Ratio Analysis of Macy's and Nordstroms - Essay Example

?Nordstrom Inc., a giant in retail or of fashion apparels, shoes, and any other ingredient of use for men, women and children, is a high scale retailchain store in United States. It functions through a diverse channel of stores and boutiques. Moreover, it has expanded its business through internet to an even higher scale. The company has entered into credit card and debit card business as well which is operated by one of its subsidiaries. Nordstrom sells both branded and private labeled cloths which make it a favorite for not only elite class of the society but it is equally popular amongst middle class or aspiring middle class citizens. Nordstrom generates sales from following segments. Firstly, retail full line stores generate substantial earnings which are evident from its financial ratios. Secondly, a direct segment is another organ of Nordstrom Inc. This segment primarily focuses on internet based selling. Nordstrom’s website reports high traffic on it, which is a sign of high customer satisfaction. Company has always delivered its promise of quality, fashion and customer service. Thirdly, credit segment earns revenue through charges levied on their company’s own or co-branded credit cards. Macy’s Inc. is another giant of the retail industry. It is based in Cincinnati, Ohio since 1820 and has been crowned as one top retail stores in the United States. Company operates through its two organs namely retail stores and its website. Macy has a huge portfolio for its customers, ranging from apparels, shoes and other accessories for men, women and children. They have also entered into home furnishings and various other consumer goods. In short, Macy’s Inc. has everything which one could dream for his/her living. Macy has been focusing on forward integration lately so that it can offer premium service to its customers and consequently, increase its saving by inventory management and price optimization. Keeping a holistic view of the retail industry, it is evident by the reports published by National Retail Federation(NRF) that the retail industry will grow by 4% in the current year due to better-than expected holiday season. However, commodity prices will increase due to augmenting levels of inflation which can create setbacks for the retail industry. Retail industry survives on volume of sales. Whoever, can provide high quality with low price wins the bid therefore, Nordstrom and Macy have been working to reduce cost through better inventory management controls and reduces their cost of goods sold to sales ratio. Nordstrom Inc. has performed well in the last couple of years. It has continued to grow and prosper which can be seen by its improving profitability ratios. The return on Equity has improved to 34.12% in 2010 as compared to 31% in 2009. Nordstrom has established a strong line up of globally recognized brands which have added substantially to its earnings. The company’s earning has made a heap of 39% in 2010 from $441M in 2009 to $613M in 2010. Analyzing its Gross profit margin notifies an increment of $587M which is about 19.9%. Gross profit margins have grown to 36.39% in 2010 from 34.1% in 2009 as the company has been able to reduce the percentage of sales devoted to cost of goods sold from 68.83% to 66.27%. which is a reason of reducing its cost of goods sold to sales ratio. Company has integrated better mechanisms of inventory management to increase their year-end earnings. Moreover, sales have climbed up by 16.68% from $4560M in 2009 to $5321M in 2010 which is a reason for higher profitability ratios. Subsequently, net profit margins have increased from 9.67% to 11.52% in 2010. Nordstrom has performed well in terms of liquidity. This is evident from its current ratio as it has increased to 2.56 in 2010 from 2 in 2009. Looking closely at it, these figures are better than the industry averages hence the company is in a relatively safe position to pay off its current obligations. Nordstrom has performed really well in terms of managing their assets. Inventory turnover period has improved as well from 61 days in 2009 to 58 days in 2010 which is due to lower levels of inventory on hand. Nordstrom Inc. is a highly leveraged firm with its debt to asset ratio touching 76% in 2010 from 73% in 2009. Industry averages support such huge numbers as it is a leverage intensive industry where financial institutions make most of the investment. But looking at the cash flows and augmenting net profit margins, the company looks in a relatively safe position and is aspiring to achieve more depending on a favorable holiday season. Macy’s Inc. has been working extremely hard to gain back their profit margins. Their soaring profitability ratios, poor asset management and high leveraging have been a great concern for their stakeholders. Although the company has been regular in giving dividends however, current situations have inclined stakeholders to take prudent steps. The company’s net earnings have increased substantially due to their new venture which is evident by the sharp hike in ROE from 7% in 2009 to 16.6% in 2010. Moreover, their gross profit has grown in magnitude but a proportionate increase in sales has caused minimal change from 40.5% in 2009 to 40.7% in 2010. However, due to high interest payments, the company has shown negative growth in net profit margins from 14% in 2009 to 3.3% in 2010. This may create negative sentiments in the market for the investors. Although equity is a small proportion of the assets yet a decline in it can cause decrease in company valuation. Macy’s Inc. has not been liquid in these two years. Their current ratios have seen a decline to disproportionate increase in liabilities. Current ratio has fallen to 1.36 in 2010 from 1.5 in 2009. Current liabilities have increased sharply which may be a concern in the short run. In terms of asset management, it’s in extremely poor state. Inventory turnover period of more than 120 days is above industry average. Macy’s Inc. has been trying hard to improve it but unfortunately, results have not been in their favor. Their plans are to integrate special mechanisms in the field of asset management so that they could save handsome amount in the upcoming years. Lastly, retail industry has been leverage intensive and so is the case with Macy’s Inc. as well. Debt-to-asset ratio has reduced from 78% in 2009 to 73% in 2010 yet it is on the higher side. The given ratios indicate a sorry state for Macy’s Inc. however, their plans for future are bright and persistence towards their mission could yield everlasting profits. Nordstrom Macy’s Inc. Ratio Expression 2009 2010 2009 2010 ROE (441/1391) =31.7% (613/1796.5)= 34.12% 329/4649.5=7.07% 847/5091.5=16.67% Gross Profit margin 9516/23489=40.5% 10179/25003=40.7% Net Profit Margin 441/4560=9.67% 613/5321=11.52% 329/23489=14% 847/25003=3.387% Current Ratio 4054/2014=2.01 4824/1879=2.567 6882/4462=1.542 6899/5065=1.36 Inventory Turnover Period 365/(5328/899)=61.5 days 365/(5897/937.5)=58 days 365/(13973/4805)=125.5 days 365/(14824/4686.5)=115 days Debt-to-asset Total debt/ Total asset 5007/6579=76.1% 5441/7462=72.9% 16647/21300=78.15% 15101/20631=73.2% . Conclude the paper with a recommendation on whether the stock should be purchased, traded or sold.  Nordstrom Inc. has a net worth of $ 9 billion and volumes reaching 3 million shares per day. Analysts see a positive trend in performance for the company with an initial estimate of an increase of $0.4 per share compared to last quarter’s results of $0.69 (Weinstein). Industry analysis indicates that the number to beat is $0.73 per share, estimates suggest that the company is likely to earn between $0.69 to $0.77. There has been an upside trend in year on year revenue, which has increased by $1.07 billion to $9.7 billion in 2010 compared to $8.63 billion for 2009 (Weinstein). The same trend has been observed with the year on year EBIT and bottom line earning. It is hence safe to assume that this trend would continue to prevail for the year 2011 as well. However, there has not been a corresponding increase in volume compared to earnings suggesting that investor sentiment is down and they do not foresee a substantial increase in price. Furthermore, performance compared to industry average is bleak and slow and is not likely to increase rapidly. Recommendation: Sell Macy’s Inc. Analysts expect a sharp increase in net income. Estimates go up to as high as 34.3% (Hoffman). Analysts are also projecting a profit of approximately $2.54 for the year, a sharp increase of 20%. The company continues to beat estimates with its performance. Analysts forecast a revenue increase of 4.8% from last year with total revenue touching $25 billion. The company continues to perform well and market sentiment is positive. Furthermore, there are no signs of holding back and analysts forecast sharp growth. Recommendation: Buy Works Cited Hoffman, Derek. Macy's Inc second quarter earnings sneak peak. 5 8 2011. . Weinstein, Robert. What to Expect from Nordstrom's earnings report thursday. 8 8 2011. . Read More