Financial Statement Analysis: Macy’s Inc. vs. Nordstrom, Inc. MACY’S, INC. Essay Example

2010 fiscal year. It reached its peak value of $23-$24 around April-May 2010. The stock reached a low point of $17 around mid-July. By early November it reached $25-26. It was quite stable from November to the beginning of Jan 2011. By the end of the 2010 fiscal year it had slightly dropped to $22. 99.

When the stock price went from $16 at the beginning of the 2010 fiscal year to $24 dollars in May was largely because the company turned from net loss of $88 million (May 2009) to net income of $23 million (May, 2010). Additionally, during January 2010, Macy’s announced plans to launch a new Bloomingdale's Outlet store concept in 2010, which would initially consist of four Bloomingdale's Outlet stores and in February 2010, Bloomingdale's opened in Dubai, United Arab Emirates. The decline from May to July was largely caused by the current economic recession.

In its second quarterly report, it mentioned that consumer spending levels have been adversely affected by a number of factors, including substantial declines in the level of general economic activity, decline in real estate and investment values, substantial increases in consumer pessimism, unemployment, the rising costs of basic necessities, and a significant tightening of consumer credit. The bouncing from July to November is mainly due to optimism of economic recovery and holiday shopping.

Macy’s Third Quarter earnings beat estimates as sales advanced. Net income totaled $10 million, in the three months ended Oct. 30, compared with a net loss of $35 million a year ago. The stock price for Macy’s, Inc (M) was $27. 70 on 10/10/11. NORDSTROM, INC. a. Nordstrom’s Inc. is a retail organization operating retail stores

and online stores that focus on high-quality brand name and private label merchandise focused on apparel, shoes, cosmetics and accessories.

They also have a credit segment in the form of a federal savings bank, private label credit cards, Visa credit cards, and debit cards. Nordstrom’s competes with other national, regional and local retail establishments that may carry similar lines of merchandise, including department stores, specialty stores, boutiques and Internet businesses. The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years 2010, 2009 and 2008 ended on January 29, 2011, January 30, 2010 and January 31, 2009, respectively.

Depreciation is computed using the straight-line method over the asset’s estimated useful life, which is determined by asset category as follows: Buildings and improvements (5 – 40 years); Store fixtures and equipment (3 – 15years), Leasehold improvements (Shorter of initial lease term or asset life); Capitalized software (3 – 7 years).  Nordstrom’s merchandise inventories are stated at the lower of cost or market value using the retail inventory method. The largest source of cash from financing activities is from Proceeds from Long-Term Borrowing at $498 million.

The largest use of cash from investing activities is for Capital Expenditures at $399 million. The stock price at the end of the 2010 fiscal year was $40. 91(Jan 28, 2011) compared to $34. 54 at the beginning of the 2010 fiscal year (Jan 29, 2010). Company stock was at a low point at the beginning of the 2010 fiscal year. It reached a peak value of around $46 in April. The stock reached a low point around $28 in September. It climbed up to $42-$43 by early November. It was

quite stable from November to end of fiscal year.

The stock price went from $34 at the beginning of the 2010 fiscal year to $46 dollars in April largely due to excellent performance for the first quarter. Net sales increased 16. 7% for the quarter ended May 1, 2010 compared with the same period in the prior year. All channels had same-store sales increases, led by multi-channel outlets. When the quarter ended on May 1, 2010, the company opened two full-line stores and six Nordstrom Rack stores.

The company’s multi-channel same-store sales increased 13. 7% for the quarter ended May 1, 2010 compared with the same period in 2009. The decline from April to September was largely caused by the general economic recession. The up bound of stock price was due to strong sales in the third quarter. It reported a 43% surge in third-quarter profit. During the quarter the high-end department store earned $119 million, compared with $83 million, a year ago. Nordstrom's revenue grew 11. 2% to $2. 18 billion from $1. 6 billion.

Macy’s has high Accounts Receivable (AR) turnover at 66. 68 compared to Nordstrom’s 4. 78; Macy’s is more effective in collecting AR and has less capital tied up in receivables for long periods of time. One explanation for such a large variance is that Nordstrom’s corporate credit card accounts for the majority of its collections on AR. Nordstrom’s CY inventory turnover (6. 29) is double that of Macy’s (3. 16), indicating that company turns inventory twice as fast as Macy’s per year; this is consistent with the prior year.

Although Nordstrom’s inventory turnover is higher than Macy’s, their collection period is significantly longer

(Nordstrom’s 76. 41 days CY versus Macy’s 5. 47 days CY). While Macy’s average collection period remained essentially stagnant from PY to CY, Nordstrom’s actually decreased their collection period by 8 days (76. 41 days CY from 84. 13 days PY). A higher average collection period exposes Nordstrom to the potential of having to write-off receivables due to aging, and thus reduces the company’s capacity to meet current liabilities.

Nordstrom has higher CY working capital than Macy’s ($2,945 versus $1,834), which indicates that while both companies have the ability to meet current obligations, Nordstrom is in a much stronger position to do so. In fact, Nordstrom actually increased its working capital from PY by $905 (an increase of 30%), whereas Macy’s working capital decreased from PY by $586 (a decrease of 32%). The debts to asset ratios are essentially equal for both companies for CY (Macy’s 0. 732 and Nordstrom 0. 729). These numbers indicate that both companies’ financing is largely through debt rather than through equity.

A decreased debt to equity ratio for both companies from PY to CY (Macy’s decrease of 0. 84 and Nordstrom decrease of 0. 49) could be attributed to profitable years which increase Stockholder’s Equity; Macy's reflects a larger difference because it also decreased its total liabilities. However, both companies still have relatively high debt to equity ratios (Macy’s 2. 73 versus Nordstrom 2. 69). Relatively high debt to equity ratios increases the exposure both companies have to interest rate increases. Nordstrom has a much stronger interest coverage ratio (8. 0 versus Macy’s at 3. 27).

Nordstrom paid less interest in relation to earnings, and, because of its high interest coverage, it

will also be in a better position to pay interest on outstanding debt. We will use 7 key ratios to help analyze which firm has a higher probability of profitability. The key ratios include: Gross Profit Percentage, Return on Sales (ROS), Return on Equity (ROE), Asset Turnover, EBITDA to Sales, Earnings per share, and Return on Assets (ROA). A table with these values can be found on Page 2 of this document.

Importantly, gross profit percentage, or gross profit divided by sales, is a vital tool for investors to use in determining company health. Clearly, Macy’s had a more attractive gross profit percentage in both 2010 (2. 3% higher) and 2011 (1. 5% higher), however, the percentages were close enough to not merit a decision on profitability. We further analyzed the remaining ratios, and observed that Nordstrom had a better ROE, ROS, Asset Turnover, EBITDA to Sales, ROA, and earnings per share for both CY and PY.

Most importantly, ROE of Nordstrom was about double Macy’s for CY and quadruple Macy’s PY. The Market price of Macy’s and Nordstrom also varies, and is another helpful indicator of overall investing value. As of close of market October 6, 2011, Macy’s (M) is trading at $26. 34, and Nordstrom (JWN) is trading at $47. 87. We used the Price-Earnings (P/E) Ratio, as well as the Book Value per Share, to determine which company has the better market price. Clearly, Macy’s 2011 has a more attractive (lower) P/E Ratio, meaning investors are seeing a higher percentage of returns per share.

However, in 2010, the Nordstrom had a lower P/E ratio. Due to this, forecasting is very difficult and a clear winner

cannot be named. Looking at the book value per share, Nordstrom has a lower book value per share. Combine this with a higher stock price to find that investors have more faith that Nordstrom will be able to continue its growth than Macy’s. [1] *It should be noted that gross profit percentages vary greatly by industry, so while these two companies can be compared, this should not be used when comparing companies in different industries.

Investment Decision Based on the evaluation of Nordstrom, Inc. and Macy’s, Inc. Form 10-K, Nordstrom has a superior business model. Not only does Nordstrom have a retail segment but it also operates its own credit segment. Therefore, Nordstrom is able to collect revenue from its retail and credit operations. While the credit business fosters greater customer loyalty and drives more sales, it also generates revenue through finance charges and other fees on the cards. Nordstrom’s most recent 10-K reveals that its total credit card revenues for 2010 equal $390 million.

While Nordstrom’s collection period is significantly longer than Macy’s, 76. 4 and 5. 47 days respectively, this is mostly due to the success of Nordstrom’s credit segment. When customers make purchases with national credit cards, such as Visa or MasterCard, the seller receives cash quickly. For Macy’s, all of its credit card purchases are quickly converted to cash because Macy’s does not directly grant credit. However, Nordstrom’s credit cards belong to its own line of credit, so receipt of cash is delayed.

Therefore, Nordstrom card purchases will be recorded as ‘proceeds from long-term borrowing’, thus creating a longer collection period when compared to Macy’s. The financial success Nordstrom has experienced from this credit

segment alleviates any concerns regarding the substantial difference in collection periods between the two companies. Nordstrom is well positioned in this slow economic situation. The ratio analysis and annual report indicate that Nordstrom has a high current ratio and working capital. The difference in Macy’s CY current ratio (1. 6) and quick ratio (0. 42) is significant; this disparity indicates that more than half of Macy’s current assets are tied up in inventory, which cannot be used to pay current obligations.

Therefore, Nordstrom is more attractive to creditors and thus more likely to receive the loans it needs to improve its long-term profitability. In addition, Nordstrom’s reputation for fashionable, high-quality merchandise and its ability to manage inventory well have resulted in strong sales trends over the last two years. Nordstrom reported a 10. percent increase in same-store sales for the five-week period ended Oct. 1 2011, from a year ago, doubling the estimated 5. 1 percent. Overall, wealthier U. S. consumers have not been as affected by the recent economic downturn. Therefore, the majority of Nordstrom’s customer base continues to be valuable consumers. Nordstrom is in a better position for future growth than Macy’s. Higher inventory turnover, combined with a higher ROA, ROE, and ROS signifies that Nordstrom is better at managing its expenses than Macy’s.

In addition, it indicates that the company uses it assets more efficiently. The large difference in ROE between Macy’s and Nordstrom is the most significant metric identified to help indicate the future success of the two companies. Commonly known as the most important ratio for investors, the ROE of Nordstrom’s is over double the ROE of Macy’s in 2011, and quadruple

the ROE of Macy’s in 2010. Nordstrom has a lower book-value per share compared to Macy’s and, combined with a higher stock price, indicates that Nordstrom will be more likely to have continued growth than Macy’s.

Bond investors awarded Nordstrom its lowest borrowing cost ever on a sale of 10-year bonds in October 2011. Fitch Ratings assigned a rating of 'A-' to Nordstrom’s $500 million 4% senior unsecured notes due October 15, 2021. Nordstrom is rated Baa1 by Moody’s Investors Service and A- at Standard & Poor’s, ranking it above rivals Neiman Marcus Group Inc. , Saks Inc. and Macy’s Inc,. As of May 2011, S&P Rating Services upgraded Macy’s from junk-bond status to a BBB-, the lowest investment grade rating.

Macy’s and Nordstrom are both successful retail businesses who have proven themselves worthy throughout the years. However, based on the detailed ratio analysis of both Macy’s and Nordstrom, along with other empirical evidence and support, it is our recommendation to invest the full amount of $25,000 in Nordstrom, Inc. stock. The basis of our recommendation is supported through the examination of certain key financial metrics, along with supporting financial information and media findings, which we believe indicate strong potential for the long-term viability and growth of Nordstrom, Inc.

References 

1. "Fitch Rates Nordstrom's Note Issuance 'A-'; Outlook Stable. " Market Watch. N. p. , 07 Oct 2011. Web. 14 Oct 2011.
2. Maheshwari, Sapna. "Nordstrom's Lowest-Yield Debt Show Resistance: Corporate Finance. " Bloomberg. N. p. , 07 Oct 2011. Web. 14 Oct 2011.
3. "Shop Around With These 6 Retail Stocks. " Seeking Alpha. N. p. , 07 Oct 2011. Web. 14 Oct 2011.
4. FitzGerald, Drew. "S&P Lifts Mac'ys back
   

to investment grade rating. " Market Watch. N. p. , 18 May 2011. Web. 16 Oct 2011.