Financial Position of Macys Inc - Research Paper Example

? Company Analysis of the of the Table of Contents Table of Contents 2 Executive Summary 3 Company Analysis 4 Financial Analysis 4 Ratio Analysis 8 Competitor Analysis 13 Industry Analysis 16 Porter’s five forces analysis 19 Key findings from the Industry analysis 21 Conclusion 22 References 23 Executive Summary The study have been prepared in order to understand the financial position of Macy’s Inc followed by its performance within the retail industry of United States. It would be conducting a ratio analysis of the company for understanding the trend of performance from the year 2009 till 2013. The study would also conduct an industry analysis of the retail industry in United States for understanding the situation of the industry. This would also help in understanding the position of Macy’s Inc in the industry and the threat it possess on grounds of the five forces in the Porter’s Five forces analysis model. Finally the study would be concluding with an insight into the sum-up of the entire study followed by recommendations for further improvement. Company Analysis Macy’s Inc. is one of the American multinational holding companies which is headquartered in Cincinnati, Ohio. The company is the owner of all the departmental stores of Rich’s and Macy’s Bloomingdale’s that specializes in sale of footwear, clothing, furniture, bedding, accessories, beauty products, jewelry and house ware. The organization operates almost 850 stores in the entire United States. It is renowned for possessing the most prominent flagship stores in the country specifically Macy’s in New York, Los Angeles and San Francisco. The organization is the biggest fashion good retaining company in the world and 36th biggest retailer from overall perspectives on the basis of the sales revenue amount of $ 25 billion in the Company’s annual report of 2010. Financial Analysis The financial analysis would be done by the assessment of the figures in the balance sheet and income statement of Macy’s Inc followed by the ratio analysis of the organization. Analysis of the financial performance of a company is generally determined by the evaluation of accounting information with the help of different accounting tools. Financial analysis is defined as the procedure for evaluating relationship in between different components within the financial statement fir having a clear understanding of the position and performance of an organization. The financial analysis of Macy’s Inc would help the management in taking a concrete decision and avoid the chances of flaws. For avoiding any faulty decision, it is very important to analyze and interpret the results in a systematic manner. A comparative analysis of the performance of the organization with its competitors would also be performed in order to understand its position within the industry (Sinha, 2009). The competitors of the company include Dillard’s Inc and SAKS Inc (Hoovers, 2013). The next portion of the project would be displaying the income statement of Macy’s Inc. Year 2009-01 2010-01 2011-01 2012-01 2013-01 Revenue 24892 23489 25003 26405 27686 Cost of revenue 15009 13973 14824 15738 16538 Gross profit 9883 9516 10179 10667 11148 Operating expenses           Sales, General and administrative 8481 8062 8260 8281 8482 Other operating expenses 5780 391 25 -25 5 Total operating expenses 14261 8453 8285 8256 8487 Operating income -4378 1063 1894 2411 2661 Interest Expense 588 562 579 447 437 Other income (expense) 28 6 5 4 -122 Income before income taxes -4938 507 1320 1968 2102 Provision for income taxes -135 157 473 712 767 Net income from continuing operations -4803 350 847 1256 1335 Net income -4803 350 847 1256 1335 (Source: Morning Star, 2013a) In the year 2009, the company was incurring losses. The aforementioned table shows that the company has started making profit from the next year i.e. 2010. The company has made impressive performance in terms of generating net earnings. The net earnings figure has increased yearly which shows that the company is performing in an impressive manner. The balance sheet of Macy’s Inc has been shown below: Year 2009-01 2010-01 2011-01 2012-01 2013-01 Assets           Current assets           Cash           Cash and cash equivalents 1306 1686 1464 2827 1836 Total cash 1306 1686 1464 2827 1836 Receivables 439 358 392 368 371 Inventories 4769 4615 4758 5117 5308 Prepaid expenses   223 285 465 361 Other current assets 226         Total current assets 6740 6882 6899 8777 7876 Non-current assets           Property, plant and equipment           Land 1764 1719 1702 1689 1736 Fixtures and equipment 6608 6129 5752 5275 4909 Other properties 7528 7441 7408 7442 7498 Property and equipment, at cost 15900 15289 14862 14406 14143 Accumulated Depreciation -5458 -5782 -6049 -5986 -5947 Property, plant and equipment, net 10442 9507 8813 8420 8196 Goodwill 3743 3743 3743 3743 3743 Intangible assets 719 678 637 598 561 Other long-term assets 501 490 539 557 615 Total non-current assets 15405 14418 13732 13318 13115 Total assets 22145 21300 20631 22095 20991 Liabilities and stockholders' equity           Liabilities           Current liabilities           Short-term debt 966 242 454 1103 124 Accounts payable 3910 1796 1980 1593 2204 Deferred income taxes 222 206 364 408 407 Taxes payable   68 186 371 550 Accrued liabilities   2142 409   542 Other current liabilities 28   1672 2788 1248 Total current liabilities 5126 4454 5065 6263 5075 Non-current liabilities           Long-term debt 8733 8456 6971 6655 6806 Deferred taxes liabilities 1119 1068 1245 1141 1238 Other long-term liabilities 2521 2621 1820 2103 1821 Total non-current liabilities 12373 12145 10036 9899 9865 Total liabilities 17499 16599 15101 16162 14940 Stockholders' equity           Common stock       5 4 Additional paid-in capital 5663 5689 5696 5408 3872 Retained earnings 2008 2274 2990 4015 5108 Treasury stock -2544 -2514 -2431 -2434 -2002 Accumulated other comprehensive income -481 -748 -725 -1061 -931 Total stockholders' equity 4646 4701 5530 5933 6051 Total liabilities and stockholders' equity 22145 21300 20631 22095 20991 (Source: Morning Star, 2013b) The aforementioned table shows the balance sheet of Macy’s Inc. The table shows that there has been an increase in the value of the current assets yearly which shows that the company is actively utilizing its current assets in meeting up the short term liabilities. The current as well as non- current liabilities of the organization has decreased gradually which shows that it is reducing its reliance on the short term or long term debt financing for funding the business operations. Moreover, Macy’s Inc has also increased its equity financing yearly which implies that it is increasing its reliance on the internal sources of financing for funding the operational activities. Ratio Analysis For conducting the further financial analysis of Macy’s Inc, a financial tool known as ratio analysis would be taken into consideration. Ratio analysis is a procedure which would help in presenting the financial information of Macy’s Inc and its competitors in much systematic and comprehensive manner. It would help in assessing the financial performance of the organization and its competitors in terms of its financial soundness, solvency, efficiency and profitability. In other words, ratio analysis would help in the establishment of relationship between various financial factors within the business operations (Siddiqui, 2006). 1) Liquidity Ratio The liquidity ratio helps in assessing the performance of an organization in terms of meeting up its short term obligations. It assesses the extent till which an organization utilizes its current assets for meeting up the short term liabilities. The liquidity ratios are very important as they failure in meeting up the short term obligations results in the bankruptcy state for the organization. Higher values of liquidity ratio imply that the company is performing in an impressive manner in terms of meeting up the short term liabilities. In this context, current ratio of Macy’s Inc would be calculated for determining the liquidity position of the organization (Gallagher and Andrew, 2007). 1.1) Current ratio Calculation of Current Ratio 2009 2010 2011 2012 2013 Current Assets 6740 6882 6899 8777 7876 Current Liabilities 5126 4454 5065 6263 5075 Total Current Ratio 1.315 1.545 1.362 1.401 1.552 The aforementioned graph shows that the performance of Macy’s Inc in terms of meeting up the short term liabilities by the utilization of short term assets is inconsistent (Kuppapally, 2008). However, the current ratio of the company has increased gradually from the year 2011. The value is highest in the year 2013. This implies that Macy’s Inc is performing in an impressive manner in terms of meeting up the short term obligations. 2) Profitability Ratio Profitability ratios help in assessing the financial performance of an organization in terms of generation of profit. The ability of an organization in earning profit can be assessed with the help of the profitability ratio. It would help in evaluation of the financial reliability of any organization. In this context, return on equity ratio and return on asset ratio of Macy’s Inc have been calculated for assessing the profitability of the organization (Thukaram, 2007). 2.1) Return on Equity Calculation of Return o Equity 2009 2010 2011 2012 2013 Net Income -4803 350 847 1256 1335 Shareholder's Equity 4646 4701 5530 5933 6051 Return on Equity -103.379 7.445 15.316 21.170 22.062 It helps in determining the extent till which the shareholder’s equity has been utilized for generating the net income of an organization. It is a measure of the profitability of the company. The return on equity of Macy’s Inc has increased yearly which implies that it is performing in an impressive manner in terms of generation of net earnings by the utilization of the shareholder’s equity. 2.2) Return on Assets Calculation of Return on Assets 2009 2010 2011 2012 2013 Net Income -4803 350 847 1256 1335 Total Assets 22145 21300 20631 22095 20991 Return on Assets -21.689 1.643 4.105 5.685 6.360 It helps in determining the extent till which the assets of an organization are being utilized for generating earnings for the company. It shows the efficiency of an organization in terms of managing the assets. The aforementioned line chart shows that the return on asset value of Macy’s Inc has increased gradually from 2009 to 2013 with the highest value in the year 2013. This states that the company is performing in an impressive manner in terms of generation of net earnings by the effective management and utilization of the asset. Macy’s Inc should focus on maintaining consistency in its performance. 3) Solvency ratio Solvency ratios help in determining the ability of an organization in meeting up the long term financial obligation. When any company increases its reliance on the external sources of funding rather than its internal sources of financing, it is said to possess higher risk of being insolvent (Schmidgall, Hayes and Ninemeier, 2003). In this context, the long term debt to equity ratio has been calculated. 3.1) Long term debt to Equity Ratio Calculation of Long Term Debt to Equity Ratio 2009 2010 2011 2012 2013 Long Term Debt 8733 8456 6971 6655 6806 Shareholder's Equity 4646 4701 5530 5933 6051 Long Term Debt to Equity Ratio 1.880 1.799 1.261 1.122 1.125 The long term debt to equity ratio of Macy’s Inc would help in assessing the performance of the organization in terms of meeting up the long term financial obligation. The long term debt to equity ratio of Macy’s Inc has decreased gradually from 2009 to 2013. It reflects that it has decreased its reliance on the external sources of financing to a great extent. It has increased its dependence on the equity financing. This implies that the company is performing in an impressive manner in terms of sourcing funds for the business operations. Competitor Analysis 1) Liquidity Ratio: Current Ratio Current Ratio 2009 2010 2011 2012 2013 Macy's Inc 1.315 1.545 1.362 1.401 1.552 Dillard’s Inc 1.846 2.276 2.048 1.830 1.945 SAKS Inc 2.362 2.437 2.201 2.736 1.985 Nordstrom Inc 2.009 2.013 2.567 2.159 2.283 TJX Companies 1.310 1.659 1.628 1.676 1.519 The aforementioned table shows that the current ratio of Dillard’s Inc. and SAKS Inc. has remained consistent in between 2009 and 2013 whereas the ratio of Macy’s Inc shows an increasing trend. The performance of TJX Companies has also been shown in the aforementioned table. It states that the company has shown inconsistent performance in terms of paying the short term liability. The ratio decreased in the last year as compared to the previous three years. The company should maintain consistency in its performance. Nordstrom Inc has performed well in this context. The ratio of the company shows an increasing trend. This is impressive performance in terms of meeting up the liabilities efficiently. This reflects that Macy’s Inc is performing impressively as compared to its competitors in terms of meeting up the short term liabilities by the utilization of the short term assets. Thus the company is utilizing the current assets in an effective manner for repaying the short term obligations. 2.1) Profitability Ratio: Return on Equity Return on Equity 2009 2010 2011 2012 2013 Macy's Inc -103.379 7.445 15.316 21.170 22.062 Dillard’s Inc -10.706 2.995 8.625 22.612 17.056 SAKS Inc -16.046 -5.410 4.124 6.214 5.478 Nordstrom Inc 33.140 28.053 30.332 34.918 38.421 TJX Companies 41.265 42.021 43.323 46.619 52.019 The return on equity percentage of Dillard’s Inc and Saks Inc shows inconsistent figures which implies that they could not perform in a consistent manner in terms of generation of net earnings by the utilization of the shareholder’s equity. On the other hand, the return on equity value of Macy’s Inc has increased yearly which implies that the organization is performing in highly efficient manner in terms of earning net income by utilizing its shareholder’s equity. The return on equity of Nordstrom Inc has increased remarkably which implies that it is performing well in utilizing the shareholder’s equity for generating the profit. The performance of TJX Companies has also increased yearly. Thus, it can be stated that Nordstrom Inc and TJX Companies are two companies which provide tough competition to Macy’s Inc. 2.2) Profitability ratio: Return on Assets Return on Assets 2009 2010 2011 2012 2013 Macy's Inc -21.689 1.643 4.105 5.685 6.360 Dillard’s Inc -5.078 1.498 4.115 10.776 8.298 SAKS Inc -7.159 -2.715 2.240 3.524 3.014 Nordstrom Inc 7.084 6.703 8.215 8.044 9.086 TJX Companies 14.260 16.265 16.846 18.063 20.048 The aforementioned table shows that Dillard’s Inc and SAKS Inc could not maintain consistency in generating net income by managing the asset value. On the other hand, the performance of Macy’s Inc has been consistent and improved gradually. Nordstrom Inc is performing well in this context where its return on assets value is increasing yearly. This states that the asset management of the company is being done in an effective manner. The return on asset value of TJX Companies is has increased yearly and is the highest among all the competitors. This implies that there is a tough competition within the industry where Macy’s Inc requires maintaining consistency and improving in its asset management practices in order to increase the net earnings for the company and achieve competitive advantage in the market. 3) Solvency ratio: Long term debt to Equity ratio Long Term Debt to Equity Ratio 2009 2010 2011 2012 2013 Macy's Inc 1.880 1.799 1.261 1.122 1.125 Dillard’s Inc 0.337 0.411 0.430 0.397 0.414 SAKS Inc 0.657 0.460 0.308 0.305 0.227 Nordstrom Inc 1.830 1.436 1.373 1.606 1.633 TJX Companies 0.171 0.268 0.250 0.241 0.211 The long term debt to equity ratio of Dillard’s Inc has increased yearly. This shows that the company has increased its reliance on the external sources of financing which increases its risk factor in terms of getting insolvent. The long term debt to equity ratio of SAKS Inc has decreased yearly which is impressive as it implies that the company has decreased its dependence on the external sources of financing and is increasing its equity financing gradually for financing the funds required in the business operations. The performance of Nordstrom Inc is not very impressive in this context as they have increased their debt financing in the final year i.e. 2013. TJX companies have tried to bring its debt condition under control as compared to the previous years. This states that Macy’s Inc is in a better position in terms of financing its business operations with reduced reliance on debt financing as compared to all its competitors. Industry Analysis Retail industry is known as the second biggest industry in United States both in terms of the total number of employees and the total number of establishments (Research and Markets, 2013). The retail industry in United States generates an amount of $ 3.8 trillion in the retail sales per annum including $4.2 trillion of the food service sales) the per capita amount being $11,993 approximately. The retail sector is one of the biggest sectors worldwide. Retail trade market accounts for almost 12.4 percent of the entire business establishment in United States. The single store business accounts for almost 95 percent of all the retailers in United States and generates sales accounting less than 50 percent of almost all the retail stores. The gross margin of this industry ranges between 31 to 33 percent of the sales figure and varies broadly by the segment. The retail industry in United States would be analyzed with the help of Porter’s Five Forces analysis Model. Porter’s five forces model would help in determining the profitability s well as the competitive ability of Macy’s Corporation in the retail industry. The five forces that are taken into consideration while performing the industry analysis using Porter’s five forces analysis are mentioned below: Bargaining power of the Suppliers Bargaining power of the buyers Threat of new entrant Threat of Substitutes Competition from the existing firms One of the main reasons behind conducting the porter’s five forces analysis of Macy’s Corporation is to understand the present scenario in the retail industry of United States and the upcoming threat for the organization by assessment of the five aforementioned forces. It would help the organization in improving in those areas where it lags behind and catch up with the industry performance as well. In porter’s five forces model, the analysis is done on grounds of five different forces that help in determining the competitive supremacy within the business situation (Porter, 1980; 1998). The porter’s five forces model would help in assessing the business situation and the position of an organization in the industry. It acts as one of the business strategy tools enabling the assessment of the attractiveness within the industry. The current strength related to the competitive positioning of an organization is assessed with the help of porter’s five forces model. In a similar manner, the competitive positioning of Macy’s Inc would be assessed with the help of this business model (Alkhafaji, 2003). This model is considered to be the most significant component in the business planning tool set because it helps in pointing out the strengths and weaknesses of an organization performing its operation within an industry. The five forces are interconnected with each other as shown below: Porter’s five forces analysis Threat of substitutes: Threat of substitutes helps in assessing how easily a customer would be switching to the product or service offerings of the competitors. There are a number of substitutes available for one particular product or service. The customers might find that the substitute products or services are being offered at lower prices. The customer may also find the quality of the substitute product or services to be superior to the product or service offerings of the organization. Thus there are many reasons for which a customer can switch to the substitute product or service offerings of the competitors. The retailers have to deal with a large range of products. Thus it is easier for a customer to switch from the product to its substitute. The threat of the substitute products is high in the retail industry. The thrift stores or the second hand stores act as potential substitutes for the products of Macy’s Corporation. However, there is an advantage for the company that these offerings might seem to be unappealing for the affluent customers who provide much higher significance to the brand name. Bargaining power of the suppliers: Bargaining power of suppliers helps in assessing that the position of the suppliers within the industry. The supplier’s bargaining power increases when the total number of suppliers in the market is low and they remain well organized. The bargaining power is also high when there is less availability of substitute products in the market or the switching cost of switching from one particular supplier to another is high. In the retail industry, the switching cost is low which makes it easy for the retailing companies to switch from one particular supplier to another. Thus it can be inferred that the bargaining power of the suppliers is low in the retail industry of United States and Macy’s Corporation possesses less threat from the supplier’s bargaining power. Bargaining power of the buyers: The bargaining power of the buyers help in assessing the power of the customers in reducing the product price in the industry (Davis, 2008). The bargaining power of the buyers remain low when only few number of buyers chase for a large range of products which are not highly differentiated. The products offerings of the retailers in the industry are highly differentiated from each other. The retailers mainly focus on maintaining a good relationship with their respective customers by providing satisfaction to them with high quality products. This reduces the bargaining power of the buyers. Macy’s Corporation possesses less threat from the buyer’s bargaining power. Rivalry from the existing firms: This is another important force in the porter’s five forces model. It analyses the actual intensity of the competition existing between all the present companies in the market (David, 1986). Rivalry within an industry increases when there are large number of equal competitors and at the same time the customers bear low switching costs. The competition within the existing forms get further intensified when the industry lies in the growth stage. It is also high when the exit barrier remains high and the rivals have no option of exiting from the market rather than sustaining and competing within the industry. As already discussed above, there are a large number of players in the retail industry of United States. There is intense competition among the retailing companies in the industry. The competitors such as Nordstrom Inc and TJX Companies are really performing well in all aspects to give tough competition to the company. Thus it can be inferred that the rivalry among the existing firms is high and Macy’s Corporation would be facing tough competition from its competitors in the market. Threat of new entrants: The entrance of a new competitor in the operational market results in the weakening of the supremacy of the present business enterprises within the industry. It increases the competition in the industry. The threat of new entrant is high when the start-up capital requirement is low along with low switching cost. It is a known fact that if the entry barrier is very high then the chance of new entrant entering in the industry reduces. The industry situation remains in control when the exit barrier remains low and the entry barrier remains high. The capital requirement for starting the business by a new organization is very high. There are many renowned players performing their business operations in this industry. This reduces the chances of a new entrant to enter into the market easily. The entry barrier in the retail industry is also very high. This reduces the threat of new entrant. Macy’s Corporation will have low threat from the new entrants in the retail industry of United States. There are big competitors providing tough competition to Macy’ Inc. The company should differentiate its products and services for achieving competitive advantage over its competitors. Key findings from the Industry analysis This part would be summarizing the entire scenario understood after carrying out the industry analysis. As already discussed above, there is high threat from the substitute products or services to Macy’s Inc products and services. The thrift stores or the second hand stores act as potential substitutes for the products of Macy’s Corporation. The company requires seeking and retaining the affluent customers as they remain brand loyal and are not influenced by the unappealing offers of the substitute products. As the switching cost is very low, the retailers have easy access to switch to other suppliers which reduces the bargaining power of the suppliers in the industry. However Macy’s Inc should aim at maintaining long term quality with the supplier proving quality product to the company and creating a reputation for its brand in the market. The products offerings of the retailers in the industry are highly differentiated from each other. In this industry, the major players aim at keeping good relationship with the buyers. This automatically reduces the bargaining power of the buyers. Macy’s Inc should satisfy its customers by providing quality products so that it has less threat of losing them. As there are a large number of big players in this industry, it reduces the chances of new entrants in the market. Conclusion Macy’s Inc holds a renowned position in the retail industry of United States. The financial analysis of the company has helped in understanding its financial performance. It has improved its performance in terms of profitability. The company is performing in an impressive manner in terms of financing its business operational activities. It has reduced its reliance on the debt financing and is raising its fund by means of equity financing. The liquidity position of the organization has also improved yearly which implies that it is performing efficiently in meeting up the short term liabilities. The industry analysis of the company by means of Porter’s five forces analysis has helped in understanding the current position of the organization in the retail industry along with the upcoming threats and opportunities. There are a wide range of substitutes available for the company’s products and services. The company requires differentiating its products effectively along with the changing tastes and preferences of the customers. Macy’s Inc has less threat from the buyer’s bargaining power, supplier’s bargaining power and new entrant. However, there is intense competition within retail industry. The organization should maintain consistency in the financial as well as non financial performance in order to hold its position in the industry. References Alkhafaji, A. F. (2003). Strategic management: Formulation, implementation, and control in a dynamic environment. 21st ed. London: Routledge. David, F. R. (1986). Fundamentals of strategic management. Columbus: Merrill Pub. Co. Davis, J. R. (2008). Does environmental scanning by systems integration firms improve their business development performance? Michigan: ProQuest. Gallagher, T.J., & Andrew, J.D. (2007). Financial management: principles and practice. New York: Freeload Press, Inc. Hoovers. (2013). Macy's, Inc. competition. Retrieved from http://www.hoovers.com/company-information/cs/competition.Macys_Inc.954ec8ce037ed0d1.html Kuppapally, J.J. (2008). Accounting for managers. New Delhi: PHI Learning Pvt. Ltd.  Morning Star. (2013a). Income statement of Macy’s Inc. 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(2007). Management accounting. New Delhi: New Age International. Read More