A BRIEF PRESENTATION
Macy’s Inc is an american
classic when it comes to retail. It sells a wide range of merchandise, including
apparel and accessories (men’s, women’s and children’s), cosmetics, home
furnishings and other consumer goods. The specific assortments vary by size of
store, merchandising assortments and character of customers in the trade areas.
Most stores are located at urban or suburban sites, principally in densely
populated areas across the United States[1].
The company was formerly known as
Federated Department Stores, Inc. and changed its name to Macy's, Inc. in June
2007. Macy's, Inc. was founded in 1830 and is based in Cincinnati, Ohio.
Macy’s Inc is becoming a
declining company and this is reflected into its decreasing revenues accompanied
by shrinking operating margins as showed in the graph below. In fact, as consumers continue to migrate online, Macy’s Inc
and traditional retailers are reeling. Some are being forced to shrink —
or go out of business altogether.
After shuttering dozens of stores in 2016, Macy’s began 2017 by announcing plans to close 68 more of its locations, including a store in downtown Minneapolis that opened in 1902. The company estimates that 3,900 jobs will be lost as a result of the closures. This is reflected into its capital invested which continues to decline as showed in the graph below:
VALUATION: MACY’S INC 2017
To value a declining
company such as Macy’s, we will assume that the firm, while not in distress,
will close its locations as it
continues to experience declining traffic in their stores.
Thus, we assume that revenues
will decrease 2.3% on average a year, each year for the next 7 years to $21.9 billion
in the seventh year, as the firm shuts down stores. After 2025, we will assume
that the company will recover and that revenues will grow 0.9% on average until
2027 and 1.5% a year forever.
The pre-tax operating margin will
improve from 5.10% to 8% over the next years, reflecting both the cost savings
from shutting down unprofitable stores and a reversal back to health at the
other stores.
Taxes: For the first five
years we’ll use the current effective tax (35.8%) that will converge gradually
on 30%, the marginal tax rate for the US as tax code changes.
In terms of risk, we
will use for the first five years, the current cost of capital for Macy’s
Inc, which we estimate to be 6.44%.
high growth
|
Stable Growth
|
|
10 years US bonds
|
2.29%
|
2.29%
|
ERP
|
5.13%
|
5.13%
|
Beta
|
1.38
|
1
|
Ke
|
9.36%
|
7.42%
|
E/E+D
|
51%
|
65%
|
Kd(1-t)
|
3.43%
|
3.43%
|
D/E+D
|
49%
|
35%
|
WACC
|
6.44%
|
6.02%
|
During the 2017-2020 period, as stores are being reconfigured or closed and assets divested, Macy’s will shorten its capital invested and collect proceeds from the divestitures. We estimated the proceeds as percentage of change in capital invested over the next four years based on the assumption that the Return on invested capital will converge to 13% over the next 10 years. The table below reports the numbers by year:
We assume that the
divestitures proceeds, as a percentage of book value, will be 40% in 2017 and
that divestitures will end in 2020.
To close the
valuation, we estimated the terminal value based on a growth rate of 1.5%, a
return on capital that equals the cost of capital on the long term phase ( we
assume that Macy’s will earn its cost of capital).
Reinvestment Rate = g stable / ROCE stable
= 1.5%/ 6.02%
= 24.9%
Terminal Value =
=
1 260 * (1+1.5%) * (1-24.9%) / (WACC-g) = 20 980
The table below underlines the free cash flows
generated over the next 10 years:
Summing the present value of the free cash flows over the next 10 years and the terminal value’s present value yield a value of $21 966 billion. Adding cash ($1 297 billion), subtracting out debt ($7 720 billion), debt value of leases ($2 612 billion), pension obligations ($1 028 billion), minority interests (-$1 billion) yields and dividing by the number of shares outstanding (304) yields a value per share of USD 39.15. Taking into consideration the probability (90%) that this scenario will take effect yields an adjusted value per share of USD 35.24, 59.5% higher than the share price as of 08/08/2017.
"A picture is worth a
thousand words"
