2. 2
Table of Contents
Industry Background 3-7
MarketAnalysis 3-5
Porter’s Five Forces Analysis 5-7
Macy’s Inc. 7-13
Company Background 7-8
Mergersand Acquisitions 8-9
Bluemercury 8
China Joint Venture 9
Comparison to other industry players 9-10
Mission Statement 10
BusinessStrategy 11-12
Core Pillarsof Strategy 11
Macy’s Backstage 11-12
Outlook 12-13
Valuation 14-24
DCFValuation 14-20
Revenue 14-15
Expenses 15-16
Capital Expenditure 16
Working Capital 16-17
Beta 17
Cost of Equity 18
Cost of Debt 18
WACC 19
Terminal Value 19
DCF Conclusion 20
ComparableMergers and Acquisitions Valuation 20-22
ComparableCompany Valuation 22-24
Conclusion 24
Appendix 25
Bibliography 26-29
3. 3
Industry Background
At the turn of the 19th century the industrialrevolution took
place and significantly increased per capita efficiency. In turn this
allowed the middleclass to become wealthier while increasing
output. These aforementioned changes led to a “dream world” of
consumption (Friese)that was unheard of before. Departmentstores,
with several departmentsselling differentgoods, wereintroduced at
this period. Customerswerenotused to being able to wander in to a
store and walk around window-shoppingatthe goods on display.
Departmentstores werea revolutionary conceptthat changed the
way peopleshopped.
Alexander Turney and R.H. Macy werethe pioneersof
departmentstores. The trademarksof a departmentstore included
selling multipledifferentproductsunder asingle roof as well as
having an established fixed price. Initially specializing in women’s
clothing, departmentstores evolved to retailing clothing, home
goods, furniture, sportsapparel, and kitchenware. Retailers selling
groceries and fresh foodsare usually not considered to be within the
same industry and areconsidered supercentersinstead.
Market Analysis
Fast-forward to 2015 and departmentstoreshavebecome an
industry generating$164 billion in revenuesand $6.7 billion (4% of
revenues) in profit. This industry however, hasbeen steadily
decliningover the years. An annualaverageof -4.5% decreasein
revenuehas been noted for the years 2010-2015, withaslow down
in declineforecasted to -2.5% for the years 2015-2020 (Carter).
Consumer trendsareleaningmore towardsonlineretailers,
supercenters, and warehouseclubs. All of these alternatives provide
a cheaper and often times more convenientalternativefor consumer
spending. This increased competition from outsidethe industry is
drivingdown industry profits, forcingrecentrevenuereturnsand
forecasted growth to be negative.
4. 4
Exhibit 1: Industry Revenue
Year
Industry
Revenue $
million
Growth
%
2008 224,784.60 -6.9
2009 210,460.30 -6.4
2010 206,459.10 -1.9
2011 201,232.30 -2.5
2012 191,617.80 -4.8
2013 180,179.30 -6
2014 172,871.50 -4.1
2015 163,999.40 -5.1
2016 156,875.70 -4.4
2017 152,479.60 -2.8
2018 149,066.20 -2.2
2019 145,579.30 -2.3
2020 143,492.90 -1.4
(Source: Carter)
Some of the main driversthat impact the departmentstore
industriesinclude: disposableincome, ecommerce, population, and
price of oil. Disposableincome directly impacts where and how soon
customerswill shop to replace their current products. Lower
disposable incomewill lead to thriftier purchases, with consumers
opting outof buyingnew clothes and continuingusingor repairing
owned goods. Ecommerceis impacting traditional departmentstores
by divertingsome of the retail purchasesto online purchases.
Increase in population resultsin an increase in consumers, and vice
versa. Finally, higher oil prices resultsin higher transportation costs,
decreasing profits(Carter).
Consumer spendingand personalincomeareforecasted to
increase to 2020 (United States| EconomicForecasts| 2015-2050
Outlook). Even though this is oneof the main driversof the
departmentstore industry, based on historical data, department
stores were unableto significantly increase industry revenueafter
the 2008 stock marketcrash.
5. 5
Exhibit 2: Industry Revenue vs. Disposable Income
Source: Carter, Per Capita Disposable Income
Duringthis period, consumer spendingand incomeincreased
significantly, however, departmentstore growth continuesto be in
the negatives. This shows that income growth is not enough to
increase revenuesacross the industry dueto fierce competition. To
conclude, it is unlikely that the departmentstore industry willhave a
major turnaround in the near future, indicatinga continualsteady
decline.
Porter’s Five Forces Analysis:
Retail Department StoreIndustry
Power of suppliers - Low: Macy’sbuysin large volumesdueto
the company’s sizeand vast amountof stores, resultingin
bargaining leverage. This bargainingleverage is further
enhanced dueto the wide rangeof productsthey purchase
from smaller, non-concentrated suppliers. Supply costsaccount
for a high 67% of industry revenues (Carter), suggesting
incumbentsare price sensitive and willingto switch inputsor
suppliers if prices are too high.
Power of buyers – High: Buyers, individualconsumers, areprice
sensitive. There are a large number of alternatives buyers can
pursueat no switching cost. Even though buyersdo notbuy in
large volumes, the pricesensitivity as well as substitute threats
hold moresway over buyer power, increasingit significantly.
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Revenue vs. Income
Disposable Income
Industry Revenue
6. 6
Threat of entrants – Medium: Largeeconomies of scale benefit
well established incumbentswho purchase in bulk and are able
to charge a lower price, making it harder for new entrants. Low
capital requirements (Sachs) increase threat of entrants. Brand
differentiation is present, giving incumbentsan advantageover
new entrants.
Threat of substitutes – High: Supercenters, discountstoresand
ecommerce providesimilar goodsfor a lower cost, thus
increasing substitute perceived value. With the emergenceof
Internet and the developmentof ecommerce, the traditional
brick and mortar stores are becoming less and less appealing.
Higher fixed costs and staffing needsforce departmentstores
to charge higher prices than their online competitors.
Ecommercewebsites are able to access morecustomers,
spanninglarge geographic locations and are able to do
business24/7. Growingecommercetrend is contributing to
the decrease in industry profitability and may proveto be an
increasing threat in the years to come.
Industry rivalry – High: High concentration, the top 4 rivals
dominatewith an 81.4% marketshare. However, these rivals
are contendingin a decliningindustry (Carter), forcing
incumbentsto fiercely battle for the currentavailable market
share. Rivalry is often characterized by pricecompetition. The
moreimportantfactors, declining industry and heavy price
competition, contribute to very high rivalry within the
industry.
Exhibit 3: Porter’sFive Forces
Industry
Rivalry (high)
Suppliers
(low)
Buyers
(high)
Threat of Entry (med)
Substitutes (high)
7. 7
In conclusion, three out of five forces have a high impact on
profitswith only threat of entrants having a medium and
supplier power havinga low impact. The most important
forces, rivalry and substitutes forceincumbentsto lower their
prices in an attempt to increase perceived valuefor the
customers. With the availability of Internet, customersare able
to shop around onlineand easily compareprices, limiting
mark-up ability of retailers. Incumbentsface both internaland
external industry competition to maintain lowest possible
prices. Asa direct resultof this pressure, this is nota very
profitable industry for incumbentsand decreasingindustry
profitability is not surprising.
Macy’s Inc.
Company background
Founded by R.H. Macy, Macy’sInc. operates within the
departmentstores industry withtwo separate divisions: Macy’sand
Bloomingdales, as wellas specialized beauty products under the
brand Bluemercury. Historically, the company hasbeen a leader and
innovator since beginningoperationsin 1858. Notonly wasthe
company oneof the first to open a departmentstore, but also the first
to promotea woman to an executive position, offer a fixed price for
goods, and hold a retail liquor license in New York. The trend setting
continued with the Macy’sThanksgivingDay Parade in 1924,
exposingthe company to huge publicity ever since.
After going publicin 1922, thecompany began aggressively
expandingby taking over competitorsand openingregional stores.
As of December 1994, Macy’sInc. (known asFederated Department
Stores Inc. at the time) acquired R.H. Macy’s company. Thecompany
operated over 400 departmentstores. Federated DepartmentStores
Inc. renamed their businessto Macy’sInc. in 1995 and began
convertingacquired name brand stores to Macy’s stores (Macy’sInc.
History).
Macy’sInc. currently operatesin 45 states with around 900
stores. The company employsaround167,000peopleand generated
$28.1 billion in revenuefor the year-end 2014. Thecompany is
8. 8
traded on the NYSE with the ticker symbol“M” (About Us - Macy’s,
Inc).
Mergers and Acquisitions
Bluemercury
The most recent acquisition occurred on March 15th, 2015. The
transaction involved Macy’sInc. acquiring Bluemercury for $210
million in cash. Bluemercury, based in Washington D.C., isa chain of
specialized luxury beauty productsand spas. Macy’spurchased the
retailer with the expectation of widely expandingreachand
presence, while focusingon the prestige and quality of the already
known luxury brand. Thebuyer planson a decentralized approach,
retaining Bluemercury’scurrentCEOand COO (Macy's, Inc. Completes
Bluemercury Acquisition).
Macy’smay be diversifyingfrom the traditional retail
departmentstore industry throughthis acquisition. Bluemercury
serves a younger, higher incomecustomer base, and as many as 350
Bluemercury storesmay open insideof currentMacy’sstores
(Halkias). This may increase foot-traffic within currentstores, and
cross-sell currentproducts, increasingrevenues.
Even though the beauty and cosmetics industry has many
similar external drivers(disposableincome, ecommercesales), the
industry hasbeen faring well. Growthhas averaged 6.4% per annum
over the last four years, while forecasts predict an annualgrowth of
4.9% untilthe year 2020 (Carter “Beauty, Cosmetics& Fragrance
Storesinthe US”). As long as the economy is doingwell, this
investmentshould provebeneficial to Macy’sdueto the synergies
involved. Thecompany willbe able to cross-sell the beauty products
within Macy’sstores, increasing willingnessto pay. Locating
freestandingdepartmentsof Bluemercury within currentMacy’s
retail outlets will reducerentexpenses for the acquired company,
providingadditional cost synergies.
China Joint Venture with Fung Retailing Limited
On August15th 2015,Macy’sannounced thatit had formed a
joint venturecompany withFungRetailing to attempt retailing
through ecommerce in China. Macy’swill own 65% with Fung
9. 9
Retailing owningthe remaining35%. The newly formed venturewill
begin selling onlinein late 2015 throughAlibaba’s Tmall Global, an
onlinemarket space dedicated to connectingforeign companieswith
local Chineseconsumers.
FungRetailing, a privately held Chinese company, has
extensive local market know-how with 1,000 storesin China.
Furthermore, FungRetailing focuses extensively on technological
developmentand omnichannelretailing, similar to Macy’s (Macy's
FormsJoint Venture with Fung Retailing to Test E-commerce inChina).
Comparison to other industryplayers
Macy’sInc. holds a dominating18.1% marketshare, second
only to Target (38.1%). Other importantindustry competitors
includeSears, with a 14.2% marketshare, Walmartwith 11%,
JCPenny with8%, and Nordstrom with7.2% (Carter).
Exhibit 4: Competitors
Source: Carter
Historical marketshare, calculated usingcompany revenueasa
percentage of industry revenue, can shed light as to the growth or
decline of the companieswithin the industry. Outof the
aforementioned companies, Macy’sand two other competitors have
increased market share, while the other three decreased. Macy’s
began with a modest12% marketshare in 2010 and expanded to an
18% share by 2015. Targetexperienced the largest acquisition of
market share, going from 25% in 2010 to 37% in 2015. Nordstrom
also grew its hold over the market from 4% in 2010 to 7% fiveyears
later. On the other hand, Walmartwentfrom 14% in 2010 to 11% in
2015. Searsexperienced a similar declinefrom 18% to 14%. Finally,
JCPenny lostthe least market share, going from 9% in 2010 to 8% in
2015.
Using EBITas a percentage of revenue to measurekey industry
ratios, illustrates a company’s ability to generate earnings based on
sales. Using historical EBITover sales helps uscomparethe efficiency
10. 10
developmentof the companiesrelative to one another. The
departmentstore industry averageis around 5% (Department&
Discount Retail Industry). Macy’sraised its EBIT as a percentage of
revenueover 3% during2010to 2015, from 7.5%to 10.6%. Target
dropped in efficiency by 1% from 10% to 9% over the same period.
Walmartdecreased this ratio from 7.6% in 2010 to 7.1% in 2015.
Nordstrom also declined 4%, from 9.7% to 5.7%. Searsbegan with a
low ratio of 1% in 2010 and droppedto a negative 3.1% in 2015 due
to an operating incomeloss. JCPenny experienced thelargest drop in
this ratio from 4.7% in 2010 to negative 3.9% in 2015.
Out of all of the main industry rivals, Macy’sproved to be
effective in growingits dominanceof the market. The company
increased market share by 5% in five years, the second largest
market acquisition behind Target. Efficiency wise, illustrated by the
EBITover revenueratio, Macy’swas the only one of its competitors
who was able to increase the ratio from 2010 to 2015. Thiscan be
attributed solely to a larger increase in EBIT compared to sales, as
sales were growingeach year from oneperiod to the next. The higher
EBITto revenuepercentageleads to the conclusion that Macy’sis
moreefficient at controlling its costs while still generating increasing
revenue. In addition, the large increase in marketshare relative to
competitors indicates that Macy’sis in a strongposition going
forward and iscapable of defendingits dominantstatus.
Mission Statement
"Our goal is to be a retailer with the ability to see opportunity on the
horizon and have a clear path for capitalizing on it. To do so, weare
movingfaster than ever before, employingmoretechnology and
concentrating our resourceson those elements most importantto
our core customers."
The company furthermorehasa mission statement focused
specifically on Macy’s and Bloomingdalesand readsthe following:
"Our vision is to operateMacy'sand Bloomingdale'sasdynamic
national brandswhile focusingon the customer offeringin each store
location" (Farfan).
These two mission statements have been reflected in Macy’s
businessstrategies regardingits first two pillars: adaptation and
technological integration. The company isclosely followingits
mission statements and this is reflected in positiveand growing
earningswithin a decliningindustry.
11. 11
Business Strategy
Core pillarsof strategy
Macy’sfocuses its strategy around threecore issues: My
Macy’s, Omnichannelintegration, and Magic Selling (M.O.M. for
short). Since 2008 when these strategies have been introduced, they
have been steadily interwoven to enhance and bring increased
customer value(Refinement of M.O.M. Strategies - Macy’s, Inc).
My Macy’sinvolveslocalization and catering to local tastes.
Localization incorporates providinglocation specific optionsfor
consumersto purchase. Examplesof this includemen in some states
demandingcuffed pants, or Pittsburgh customersasking for
bedspreadswhile the rest of the nation doesnot (Touryalai).
The second part, Omnichannel integration, ensuresif any
Macy’sin the country has a specific item available, the customer has
access to it. This required Macy’sto upgrade40,000 registersin 2010
so that employeescan search all existing stores and warehousesfor
items that may be unavailablein specific outlets. The same tool will
also ship items to customersfrom locations with larger stocks, rather
than closer locations. Omnichannels can help maintain higher
productmarginsby shipping from locations with plentifulstock,
which may have otherwise been sold in a clearance discount
(Touryalai).
The finalpillar of integrated strategy revolvesaround “Magic
Selling” (Touryalai). In short, this simply meansmakingconnections
with customers and engaging with them throughoutthe sale process.
These closely linked M.O.M. pillarsof strategy have ensured
that Macy’sprosperswhile many of its competitors face diminishing
marginsand revenuesover the past fiveyear period. However, this
strategy was not enoughto lead to a sustainable competitive
advantage. After the release of third quarter earnings, the company
realized that they mustattempt a change in strategy if they want to
see a turnaroundin revenuesafter persistentdecreasing sales. Terry
Lundgren, CEO, announcedthecompany willfocus willalter in store
productmixas well as experimentwith onlinesales (Bose).
Macy’s Backstage
In September 2015 Macy’sentered the discountstore retailer
business, titled Macy’sBackstage. Competitorssuch as Nordstrom
and Sacks Fifth Avenuehavepreviously proved successfulin entering
12. 12
the off-priceretailing, and Macy’s realized that in order to not be left
behind, it had to do the same. The company willenter the market
space of T.J. Maxx and Marshalls, who generate a whopping$304 of
sales per squarefoot, compared to Macy’s$158. Macy’swillhave to
alter strategy for this particular business, as departmentstores buy
inventory in advanceand in bulk, while discountstores buy
inventory whenever alower cost opportunity presentsitself (Thau).
Outlook
Macy’shave a similar pessimistic futureoutlook as the entire
departmentstore industry. After the release of third quarter results
on the 11th of November 2015, thecompany thought it necessary to
make downward adjustmentsto their forecasts for year’s end. The
company expected same-store sales to drop by 1.8-2.2% for the
currentfiscal year (Bose).
As a result of the warmer weather, shoppershave been
reluctant to purchasethe winter clothes offeringsalready in stores.
As CEOTerry Lundgren confirmed, “We’regoingto take markdowns,
[…] we’re going to get rid of the inventory – have to do that before
Christmas.” (Belvedere). Quarter four earningswillinevitably suffer
as a result of the larger markdowns. Thedifficulty in forecasting
months in advancewhen to exhibit inventory for new seasons has
proven to be a drastic hindrancefor the company. Should Macy’s
avoid such mishaps in the future, they will requiremore flexible
inventory and supplier contracts. Even though this may be costly and
difficultto implement, a rapid just-in-time inventory stockingsystem
can mean the difference between life and death for a retail company.
If the giant retailer wantsto continueearning above average industry
profits and gain an edge over competition, they will have to better
control inventory.
Customersare choosing to decrease spendingon new retail
goods and merchandise, hurtingMacy’s. Instead, consumersare
spendingtheir additionalincome on experiences and eating out
(Belvedere). If this trend is to continueand reprioritization from
tangible goodsto experiencesbecomes the new norm, Macy’sInc.
will need to adapt its strategy to better fit this new environment.
The company willalso halt any ambitions to invest in a real
estate investmenttrust, diversifyingaway from departmentstores
(Belvedere). Thisfrugalstrategy may proveto be usefulin the short
run and allow more liquidity needed to financegrowth and a
turnaround in strategy. However, in the longrun with the shrinking
13. 13
departmentstore industry, thismay hinder the company and limitits
revenuesources.
Diversifyingaway from the decliningand highly saturated U.S.
market through a joint venturein China is a wiseattempt to maintain
profitsand growth (Bose, Macy's CutsFull-year SalesForecast, Forms
China Venture). Spreadingoutrevenueto a country with over 668
million Internetshoppersand a growing middleclass can further
bolster futuresales and provideafoothold in the expandingforeign
markets (Macy's FormsJoint Venture with Fung Retailing to Test E-
commerce inChina).
Overall, the company is faringbetter than the majority of its
competition. However, the industry isshrinkingand is forecast to
continueshrinking. In all likelihood, Macy’swill be forced to evolve
or face a similar fate as many of its previousbankruptcompetitors.
The company hasmade a promisingstep forward over the past five
years by focusingon local tastes and entering new channels (such as
online). This proved to be highly beneficial, yet no longer enough.
Diversifyingwiththe acquisition of Bluemercury aswellas opening
Macy’sBackstage is a prudentand promisingstep, yet may be too
late. Enteringthe growingChinese market holds promise and may
providethe much-needed boost in sales.
14. 14
Valuation
Company valuation occurred in three separate ways. The first
was usinga DCFto determinefuturecash flows, second was using
comparable companies, and finally through comparable mergers &
acquisitions.
DCF Valuation
Revenue
Calculating the DCFwasa several step process. First thing
needingto be donewasto forecast revenuefor the following five
years, up to 2020. Asof the day of the valuation, Macy’sreleased
three quartersof earnings. Based on the earningscall and Macy’s
corporate website, sales were adjusted by managementto decrease
from a 1% annualgrowth down to a 1% annualdecline(Macy’s, Inc.
ReportsSecond Quarter Earnings, Adjusts2015 Guidanceand
Outlines New Sales GrowthInitiatives). This drop in sales had a
100% weightin the 2015 salescalculation as managementwere
likely to have an accurate forecast for such a short time period.
The followingyearswere calculated usinga weighted average
of the mostimportantexternal industry driversoutlined in the
Market Analysis section above. The external driversincluded:
population growth, disposable income, and a growingecommerce
trend. Alongwith this, CAGR wascalculated for the previousfive
years and given a weight. As the forecasts progressed further into the
future, CAGR decreased in weight as past data become moreand
moreinsignificant. On the contrast, the external driversof population
growth, disposableincome, and loss of marketshare to ecommerce
bore moreweight. Finally, inflation wasaccounted for and added to
the calculated growth.
15. 15
Exhibit 5: Revenue Forecast
Source: Colby, Per Capita Disposable Income, Global B2C
Ecommerce Salesto Hit $1.5 TrillionThis Year Drivenby Growth in
Emerging Markets, USInflationForecast 2015-2020 and up to 2060,
Data and Charts
The yearly revenuegrowthwas consistent with the
managementforecast stated in quarter 3 earnings call, of 2-3%
annually (Macy's(M) EarningsReport: Q3 2015 Conference Call
Transcript).
Expenses
Expenseswerecalculated by performinga common size
analysisof the income statement. Costs of good sold and SG&A
expenseswere averaged out over the previousfiveyears (Exhibit 22:
CommonSize Income Statement). Thesefigureswere then used to
project expensesas a percentageof sales. The tax rate was calculated
by usingMacy’stax expenseas a percentage of pre-tax income,
averaged out over the past five years. This led me to a tax rate of
35.81% thatwas applied to futureincome.
Cost of goodssold has remained around asteady 60% over the
years, making this figureappropriatefor futureprojections. SG&A
expenses, depreciation expenses (doneon a straight line basis), as
well as interest expenses wereall taken as a percentage of revenue
averaged out.
Year 2015 2016 2017 2018 2019 2020
Population Growth 0.99% 0.99% 0.99% 0.99% 0.99% 0.99%
Weight 0.00% 30.00% 32.50% 37.50% 40.00% 42.50%
Per capita disposable income growth 2.58% 2.70% 2.51% 2.55% 2.19% 2.14%
Weight 0.00% 30.00% 32.50% 37.50% 40.00% 42.50%
Loss of market to ecommerce 3.85% 4.43% 4.18% 4.15% 4.15% 4.15%
Weight 0.00% 5.00% 10.00% 15.00% 20.00% 25.00%
CAGR 1.75% 1.75% 1.75% 1.75% 1.75% 1.75%
Weight 0.00% 35.00% 30.00% 20.00% 15.00% 10.00%
Management forecast -1.00%
Weight 100.00%
Growth pre inflation -1.00% 1.50% 1.24% 1.05% 0.70% 0.47%
Inflation 0.09% 1.15% 1.84% 2.17% 2.28% 2.38%
Revenue Growth -0.91% 2.65% 3.08% 3.22% 2.98% 2.85%
16. 16
Exhibit 6: Projected Income Statement
Capital Expenditure
Capital expenditurewasderived from acommon-sizeanalysis
of expenditureasa percentage of revenue. The average trend over
the yearswas around 2.2%. Macy’s, however, haveaplan to upgrade
150 of their top performingstores (Sheff), which will resultin higher
initial capital expenditures. Furthermore, the joint ventureexpansion
into China will requiresignificant expenditureto gain an initial
foothold in the new market. As a result, it was appropriateto grow
capital expenditureby 10% for the years 2015-2017, and then
decrease to the historical average over the following three years.
Working Capital
Workingcapital is generally positivefor the departmentand
discountretail industry (Department & Discount Retail Industry).
Macy’sworkingcapital ratio hovers around 1.5, indicatingcurrent
assets are almost alwayshigher than currentliabilities. To project
workingcapital for futureyears, the methodology used was
calculating the change in workingcapital over the change in sales.
Using percentage change as a percentage change of sales gives a
moreaccurate resultin comparison to usingworkingcapital as a
percentage of sales, which overstates workingcapital. Based on
historical data over the previousseven years, the average change in
workingcapital over change in sales was taken. As a result, working
capital changed 2.12 times morethan changes in sales. With this
In Millions 2015 2016 2017 2018 2019 2020
Net sales 27,849 28,587 29,468 30,419 31,326 32,218
% growth 2.65% 3.08% 3.22% 2.98% 2.85%
CoGS (16,710) (17,152) (17,681) (18,251) (18,796) (19,331)
% of sales 60% 60% 60% 60% 60% 60%
Gross Margin 11140 11435 11787 12167 12531 12887
Expenses (SG&A, D&A) (8,887) (9,122) (9,403) (9,707) (9,996) (10,281)
% of sales 32% 32% 32% 32% 32% 32%
EBIT 2253 2313 2384 2461 2534 2606
Interest Expense (557) (572) (589) (608) (627) (644)
Taxable Income 1,696 1,741 1,795 1,852 1,908 1,962
Tax (607) (623) (643) (663) (683) (703)
Net Income 1,089 1,118 1,152 1,189 1,225 1,259
EPS 3.20 3.28 3.38 3.49 3.60 3.70
17. 17
figureI was able to forecast changes in workingcapital over the
followingfive years.
Beta
Beta was calculated usingtwo differentmethodologies. The
first methodology was runningaregression usingMacy’sreturns
versusthe S&P 500 returns. Usinghistorical prices from November
11th 2010 to November 11th 2015, itwaspossible to concludeon a
statistically significant Beta of 0.87.
Exhibit 7: RegressionBeta
The second method used was through un-leveraging
comparable companies’ Betas and then re-leveraging the median
Beta usingMacy’s debt to equity ratio with the followingformula:
𝐵𝑒𝑡𝑎𝑙𝑒𝑣𝑒𝑟𝑒𝑑 = 𝐵𝑒𝑡𝑎 𝑢𝑛𝑙𝑒𝑣𝑒𝑟𝑒𝑑 ∗ [1 + (1 − 𝑡𝑎𝑥) ∗
𝐷𝑒𝑏𝑡
𝐸𝑞𝑢𝑖𝑡𝑦
]
Exhibit 8: CompCo Beta Calculation
Using comparable company re-leveragingmethod resulted in a
Beta of 0.834. TheBeta used for the WACC wasan equally weighted
average Beta of 0.852
Company Beta Levered Tax rate Debt Equity Unlevered
JC Penny 1.371 37% 5279 2,831.99 0.63
Kohls 0.751 36% 5135 8,764.17 0.55
Nordstrom 1.08 39% 2809 12,553.28 0.95
TJX 0.709 37% 1624 47,680.08 0.69
median 0.66
Macys 0.834 36% 7006.00 17387.63 0.66
ANOVA
df SS MS F Significance F
Regression 1 0.050346036 0.050346 13.53252933 0.000514995
Residual 58 0.215781545 0.00372
Total 59 0.266127581
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 0.005413072 0.009360431 0.578293 0.565305055 -0.013323867 0.024150012
Beta 0.879236403 0.239010055 3.678659 0.000514995 0.400805796 1.357667009
18. 18
Cost of equity
Macy’sInc. had a 16.1 billion-dollar marketcap as of the day of
the valuation. Ibbotson SBBIby Morningstar placesthis market cap
in the third decile, adding0.93% to the company’scost of equity. The
same documentwasused to determinethe long horizon equity risk
premium, 6.96%. Thelong-term risk free rate (20-year government
bond), as stated by the departmentof treasury, was 2.49% asof the
day of the valuation (Daily Treasury Yield Curve Rates).
Using these aforementioned ratesas well as the combined Beta
from the 60-monthregression against the S&P500 and re-leveraging
CompCo, Iwas able to determine the cost of equity through the
followingformula:
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑅𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒 + 𝐵𝑒𝑡𝑎 ∗ ( 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑒𝑚𝑖𝑢𝑚) + 𝑆𝑖𝑧𝑒 𝑃𝑟𝑒𝑚𝑖𝑢𝑚
Exhibit 9: Cost of equity
Cost of equity was thus determined to be 9.35%.
Cost of debt
Macy’sInc. has 26 differenttypesof bondsoutstanding, making
it difficultto calculate a weighted average YTM. An alternative
method wastherefore found. Usingthe Bloombergterminal it was
possible to assess that all of the company’soutstandingdebt has been
issued with a compositedebt rating of BBB. To confirm this bond
rating, Morningstar wasused to doublecheck the credit classification
of Macy’s. Morningstar’sratingaffirmed the BBB creditrating. As of
the valuation date, the US CorporateBBB EffectiveYield rate was
4.12% (BofA MerrillLynchUS CorporateBBB EffectiveYield).
Exhibit 10: Cost of Debt
Risk Free Rate Beta Market Risk Premium Size Premium Re
Cost of Equity 2.49% 0.85 6.96% 0.93% 9.35%
Cost of debt Bloomberg Morninstar
Rating BBB BBB
BofA Merrill Lynch yield 4.12%
19. 19
WACC
The weighted average cost of capital wascalculated by
weighing the cost of debt as well as the cost of equity outlined above.
Weights were assigned based on Macy’scapital structure.
𝑊𝐴𝐶𝐶 = 𝑅𝑒 ∗ (
𝐸
𝑉
)+ 𝑅𝑑 ∗ (1 − 𝑡)(
𝐷
𝑉
)
Cost of equity was taken from the Recalculation to be 9.35%.
Cost of debt, 4.12%, wastheBBB corporatebond yield. Marketvalue
of equity was determined by the company’sshare pricemultiplied by
shares outstanding. Debt was calculated usingthe sum of all
outstandingbonds. These two figures wereadded to find the
denominator value. The tax rate used wasan average of the historical
tax rate, 35.81%.
Exhibit 11: Weighted Average Cost of Capital
Terminal Value
Terminalvaluerepresents the perpetualcash flow from
operationsafter the last year of the DCF. This perpetuity accountsfor
the largest portion of the Discounted CashFlow Analysisand is
therefore extremely important. For this valuation I used the Gordon
GrowthModelwhen determiningthe TerminalValue.
𝑇𝑉 = 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 ∗ (1 + 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒)/(𝑊𝐴𝐶𝐶 − 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒)
A 2% growth rate was used to calculate perpetualfuturecash
flows. This figurewas derived from a2.38% averageGDP growthup
untilthe year 2040 (USGDP Growth Forecast 2015-2019 and up to
2060 | Data and), rounded downto representthe slow decline in the
retail industry. The2% growth rate was then applied to 2020’s free
cash flow of $2,652. Thisfigurewas divided by WACC minusgrowth
rate and discounted at the WACC to arrive at the presentday
terminal valueof $16,327.
WACC Value Weight Cost Tax
Debt 7,006.00$ 29% 4.12% 35.81%
Equity 17,387.63$ 71% 9.35%
Total 24,393.63$ 100% 7.42%
20. 20
DCF Conclusion
Using all of the aforementioned information, theDCFstatement
was created. After taking the NPV of the cash flowsfrom 2015 to
2020 usingthe WACC, TerminalValuewascalculated and
discounted. By addingthese two figuresI was able to concludeon a
businessenterprise valuefor Macy’sInc. Since Macy’s currentassets
less cash are enough to cover currentliabilities, all of its cash was
excess (Skonieczny). However, beinga retailer I presumed they need
20% of this cash to stock registers and continueoperations. After
subtracting debt and addingback excess cash, equity valueemerged.
Equity valuewas then divided by the number of shares outstanding
to concludeon an implied valueper share of $51.74.
Exhibit 12: DCF
Exhibit 13: DCF Valuation
Comparable Mergers & Acquisitions Valuation
The comparablemergers and acquisitions method uses
acquisitions of related companiesfrom within the retail industry to
valueMacy’sInc. I began the search by lookingat M&Asfrom the
most recent two years, from November 2013 to November 2015. The
Year end 2015 2016 2017 2018 2019 2020 Terminal Value
Net Earnings x (1-t) 2,253 2,313 2,384 2,461 2,534 2,606
Tax (807) (828) (854) (881) (908) (933)
After Tax earnings 1,446 1,484 1,530 1,580 1,627 1,673
D&A 1197.52 1229.23 1267.14 1308.00 1347.03 1385.39
Capex (622) (638) (658) (629) (648) (666)
Change in NWC 61 (173) (213) (238) (235) (238)
FCF 2,083 1,902 1,926 2,021 2,091 2,154 21,971.65
WACC 7.42%
Cash Flow NPV 9,522.23$
Terminal Value PV 13,309.14$
BEV 22,831.37$
Debt 7,006.00$
Excess Cash 1,797.00$
Equity Value 17,622.37$
Shares 340.60$
Value per share 51.74$
21. 21
search wasfurther narrowed down to only includecompleted deals
of publictarget companieswithin the U.S., where a majority stake
was acquired. Finally, an SIC codeof 5311-5399, acodefor
departmentstores, yielded two companies. To further expand my
search, I included the SIC codeof 5611-5699, whichincludesmen’s
and women’sclothing stores. This was an appropriatemeasureasTJ
Maxx as well as Nordstrom wereboth in this category, and were two
of the mostfrequently mentioned competitorsfrom analyst reports
and company statements. Expandingthe SIC codes resulted in three
additionalcomparable mergers& acquisitions, bringing the total up
to five.
Exhibit 14: Comp M&A
Exhibit 15: Comp M&A Multiple Calculation
After determiningthe shares acquired at a premium, itwas
importantto compare the share price to the price90 daysprior to
the announcement. Usingthese two prices, I discovered the premium
paid per share. Adjustingfor the pricepremium, equity valuewas
determined to which net debt assumed was added to in order to
come up with the businessenterprise value. Finally, usingthe BEV I
divided it by the last twelve month’sEBITDA, for the BEV/EBITDA
multiples. The median multiple, 6.63, wasthen multiplied by Macy’s
Inc.’s LTM EBITDA to get its BEV. Interest bearing debt was
subtracted from this value, while excess cash was added to arriveat
the firm’sequity value. Dividingequity valueby shares outstanding
resulted in an implied share valueof $55.01per share.
Target Name Acquirer Name Close date Shares bought* Share price 90 days prior Premium Net debt*
ANN INC Ascena Retail Group Inc 5/18/15 45 37.34 35.19 6.11% -207.71
Jos A Bank Clothiers Inc Men's Wearhouse Inc 11/26/13 28 65 40.50 60.49% -333.18
rue21 inc Apax Partners LLP 5/23/13 23.78 42 27.70 51.62% -63.52
Family Dollar Stores Inc Dollar Tree Inc 7/28/14 114.5 59.6 57.95 2.85% 594.65
Saks Inc Hudson's Bay Co 7/29/13 145.5 16 11.46 39.62% 296.85
*millions
Target Name BEV* EBITDA* BEV/EBITDA
ANN INC 1375.84 251.10 5.48
Jos A Bank Clothiers Inc 800.82 133.10 6.02
rue21 inc 595.186 89.80 6.63
Family Dollar Stores Inc 7229.925 728.00 9.93
Saks Inc 1964.28 262.30 7.49
*millions Median 6.63
22. 22
Exhibit 16: Comp M&A Valuation
Comparable Company Valuation
The ComparableCompany method wasalso used in order to
give morecredibility in determiningthe valueof the company. The
comparable companieswerefound usingseveralsources. Macy’s
most recent 10k filings, Proxy Statement (14a), as well as multiple
analyst reports (Sterne Agee, Cowen and Company, Barclays, Morgan
Stanley’s AlphaWise) were all utilized in determiningthe
competitors.
The most frequently mentioned competitorswere: Dillards, JC
Penny, Kohl’s, Nordstrom, Sears, Target, and TJ Maxx. Next, to make
surethat the companieswere in the same line of business, each
company’sbusinessdescription wassought. As a result of this, three
companieswere eliminated. Dillardsoperates a construction
company under itsname, as well as departmentstores. Dueto this, it
was eliminated. Sears was also operating in too many segments
includingSears Auto Services, specializing in car repairs, and Sears
HomeImprovement, specializingin carpet cleaning and home service
installations. Target proved to offer a widerange of productsthat
were too diversified, includingfreshand frozen food, aswell as
computer hardware, software, and videogames.
After removingthese three companies, I was left with
four businessesthat operated under very similar modelswhile
offeringthe same productsasMacy’s Inc; JC Penny, Kohl’s,
Nordstrom, and TJ Maxx.
Exhibit 17: Comparable Companies
Company Ticker MV Equity* EBIT* EBITDA* Sales* Debt* CA* CL* Cash* Excess cash? BEV*
JC Penny JCP 2,832 -509 126 12146 5279 4331 2241 4405 no 8,110.99
Kohls KSS 8,764 1644 2533 18785 5135 5698 2859 3065 no 13,899.17
Nordstrom JWN 12,553 1345 1843 13174 2809 5224 2800 3414 no 15,362.28
TJX TJX 47,680 3511 4091 28583 1624 6715 3930 8546 no 49,304.08
*millions
Macys EBITDA* 3524.00
EBITDA multiple 6.63
BEV* 23356.74
IBD* 7006.00
Excess Cash* 2246.00
Equity Value* 18147.54
Shares* 340.60
Share value 55.01
*millions
23. 23
Exhibit 18: CompCo multiples
Using the market valueof equity at the time of the valuation
plusdebt, less excess cash provided mewitha BEVfor these
companies. Excess cash was derived in the followingway: if current
assets less cash weregreater than currentliabilities, the companies
had enoughcurrentassets to cover current liabilities (Skonieczny).
This meansthat all of the companies’cash is excess. However, dueto
the fact that these companiesoperate within the retail industry, this
is simply unrealistic, as these companies need cash in registers to
continueoperations. As a result, only 80% of cash was considered
excess while the remaining20% would beused to continue
operations. On the other hand, if currentassets less cash were less
than currentliabilities, companiesneeded all of their cash for
operationsand did not have any excess cash, as the case with the
comparable companies.
Businessenterprisevaluewas determined usingthe market
valueof equity plusdebt less excess cash. This valuewas then
divided by EBITDA, EBIT, and sales to find the multiplesthat could be
applied to Macy’sInc. After lookingat five-year average growth of the
comparable companiescompared to Macy’s Inc., it was appropriate
to use only the lower quartile of the multiples, as the higher quartile
growth was morethan double that of Macy’s.
By applyingthe lower quartile mediansto Macy’sLTM figures,
I determined the company’sBEV. Subtracting the market valueof
interest bearing debt and addingexcess cash resulted in equity value,
which wasthen divided by shares outstanding. The EBITDA multiple
was the mostimportant multipleas retail stores have many physical
locations, resulting in significant depreciation expenses. It was
therefore importantto use a valuethat reflected this, unlike EBIT.
Sales are less accurate as they do not account for any of the
company’sexpenses. Using the EBITDA multipleresulted in an
implied share valueof $56.21.
Multiples EBITDA EBIT Sales
JCP 64.37 15.94- 0.67
Kohls 5.49 8.45 0.74
Nordstrom 8.34 11.42 1.17
TJX 12.05 14.04 1.72
Median 6.91 9.94 0.70
24. 24
Exhibit 19: Comp Co Valuation
Conclusion
All of the above valuationsyielded fairly similar results above
the tradingstock priceof $51.05 atthe day of the valuation with an
equity valueof $17,387.63. In order to computea single implied
stock value, I took an equally weighted average of all of the
concludingequity valuesand stock prices. This resulted in an equity
valueof $18,305.44and ashare price of $54.32. Theimplied share
price wasat a 6.41% premium of theactual stock price.
Exhibit 20: Final valuation
Multiples EBITDA EBIT Sales
Macy's LTM* 3524 2467 27574
BEV* 24356 24517 19408
IBD* 7006 7006 7006
Excess Cash* 1797 1797 1797
Equity Value* 19146 19308 14199
Shares* 340.6 340.6 340.6
Share value 56.21 56.69 41.69
*millions
Method Weight Equity Value Implied Stock Value
DCF 33% 17,622.37$ 51.74$
CompM&A 33% 18,147.54$ 55.01$
CompCo 33% 19,146.42$ 56.21$
Weighted Average 18,305.44$ 54.32$
Actual 17,387.63$ 51.05$
Difference (Premium) 5.28% 6.41%
26. 26
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