2019 was not a great year for department stores. While many chains experienced a profit revival and considerable sales in late 2017, at the end of the fiscal year 2019, the sales and earnings trends went south again due to the beginning of the COVID-19 pandemic. Despite facing some earning pressures in the past five years, Macy's has continued to post a strong cash flow, maintaining a generous dividend of totally $1.51 per share per year (Bowman, 2020). This paper aims to evaluate Macy's position with its competitors by compiling financial data from fiscal years 2016 to 2019. This paper also employs the latest financial performance and historical data to evaluate and critically analyze Macy's financial performance.

Objectives

Analyze the current business and financial health of Macy's using ratio analysis.

Critically analyze the retail industry sector and financial analysis of Macy's competitors in the same industry.

Provide a critical appraisal of the financial strengths and weaknesses of Macy's and its competitors.

Provide a critical evaluation of the financial ratios employed in the analysis.

Provide suitable recommendations to Macy's for implementing changes.

About Macy's Inc

Macy's, Inc. founded in 1858 by Rowland Hussey Macy, is one of the nation's omnichannel fashion retailers. The company is headquartered in New York, New York (as shown in Image 1 below), and has three famous retail brands Macy's, Bloomingdales, and Blue mercury. It offers men's, women's, and children's apparel, women's accessories, intimate apparel, shoes, cosmetics, fragrances, and home and miscellaneous products. Currently, Macy's has 544 stores all over the United States (All Stores - Macy's Store Directory, n.d.). Image 1: Source Macy's Inc.

Being one of the major retailers in the apparel industry and dealing with a wide variety of merchandizes with mid-level to high-cost prices, Macy's is vulnerable to competition from many sides in the United States. Its biggest competitor is Nordstrom, which is in the high price department (Management Glossary Content Team, 2020). The Mid-priced department store includes Kohls and The Gap as the competitors (Management Glossary Content Team, 2020). With the rise in the e-commerce giants like Amazon and eBay and the discount stores like Target and T.J max, which offer the same product at a discounted price, Macy's has been facing an increased competition level (Management Glossary Content Team, 2020).

In the fiscal year 2019, Macy's generated a cash flow of around $451 million, nearly enough to cover its $466 million of dividend payments (Macy's Inc, 2020). This disappointing cash flow was due to Macy's exceeded tax accruals by more than $150 million in 2019 and the settlement of 2018's spending budget in 2019 (Macy's Inc, 2020). However, Macy's enormous real estate in Boston, New York, Washington D.C., Philadelphia, Chicago, San Francisco, and Los Angeles provides a cushioning for investors in the event of underperformance (Macy's Inc, 2020).

Industry Sector

The apparel retail industry's profitability depends on factors like the stores' location, product specialization, marketing, and operating efficiency. These industries need to modify themselves regularly to meet the ever-changing customer needs. They also need to establish e-commerce platforms to deal with the competition and attract potential customers. Thus, analysts use both operational and financial figures to analyze the performance of apparel stores. The operational figures can be the number of stores present, the market they are catering to, the internet shopping experience, and the store locations.

Macy's addressable market is an everyday customer, and despite having fewer numbers stores than Gap & Kohl's, it has managed to earn a revenue of $25 billion in the year 2019. Customers find Macy's products are of good quality, stylish, and have good value for money (Cheng, 2018). Macy's has been adding backstage off-price concept stores so that shoppers will not be appealed to go to discount stores, helping to get higher sales and traffic (Cheng, 2018). These outlets carry valued-priced apparels and brands that are not yet available at any of its Macy's stores; thus, customers hurry to buy them as they are temporary.Financial Competitor Analysis for Macy's

Financial ratios play a crucial role in understanding its financial health and assisting its management with selling operations in the retail industry. The analysis in this section will include a discussion of liquidity ratio, profitability ratio, and efficiency ratio.

Profitability Ratios

Profitability ratios help us determine how profitable a company is at making profit relative to its revenue, balance sheet assets, and operating costs. It also helps to understand its competitive position in the market compared to other companies in the same sector.Macy's gross profit margins (refer Chart 2), which helps determine how much profit a company can make after paying its costs of goods sold, has been the highest than its competitors, and the company has managed to keep it stable. Macy's repositioned its merchandising categories and has focused on its higher-margin private brands like International Concepts, Alfani, Style & Co., and Charter Club to drive sales, which improved gross margins (Macy's Inc, 2020).Although companies' number of interests, taxes, amortization, and depreciation are essential, EBITDA strips all these numbers to focus on operational profitability.The EBITDA margin is crucial to estimate the company's cost-cutting effortsthe higher the EBITDA margin, the lower the operating expense to total revenue. Macy's EBITDA margin significantly reduced in 2019 (refer Chart 2) because it had the highest liabilities in 2019, which was $14.75 billion (Wall St, 2019). While its competitor, Nordstrom, saw a steady increase in its EBITDA margin and was highest in 2019.

Despite having the highest gross profit margins, Macy's net profit margins figures were quite the opposite. Fiscal year 2017 saw a drastic increase in the net profit margin (refer Chart 2) by 3.83 % than the previous year and was the highest that all its competitors. In 2017, Macy introduced the "North Star Strategy," where they focused on products that can only be found in Macy's and made every experience count by efficiently improving their omnichannel presence (Monk, 2017). Customers could now shop online from wherever they want due toMacy's digital presence (Monk, 2017). However, in 2019, the net profit margin declined, and Macy's was the third largest compared to its competitors. Jeff Genette, Macy's chief executive, blamed warm weather that delayed the purchase of cold weather clothing, which resulted in weaker than anticipated performance at the shopping malls and a decline in sales (Wahba, 2019) Macy's return on assets peaked in 2017 at 7.89% but hit its five-year low in February 2020 of 2.8% (refer Chart 3). This trend was observed for all the Macy's competitors due to the deterioration of net income. Macy's net income reduced to $564 million in 2019 from $1098 million in 2018 because they could not manage the rising inventory levels (Thomas, 2019). The decline in international tourism was also one of the reasons for it (Thomas, 2019).

The return on equity measure how a business effectively uses its equity to produce income and Nordstrom come out as a clear winner with an ROE % if 53.57 in 2019(refer Chart 3). Macy's has the lowest ROE indicating it is not using its resources effectively. Now one thing to look at here is that sometimes the ROE ratio can be misleading. Nordstrom is extensively using its debt to improve its returns (Wall St, 2020). Thus, its ROE is a good even with debt.

A downward trend has been observed for Macy's return on investment, and it significantly reduced to 7.36% in 2019, which was 4.4% less than in 2018 (refer Chart 3). Nordstrom had an impressive figure of 21.80% and has managed to keep it stable during the last four years. Macy's stock was down by 50% in 2019, and it had to close a few of its stores because the retail industry was experiencing a slow death (Jadeja, 2019). It also faced competition from online sites, and its inventory was high, meaning it could not sell its products efficiently. Thus, the company faced slow sales, which affected its stock.. However, there are still signs of optimism in the future. Macy's is spending heavily on improving its stores, promotions, and digital platform and improving its pricing strategy to overcome these issues (Jadeja, 2019).

Assets turnover ratio for all the competitors was average 1.2% average (refer Chart 3), which indicates that either the companies had high inventories on hold or could not deploy their assets efficiently to increase their revenues.Payout ratio and dividend yield are the ratios that help the investors to assess the expected value of stock and the sustainability of a company's dividend program. Macy's has been giving out the highest dividends (9.78 % in 2019) than its competitors because its earning per share is high (Tatevosian, 2019). Macy's has enough cash flow to cover its dividend payment by a wide margin.The current ratio evaluates a company's liquidity based on its ability to meet its short-term obligations concerning its current assets. Ratios above one is generally considered adequate. Macy's current ratio in the fiscal year 2019 was quite a reliable 1.18. Current assets were $6.81 billion, and its current liabilities were $5.75 billion.However, we should note that not all current assets are created equally. Sometimes cash can be used to pay bills right away, and short-term investments and accounts receivables can be converted to cash quickly. In apparel retail, current assets like inventory and prepaid expenses could not be converted to cash quickly.

A more conservative estimate of liquidity ratios is a quick ratio that excludes inventory and prepaid expenses. Based on its year-end quick ratio, which was 0.19, Macy's liquidity position looked most tenuous more than all its competitors. It had $1.1 billion of cash and accounts receivables versus current liabilities of $5.75 billion, which looked like a warning sign for investors (FORM 10-K, 2020). However, these current liabilities were due in the current year. Macy's had $539 million of short-term debt in the balance sheet, out of which $533 is maturing in Jan 2021 (FORM 10-K, 2020). Macy's accrued liabilities include $839 million gift cars and customer rewards, which can be covered from Macy's existing inventory (FORM 10-K, 2020). So, Macy's can easily manage the future payments as most of it is due in 2020-21.A contrasting number has been observed here for Macy's competitor Nordstrom which has negative values for net current assets % of total assets (refer Table 3) that reflect future liquidity issues. Macy's net current assets % of total assets ratio is 5.01, which is relatively low. While the company survived in 2019 by generating $25 billion revenues, we can assume that in 2020, the net current assets % of total assets can go down.

Macy's receivable turnover is lower than Nordstrom's, and it could collect its receivables in almost six days. Nordstrom here is a winner with the highest receivable's turnover collected in less than four days. This implies that Nordstrom's extension of credit and collections of accounts receivable is more efficient.The Interest Coverage ratio measures the company's capability to pay its current interest payment with available earnings, and the lower the ratio; the more company is burdened by debt expense. Macy's has the lowest interest coverage ratio (refer Chart 6), which means it was burdened by debt, but its real estate helps it earn and secure its payments. It is bringing enough revenues to fund its short-term interest requirements. Gap has the highest interest coverage amongst all competitors as it is a large company and has diversified revenue streams and attractive capital returns (Wall St, 2018). High-interest coverage is always safe and responsible practice as investors find it safe to invest in such companies (Wall St, 2018).

Macy's debt/ equity ratio is the lowest amongst almost all its peers, which clearly states that its debt does not exceed its equity (refer Chart 6). This is because all of Macy's debt is at double-digit yields to maturity, and the company has plenty of borrowing capacity to pay its long-term debts (FORM 10-K, 2020). Its massive value of real estate makes it very unlikely that the company will default on its debt. The gap here clearly comes out as a winner in terms of solvency ratios and can very easily manage its debt.

Altman's Z score is a tool that predicts the likelihood of bankruptcy but also has become widespread investigating credit risks. It uses five different ratios calculated with data from annual reports, which include profitability, leverage, liquidity solvency, and activity ratios (Altman Z-Score, n.d.). When a score is below 1.8 organization is at risk of bankruptcy, and when it is above 3 - an organization is in a safe position. Anything between 1.8 and 3 is considered neutral (Altman Z-Score, n.d.).

Macy's Altman Z-Score in the fiscal year 2019 was 2.17 as shown in chart 7, and it was in the Gray Zone. As a part of the standard review process, Macy's had to close 28 stores that depict its plan to avoid bankruptcy (Newcomb, 2020). Even in 2020, during the pandemic, Macy's could dodge its bankruptcy by earning $4.5 billion, out of which $3.5 billion were guaranteed against its real estates (Primack, 2020). So, Macy's is relatively safe from becoming bankrupt. Gap and Nordstrom were very close to scoring three, so they were in the safe zone. Kohl's score was above three, so it was less likely to get bankrupt. Kohl's applies strategies like it immediately acquires the market share when its competitor goes bankrupt, and this way, it acquires new customers (Thomas, 2020).

Limitations of Ratio Analysis

One of the primary limitations of ratio analysis is that the every company's operating ways can differ even if they are from the same industry.The sales, volume, and sales price are different for each of Macy's competitors, so applying a general formula does not give us the exact figures in terms of ratios. Another critical limitation of ratio analysis is the results are expressed in money value, and we assume the value to be constant. The company stock value keeps on changing, which also results in the company's change in earnings.

In the ratio analysis, we use historical data to get the ratios for comparison, which are taken from past balance sheets and income sheet. However, we analyze the ratio to predict future steps the company can take to avoid loss based on its past performance. Historical data can help companies get answers to their problems, which they can use to prevent them. To increase their efficiency, companies cannot rely on historical information.

Relying on ratio analysis for future performance is not a great strategy as well because situations keep changing. For instance, the pandemic of COVID-19 was a sudden situation that caused many retail stores to declare bankruptcy or shut down their stores. So, companies should not rely on Z-Scores for their bankruptcy analysis because conditions can change abruptly.

Relying solely on the financial statements can also lead to incorrect analysis. Companies adjust their figures on financial statements to look good. Thus, ratio analysis can also have inaccurate statistics, and a slight change can cause a company to win or lose.

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