MGMT 315: Financial Valuation ProjectAshli Edwards, Xiang Li, and Katerina Goudouros

Table of Contents• Introduction to Macys…………….......…………..Ashli Edwards• Company Description• History• SWOT Analysis

• Department Store and Risk Analysis…………………• Financial Analysis………………………………………………Ashli Edwards• Valuation • Beta………………………………………………………..………Ashli Edwards• Capital Asset Pricing Model……………………………..Xiang Li• Dividend Discount Model………………………………..Katerina Goudouros • Weighted Cost Of Capital………………………………..Xiang Li• Free Cash Flow Model…………………………………….Ashli Edwards• Stock Valuation………………………………………………Xiang Li• Valuation Using Multiples………………………………Katerina Goudouros

• Recommendations and Conclusion

INTRODUCTION TO MACY’S

Company Description • Macy’s Inc. is America’s premier retail department store

headquartered in Cincinnati, Ohio in the United States. • A business to consumer firm selling merchandise to demographic

population consisting of teens, adults, and children.• Product mix includes a wide variety of merchandise and services

including apparel, home décor, appliances, and cosmetics as well as in-store services like bridal and baby registry.

• Operates in almost 850 stores within the United States, District of Columbia, Guam, and Puerto Rico and employs approximately 172, 500 people.

• Publicly traded under the symbol “M” on the New York Stock Exchange.

History• 1859: Originally, A fancy dry goods

store in New York City• 1902: Moved to present trademark

location on Herald Square• 1922: Went public on the NYSE• 1924: Launched the annual tradition of

Macy’s Thanksgiving Day Parade• 1946: Launched the first annual flower

show• 1994: Merged with Federated

Department Stores• 2001: Absorbed Stern’s Department

Stores• Present: Owns 850 + stores

nationwide and U.S. surrounding territories

SWOT ANALYSIS

Strengths Weaknesses Market position The Macy’s brand

Loss of regional brand value

Opportunities Threats Expansion Abroad Industry competition

Governmental regulations

DEPARTMENT STORE INDUSTRY AND RISK ANALYSIS

Department Store Industry and Risk Analysis

Department Store Industry Risk Analysis

• Economic Condition• Industry Risk• J.C. Penny, Saks, Dillard’s

• Theft• Customer Data Hacking• Terrorism• Sales declined 40% after

9/11

FINANCIAL ANALYSIS

2011 2012 2013IndustryAverage

Liquidity

Current Ratio 1.40 1.55 1.52 1.70

Quick Ratio 0.51 0.43 0.47 0.60

Asset Management

Inventory 3.08 3.12 3.01 7.06

Days Sales Outstanding 5.09 4.89 5.72

Total Assets Turnover Ratio 1.20 1.32 1.29 2.70

Debt Management

Total Debt Ratio 44.80% 47.00% 44.65% 22.90%

Times Interest Earned 5.39 6.26 6.87 8.9

Profitability

Profit Margin 4.76% 4.82% 5.32% 2.90%

Return on Assets 5.88% 6.20% 6.97% 8.80%

Return on Equity 21.91% 22.28% 24.16% 21.10%

Market Value Ratio

P/E

VALUATION ANALYSIS

Beta

0.91 In order to find the Macy’s beta, we gathered five years of historical stock from

Macy’s and S&P 500 returns to run regression. Using Macy’s as our y-variable and the market portfolio as our x-variable to run the regression, we found Macy’s beta as 0.91. Since Macy’s beta is less than the market beta of 1.0, this means that Macy’s is less risky than the average firm in the market.

Capital Asset Pricing Model

• Calculate Return on Equity using CAPM: ri = 3.07% + (5%) x (0.91)

ri = 7.62%

Risk Free Rate ( ) 30- year Treasury bond

yield 3.07%

Risk Premium 5%

Beta ( )) 0.91

Dividend Discount Model

Dividend Discount Model (Notes)

Weighted Average Cost of Capital

• S&P Credit Rating: BBB+• Cost of Debt = 7.01%• 3.94% + 3.07% = 7.01%• Spread: 3.94%• 30-year Treasury Bond Yield: 3.07%• Cost of Equity = 7.62%• CAPM: ri = rf + (rm - rf)ßi

• ri = 3.07% + (5%) x (0.91) = 7.62%

Weighted Average Cost of Capital Weighted Average Cost of Capital Data

Market Value of Debt (Long Term Debt ) 6,728 Million

Market Value of Equity 22,642 Million

Market Price per Share x # of Outstanding Stock $62.05 x 364.9 = 22,642 Million

Total Value 29,370

Debt to Value 6,728 Million/29,370 Million = 22.91 %

Equity to Value 22,640 Million/29,370 Million = 77.09%

WACC = rD*(1-T)*(D/V) +r rE *(E/V=7.01% *(1-35%) + 7.62%*77.09% = 6.92%

Industry WACC (provided by NYU Stern) 7.87%

Free Cash Flow Model• Revenue is projected using 2.40% growth rate from Yahoo!

Finance • Total expenses is 84.88% of revenues (5-year average)• Depreciation and Amortization is 4.48% of revenue (7-year

average)• Net interest expense is assumed to be constant at 507 (6-year

average)• Tax Rate is constant at 35%

• Total other Non-Cash Adjustments is -1.13% of revenue• CAPEX/Net Cash Flow from Operating Activities is 22.99%• Other Investing Activities/Net Cash Flows from Operating is -

5.42%

Free Cash Flow Model• Horizon Year : 6• Industry WACC: 7.87% (NYU Stern)• Terminal Growth Rate: 3.27% (Trading Economics)

Timeline 1 2 3 4 5 6 7

Unlevered Free Cash Flow

1,981 2,026 2,072 2,119 2,167 2,216 2,288

Terminal Value 49,745.16

Free Cash Flow Model

Terminal Value = (2,216*3.27%)/(7.87% - 3.27%) = $49,745.16

Firm Value = $41,258

(+) Cash and Marketable Securities = $2,273

(-) Long Term Debt = $6,728

Equity Value = $36,803

Stock Price, 2014 = $36,803/364.9 = 100.86

Stock Valuation• Our calculated stock price: $100.86• Market price: $62.05

• UNDERVALUED• Overestimated revenue growth rate• LOW CAPEX/Net Operating Cash Flow:

29.99%

Valuation Using Multiples

RECOMMENDATIONS AND CONCLUSIONS

Recommendations & Conclusions• By using of the three valuation methods, we calculated the

average stock price for Macy’s to be $98.79.

• The intrinsic stock price of $98.79 is higher than the market price. This indicates that the market price trading today is well undervalued.

• Overall, we conclude it is undervalued by $36.74. Therefore, we believe Macy’s is a good potential investment and recommend buying their stock.