Macy's Inc. is a large retail company that has seen decreasing sales in recent years. A discounted cash flow analysis valued the company's stock between $40-45. While Macy's faces challenges from increased online competition and weak economic conditions, it also has some strengths. These include an impressive dividend yield, strong real estate assets, and the potential for higher returns if it can successfully adapt to retail trends. Analysts will be watching how well Macy's grows its online sales and manages costs in the coming years.

1. 1
MACY'S
INC.
STOCK
UPDATE
JUNE
'16
Source: Yahoo Finance, MarketWatch
Introduction
Retail business is rapidly evolving as the customers are
moving to smartphones and tablets to shop for their
jeans and cardigans. With weak economic backdrop,
most of large brick and mortar retailers have realized
decreased sales growth in 2015 and have predicted
difficult year 2016. Macy’s Inc., a mid range
ominchannel retailer recently cut its annual sale outlook,
leading to in doubts on performance of likes of Wal-
Mart Stores Inc., Target Corporation.
Sector Mixed Retailing
Industry Retail/Wholesale
FY ends January 31
About
Founded in 1929 and headquartered in Cincinnati, OH,
the company is a omnichannel retail organization
operating stores under three brand names - Macy's,
Bloomingdale's and Bluemercury. It uses My Macy
localization/personalization experience, omnichannel
business model and customer centered approach as its
key strategies to drive sales, cash flows and earnings. It
offers different brands at different stores depending on
demand and trends.
Valuation
Discounted cash flow (DCF) analysis has yielded price
in range of $40-$45. The revenues are expected to
decrease 5%-7% on a Y-o-Y basis for 2016. The sales
growth would likely resume in 2018 and 2019, ranging
around 1-2 percent. For next five years, cash flows
statement, income statement and balance sheet was
modeled to get free cash flow for the next five years. The
gross profit margins would remain around 39%. The
model estimates diluted EPS of $3.15 for 2016, in line
with estimates of analysts. We used a conservative
EV/EBIDTA ratio of 6.6. Usually retail companies are
valued in range of 7x-12x. DCF analysis is highly
sensitive to this multiple.
Bears Say
The company is facing increasing competition from
online retailers, such as Amazon, which are using
economies of scale to lower costs and offering fast
shipping of merchandise. The firm also faces secondary
pressures from weak economic outlook and overall
difficult stock, credit, and real estate market. People are
not spending at levels seen in the previous 5 years. The
company faces intense competition at all levels, the
competition characterized by assortment, advertising,
price, quality, service, location, reputation. Any negative
surprises in quarterly earnings coupled with high beta
causes increased volatility.
Bulls say
With an impressive dividend yield of 4.2%, the company
continues to return capital to shareholders during this
tough year. The core retail business is strong. There is lot
of value tied in some real estate properties. As per
recommendation of Starboard, the stock could be worth
$70 if the company creates a joint venture vehicles to
draw investors to its flagship properties. Strong balance
sheet suggests no nearing liquidity problems. If the
company could weather this transition cyclical
downtrend in sales, it would be well positioned to give
attractive returns for many more years. So, a strong asset
base and healthy dividends would keep investors
onboard for foreseeable future.0
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2016
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2014
Stock Price Macy's Inc.
Comparable
Companies
Trailing P/E Ratios
Dillard's Inc. 9.22
Kohl's Corp 12.38
Nordstrom Inc. 13.61
TJX Cos. 22.47
Target Corp. 12.56
Macy's Inc. 10.71

2. 2
MACY'S
INC.
STOCK
UPDATE
JUNE
'16
Source: Company Reports, Capital IQ. Bikram Singh
Last 12 months
The stock has lost 50% of its value from adjusted price of
$67 to the current value of $33.2 as of 21 June '16. In the
same time period, the retail-wholesale index has gained
29% and S&P 500 index is slightly down by -1.5%. It has
paid quarterly dividends of $0.36, $0.36, $0.36 and
$0.3775. Surprisingly, the latest dividend increase to
$0.3775 caused dividend yield to jump from 2-3% range
to whooping 4.8%. The current market cap is $10.24
billion. From Jan '09 - Jan '16, the stock returned an
astounding 412%. The company enjoyed 5 year
uninterrupted growth in revenues and earnings from
2009-2014. Year 2015 saw decline in revenue of 3.7%.
Trailing twelve months (TTM) ROE and ROA stands at
21% and 6.6%, indicating management value addition.
Recent News and Outlook
This spring awakening in April's retail sales didn't go
dormant in May. It is estimated real consumer spending
could rise 4% in April-June quarter. With modest
expectations, it could translate into 2% quarterly
increase in retail sales. But this growth could fall into the
lap of online retailers and outlets like Macy's could be
again looking at a lousy quarter, even though better than
Jan-March quarter. Understandably, consumer spending
hasn't been a good predictor of retail sales. A lot is
ridding on how Macy's management and execution team
catch up the online preferences of the consumer and
make the experience as good as stepping into the store
and trying the outfit.
The investors would be demanding the results of online
channels in coming years, as it could lead to the crucial
decision of staying in the stock or getting out. The
company is likely hold off its plans for international
expansion for the near future and focus on cost
efficiencies, the tactic companies usually take when
revenue growth stalls. The risk reward ratio is very
attractive, given 50% loss of value.
Cost of Equity 9.85%
Cost of Debt 5.68%
WACC 7.44%
Tax Rate 36.23%
Capital supplied by Debt 38.72%
EV/EBITDA 6.6 x
WACC Sensitivity analysis
WACC 6.0% 6.5% 7.0% 7.5% 8.0% 8.5%
Stock Price 45.3 45.1 44.9 44.7 44.7 44.2
Present Value of next 5 year FCFF $5,092 million
Present Value of terminal value $15,609 million
Total Enterprise Value $20,702 million
Total Equity Value $14,817 million
Total diluted shares outstanding 333 million
Per Share Value $44.5
EV/EBIDTA sensitivity analysis
EV/EBIDTA 5.0 5.5 6.0 6.5 7.0 7.5
Stock Price 33.6 37.17 40.8 44.3 47.9 51.4