 to $0.17 per share. Total sales decreased by 9.7% from the second quarter of 2008. The results of the second quarter led the company to raise its earnings forecast for fiscal 2009, from $0.40 to $0.55 cents per share to $0.70 to $0.80 cents per share.^[6]

The number of Macy's stores has decreased from fiscal 2006 to 2008. This decline cuts down on overhead and additional costs associated with running a brick-and-mortar store, which decreases overall costs, which is especially beneficial during a recession. Since Macy's and Bloomingdale's have fully functional websites, the company does not have to worry about cutting out potential customers by closing retail locations.

Macy's started the My Macy's initiative in 2008. This initiative is geared towards increasing sales through specifically altering the merchandise in individual stores to best suit the demographics of the surrounding areas. The company is in the process of expanding the My Macy's program throughout the entire country. In the fourth quarter of fiscal 2008, My Macy's stores performed 1.5% better than stores that did not have the program, and in the first quarter of fiscal 2009, that discrepancy increased to 2.1%.^[8]

M has seen sluggish results for the first three quarters of 2009. Though the firm has exceeded analyst estimates, M needs a strong Holiday shopping season to get back to 2007 and 2008 earnings levels. On November 11th, 2009, Macy's did increase it's Q4 estimates from $0.7 to $0.8 per share to $1.01 to $1.06 per share.^[9]

Trends and Forces

Macy's Weathers Decrease in Consumer Spending

The 2007 Credit Crunch, followed by the bankruptcy of Lehman Brothers (LEH) and the stock market plunge, have had an adverse effect on consumer confidence.^[10] Consumers have curbed spending on any item considered to be a luxury, and clothing is often one of the first to go. This decrease in spending hit hardest during the holiday season, which is a major revenue driver for retail companies. The deterioration in the U.S. economy contributed to the company's $4 million loss in 2008. In the holiday season specifically comp store sales decreased by 7%.^[11] Although store sales decreased there is a silver lining: online sales increased by 24% and the My Macy's initiative, in which store merchandise is specifically altered depending on the demographics of the store's surroundings, sold 1.5% better than regular Macy's stores.^[11]

Private Label Brands Benefits Both Consumers and Retailers

Private label brands are clothing lines whose design, production and distribution are controlled by the retailer itself. They are especially popular in department stores such as Macy's, J.C. Penney (JCP) and Saks (SKS). Private brands are an attractive choice for the retailer because they can produce exactly the pieces they want instead of looking for them among their suppliers. In addition, they have control over the quality and fabrication of garments under those lines so they are more able to control the costs of the goods. In addition, since they are produced and sold directly to the consumer, private brands are usually less expensive than brands from third-party companies. The lower price point makes private brands more attractive to low-income consumers as well as those hoping to curb their spending due to poor economic conditions. Private label sales represented 19%^[3] of Macy's 2008 sales, whereas it formed 52% of competitor J.C. Penney's 2008 sales.^[12]

Credit Card Losses Mitigated Through Partnership With Citigroup

The 2007 Credit Crunch has made it increasingly difficult for people to secure financing through methods such as borrowing against their homes. Therefore, many consumers have resorted to credit cards to make purchases. As of the third quarter of 2007, credit card balances rose by 7%, compared to an average of 2% a year for the previous six years.^[13] In addition, delinquency rates for the same period were 4.47%, compared to 4.24% during the same period the previous year.^[13] As credit card balances rise, so do the proportion of delinquent balances. This is bad news for retailers that extend lines of credit to their consumers. Macy's, however, has an advantage in the sense that it shares profits and losses with Citibank, meaning it does not suffer the full blow from an unpaid credit balance. In addition, Macy's benefits from letting Citibank--which has more experience in handling credit--deal with its credit cards, allowing Macy's to focus more energy on its retail business.

Competition

Macy’s faces strong competition in the retail industry from other retailers in their geographic areas, including other traditional, moderate or luxury department stores, specialty stores, general merchandise stores, off-price and discount stores and other forms of shopping including the Internet, mail order catalogs and television. Retailers competing with Macy’s include:

• Other traditional department stores such as Bon-Ton Stores (BONT), Belk, Dillard's (DDS), and Sak’s Department Store Group^[14]
• Moderately priced department stores that have lower gross margins than traditional stores like Macy’s. These include J.C. Penney (JCP), Kohl's (KSS), and Sears Holdings (SHLD)^[14]
• Luxury department stores such as Neiman Marcus, Nordstrom (JWN) and Saks (SKS)^[14]
• Discount stores such as Target (TGT) and Wal-Mart Stores (WMT)^[14]
• Warehouse stores such as BJ's Wholesale Club (BJ), Costco Wholesale (COST) and Wal-Mart's Sam's Club.^[14]
• Off-Price stores such as Ross Stores (ROST) and TJX Companies (TJX).^[14]

In terms of price point, Macy's faces stiffest competition from J.C. Penney (JCP) and Sears Holdings (SHLD):

• J.C. Penney sells goods at a slightly lower price point than Macy's does. Since more than half its 2008 sales came from private labels, J.C. Penney places considerable effort in developing its own brands, which though they have a higher profit margin than third-party brands, they do not have the same name recognition that would come from a national or international line. In addition, private brands are usually produced to appeal to the greatest number of customers, meaning their designs tend to be more conservative than third-party brands. These safer, more tried-and-true designs can present a problem when they do not excite or interest consumers enough to compel them to spend money. As of fiscal 2008, Macy's had 847^[7] stores in the United States whereas J.C. Penney had 1,093.^[15]

• Sears Holdings is composed of Sears, Kmart and Land's End. Sears sells home appliances, garden and fitness equipment and electronics. Kmart sells similar goods, along with home furnishings and clothing. Land's End sells clothes and accessories, primarily online and through catalogs. As a discount store, Kmart's price point is lower than that of Macy's, attracting a lower-income consumer. Sears Holdings is more focused on appliances and electronics, whereas Macy's is more focused on apparel and accessories (only 15% of 2008 sales came from home furnishings and other non-clothing goods^[2]). Sears Holdings had 3,918 stores as of the end of fiscal year 2008^[16], providing access to a much larger base of consumers than Macy's. The lower price point of Kmart stores also makes the chain more attractive to consumers looking to cut back on their spending considering the flagging American economy.

Luxury department stores such as Saks (SKS) operate at a higher price point, attracting a clientele with more disposable income. Discount stores operate at a much lower price point, attracting less affluent consumers. Macy's is distinct from warehouse stores in that it does not sell goods in bulk and operates at a higher price point. Below are charts comparing Macy's to the different retailers it competes with through the operational metrics of net or total sales and net income for fiscal year 2008(a loss is written in parenthesis).

References

1. ↑ ^{1.0 1.1 1.2} M 2008 Annual Report pg. 15  
2. ↑ ^{2.0 2.1 2.2 2.3} M 2008 Annual Report pg. 3  
3. ↑ ^{3.0 3.1} M 2008 Annual Report pg. 18  
4. ↑ "Macy’s considers trying on outlets for size to help boost sales, clear inventory"
5. ↑ M 2008 Annual Report pg. 18  
6. ↑ Macy's reports diluted EPS of USD0.02 for Q2 of fiscal 2009
7. ↑ ^{7.0 7.1} M 2008 Annual Report pg. 12  
8. ↑ Macy's F1Q09 (Qtr End 5/2/09) Earnings Call Transcript.
9. ↑ Seeking Alpha, "Macy's: Better than Expected Results Lift Guidance," 11/11/09
10. ↑ Heather Burke and Cotten Timberlake. "Macy's, Target Monthly Sales Fall, Wal-Mart Gains".
11. ↑ ^{11.0 11.1} Macy’s, Inc. Q4 2008 Earnings Call Transcript.
12. ↑ JCP 2008 10-K pg. 18
13. ↑ ^{13.0 13.1} Aleksandra Todorova. The Coming Credit-Card Crunch.
14. ↑ ^{14.0 14.1 14.2 14.3 14.4 14.5} M 2008 Annual Report pg. 4  
15. ↑ JCP 2008 Annual Report pg. 8  
16. ↑ SHLD 2008 Annual Report pg. 12  
17. ↑ ^{17.0 17.1} DDS 2008 Annual Report pg. 13  
18. ↑ ^{18.0 18.1} BONT 2008 Annual Report pg. 18  
19. ↑ ^{19.0 19.1 19.2 19.3 19.4 19.5}
20. ↑ JCP 2008 Annual Report pg. 11  
21. ↑ ^{21.0 21.1} KSS 2008 Annual Report pg. 18  
22. ↑ ^{22.0 22.1} JWN 2008 Annual Report pg. 14  
23. ↑ ^{23.0 23.1} SKS 2008 Annual Report pg. 18  
24. ↑ ^{24.0 24.1} SHLD 2008 Annual Report pg. 19  
25. ↑ JCP 2008 Annual Report pg. F-3  
26. ↑ ^{26.0 26.1} ARO 2008 Annual Report pg. 17  
27. ↑ ^{27.0 27.1} ANN 2008 Annual Report pg. 16  
28. ↑ ^{28.0 28.1} GPS 200\8 Annual Report pg. 16  
29. ↑ ^{29.0 29.1} LTD 2008 Annual Report pg. 15  
30. ↑ ^{30.0 30.1} WMT 2008 Annual Report pg. 1  
31. ↑ ^{31.0 31.1} TGT 2008 Annual Report