MGMT- 315-01: Corporate
Financial Planning and
Strategy
Ashli Edwards,
Katerina Goudouros
Xiang Li
FIRM VALUATION PROJECT
TABLE OF CONTENTS
1. Executive Summary
2. Introduction to Macy’s Inc.
2.1. Company Overview
2.2. History
2.3. SWOT and Value Drivers
2.3.1. Strengths
2.3.2. Weaknesses
2.3.3. Opportunities
2.3.4. Threats
2.4. Share Price Performance
3. Industry
3.1. Overview
3.2. Competitor
4. Risk Analysis
5. Financial Analysis
5.1. Overview
5.2. Share Price Performance
5.3. Liquidity Ratio
5.4. Asset Management Ratios
5.5. Profitability Ratios
5.6. Debt Management Ratios
5.7. Market Value Ratios
6. Valuation Analysis
6.1. Beta
6.2. Capital Asset Pricing Mode
6.3. Dividend Discount Model (DDM)
6.4. Weighted Average Cost of Capital
6.5. Free Cash Model
6.5.1. Stock Valuation
6.6. Valuation Using Multiples (P/E)
7. Conclusion and Recommendations
8. Exhibits
pg. 1
1. Executive Summary
Macy’s Inc. is America’s leading retail department store. Macy’s is headquartered in Cincinnati, Ohio
in the United States. The retail department store specializes in selling merchandise and services through
its department stores and online website. Macy’s product mix includes a wide variety of merchandise
and services including apparel and footwear, home furnishings, jewelry, accessories, and beauty
products. The company also offers in-store services such as optical, photography portraits, custom
decorating, wedding and baby registries. The retail store operates through a network of 850 department
stores and direct channels within the United States, Guam, and Puerto Rico. Macy’s Inc. two main
competitors are Dillard’s and Saks Incorporated in the retail department sector. For the premier retail
store, $27.931 billion accounted for total sales, $21.634 billion in total assets and $1.486 billion in net
income for the most current year. Macy’s is a publically traded company on the New York Stock
Exchange represented by the ticker symbol ‘M’ and with a stock price of $62.05 as of November 03,
2014.
Macy’s has a noticeably lower stock price than its competitors. Macy’s is currently trading for
$62.05, while its competitor, Dillard’s trades for $105.92. At a glance, it appears that Macy’s is an
undervalued stock. After analyzing the company using the three valuation methods, Dividend Discount
Model, Free Cash Flow, and Valuation Using Multiples (P/E), we discovered that Macy’s stock price is
truly undervalued. We calculated Macy’s intrinsic stock price to be $98.79 by taking the average prices
of the three valuation methods. We conclude it is undervalued by $36.74.
Overall, we recommend investing in Macy’s stock as an excellent security because it is currently
undervalued and looks favorable in the near future. Our firm valuation of Macy’s consists of in-depth
description of the retailer, its competitors and the industry, and firm and market riskiness. More so, it
provides a complete financial valuation analysis of beta regression, Capital Asset Pricing Model, Dividend
Discount Model, Weighted Average Cost of Capital and Valuation Using Multiples. We believe our report
pg. 2
provides ample evidence for our conclusion that Macy’s is an undervalued based on our assessment of
the company’s intrinsic value.
2. Introduction to Macy’s Inc.
2.1. Company Overview
Macy’s Inc. is America’s premier retail department store. The retail enterprise is headquartered in
Cincinnati, Ohio in the United States. Macy’s is a business to consumer firm selling merchandise to
demographic population consisting of teens, adults and children. The department chain, offers midrange to upscale goods. The retail department store’s 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. Macy’s operates in almost 850 stores within the United States,
District of Columbia, Guam, and Puerto Rico and employs a diverse workforce of approximately 172, 500
people. Macy’s has a strong omni-channel presence via its websites, www.macys.com and
www.bloomingdales.com. The company’s shares are publicly traded under the symbol “M” on the New
York Stock Exchange. Macy’s has achieved $27.9 billion in sales as of fiscal 2013. The retailer continues
to succeed due to its wide assortment of quality merchandise at affordable prices.
2.2. History
In 1858, Macy’s was originally a fancy dry goods store in New York City. Rowland Hussey Macy’s
rebranded the store into a full-fledged department store occupying the ground space of 11 adjacent
buildings. By November 1902, the Macy’s moved to its present uptown location in Herald Square on
Broadway and 34th Street, only to become the tourist attraction for shoppers around the world. By
1922, R.H. Macy & Co went public and opened regional stores and acquired competing retailers within
10 years such as Toledo-based department store LaSalle & Koch, Davison–Paxton in Atlanta and the
Newark-based retailer, Bamberger’s. Macy’s organized the first Christmas Parade in 1924 which
consisted of a procession featuring floats, bands, zoo animals and 10,000 onlookers, beginning a time-
pg. 3
honored tradition known as the annual Macy’s Thanksgiving Day Parade. In 1945, retail giant expanded
west and bought O’Connor Moffatt & Company in San Francisco and made strides with the first
department store flower show in 1946.
On December 19, 1994, Federated Department Stores Inc. merged with R.H. Macy & Co. to create
the world’s largest department store. More than 400 department stores and 157 specialty stores in 37
states were converted to Macy’s from Federated Department Stores. One year later A & S Department
Stores was also acquired into the Macy’s family. In January 2001, Macy’s absorbed 17 Stern’s
Department Stores. It also obtained Liberty House operating in Hawaii and Guam for a stronger
presence in the Pacific. In 2005, Macy’s had over 240 locations in the east and west coasts. Now, the
retailer serves customers through approximately 850 stores nationwide and the U.S. surrounding
territories as well as the www.macys.com and www.bloomindales.com websites.
2.3. SWOT and Value Drivers
Strengths
Weakness
Market position
The Macy’s brand
Opportunities
Expansion Abroad
Loss of regional brand value
Threats
Industry competition
Governmental regulations
Exhibit 1: SWOT Analysis Chart
2.3.1. Strengths
Macy’s Inc. is among the largest retail outlets operating in the United States that deals in the
diverse range of products like apparel, households, jewelry, etc. The company earned $ 27.9 billion
dollars for the year 2013 from its business divisions. The brand name is Macy’s strongest assets.
According to Macy’s CEO, Terry Lundgren, “Macy’s brand is one of the most recognizable names in the
retail department store industry.” The movie, Miracle on 34th Street and the Macy’s Thanksgiving Day
pg. 4
Parade are the second most watched events after the Super Bowl and popular phenomena in American
culture” (Insana 2004). Furthermore, the Macy’s name has created a strong image and reputation all
over America. It is the most recognized brand and people tend to buy from Macy’s because of its higher
product quality. Macy’s strong blend of culture and reputation has created a widespread demand for
Macy’s products.
2.3.2. Weaknesses
Macy’s transition from regional brands to the Macy’s brand presents both opportunities and
challenges for the firm. Customers are initially resistant to change and the transition period will serve as
a way to help customers adjust. Most customers have a relationship with their regional stores and over
the years the regional stores have spent much time and resources cultivating their brand image. By
moving a single brand, Macy’s is neglecting the image regional stores have created in their customers’
psyche.
2.3.3. Opportunities
Macy’s Inc. has very little geographic presence in the emerging countries. The company can
expand its business operations and portfolio in the emerging markets of Asia such as China and India
because emerging markets represent the great potential of success and profitability for the firm.
Business expansion can also be done by having strategic alliance in the form of mergers with the
companies of the same industry. The mergers are very helpful and help to maximize the market
presence of a company without physically moving across the borders.
2.3.4. Threats
Macy’s Inc. faces certain level of external threats that can impose serious impact on the business
operations of the company. The retail markets in the United States are highly competitive in nature with
a large number of market players offering wide range of products. The company has cut throat
competition in its respective industry from competitors such as Kohl’s, Dillard's Inc. and Saks
pg. 5
Incorporated. Another possible threat to Macy’s is the changing governmental rules and regulations by
the U.S. government. Legal and regulatory changes in the U.S. can impact business operations and
profitability of the company.
2.4. Share Price Performance
3. Industry
3.1. Overview
Macy’s Inc. operates in the services sector of the department stores industry. This industry consists
of companies that are engaged in the operation of department store chains including Internet and mail
order facilities. Department stores are large retail establishments that contain numerous individual
shops, providing a wide range of lines and brands. One of the most valuable aspects of the department
store is their ability to offer a wide range of products under one roof including cosmetics, shoes and
accessories, clothing, interior décor, furniture, electronics, etc. The department store industry as a
whole is valued at 1,714 billion dollars. However, since department store sales depend heavily on the
financial health of the consumer sector, including per capita disposable income, the industry’s value and
growth has declined over the past five years. According to analysts, this decline could be a direct
response to the unemployment rate, the general lack in economic growth, and the consumer cut-back in
overall spending. Forecasting into future years, analysts expect per capita disposable income to increase
and present a potential opportunity for the industry to grow. Performance has varied amongst industry
players. Some corporations have flourished while some have struggled. As a whole though, the
department store industry’s revenue growth has steadily decrease since 2002 and now, in 2014, the
industry’s growth rate is at –5.6%. Therefore, though the industry still obtains a high composite value, it
has also faced devastating impacts as a result of consumer spending cuts, recessionary periods, and the
overall decline in economic growth.
3.2. Competitor
pg. 6
Macy’s Inc.’s primary competitors in the department stores industry are Dillard’s Inc., J.C. Penney
Corporation Inc., and Saks Incorporated. Dillard’s Inc. is the largest of Macy’s Inc.’s competitors and has
a market capitalization of 4.84 billion dollars (revenue = 6.69 billion dollars). Following behind Dillard’s
Inc. is J.C. Penney, a privately owned corporation with annual revenue of 12.98 billion dollars and Saks
Incorporated, another privately owned corporation with annual revenue of 3.15 billion dollars. Though
Macy’s Inc. competes against many different department stores in the industry, it is still out performing
all of its competitors with a market capitalization and revenue significantly above its competitors and
industry averages.
4. Risk Analysis
As a well-established company, Macy’s faces several risks in its operation, which are economic
condition, industry risk, theft, customer data hacking, and terrorism. Economic condition has a
significant impact on customers’ purchasing power and behavior. As the current economy is still under
anemic recovery, consumers’ confidence may still remain low if their disposable income remains low. In
this way, they are less willing to go shopping. As a result, anemic economic condition may force Macy’s
to lower the prices and squeeze its profit in order to attract customers.
Within the retail industry, there are several major competitors Macy’s is competing with, such as
Dillard’s Inc., J.C Penney Corporation Inc., and Saks Inc. In order to prevent customer loss to its
competitors, Macy’s intends to reduce industry risk by having promotional events. For instance, Macy’s
frequently has extra saving sales event and online exclusive sales. Macy’s also has a loyalty program
called “Macy’s Star Rewards” that provides exclusive benefits for loyal customers.
Theft is another big concern for Macy’s because the retail company needs to prevent not only theft
from customers but also employees. Having in-store cameras, electronic tracking devices and a
thorough employee training program are necessary for preventing theft, though this causes extra cost at
the same time. In fact, loss prevention department has been established to undermine this risk.
pg. 7
Customer data hacking is an unexpected event that may happen at any time. Nowadays, with everfast internet technology development, retail stores face a high risk of data hacking. Customer data
breach can directly lead to a fall in sales when customers feel insecure about shopping at Macy’s .
Improving the security level of protecting customer information such as credit card numbers becomes
very necessary in a long-term perspective.
Terrorism is another unpredictable risk for retail stores like Macy’s, and it can hit retail industry very
badly. Macy’s and Bloomingdale’s in NYC sales declined 40% after the 9/11 attacks because people with
huge safety concern were unwilling to go shopping during that time.
5. Financial Analysis
5.1. Overview
The overall analysis of Macy’s Inc. is based on a variety of data beginning with the financial analysis
of the company’s financial ratios.
5.2. Liquidity Ratios
Macy's Inc.
Liquidity
Current Ratio
2011
1.40
2012
1.55
Department Stores
2013
1.52
Quick Ratio
0.51
0.43
0.47
Exhibit 2 represents Macy’s liquidly over time and compared to the industry.
2013
1.70
0.60
Liquidity measures Macy’s ability to satisfy short-term obligations which are represented by Current
and Quick Ratios. The Current Ratio for Macy’s in 2012 to 2034 values of 1.40, 1.55, and 1.52 are
increasing; despite a minor dip from 2012 to 2013. Macy’s has a Current Ratio of 1.52 which is slightly
lower than the Department Store industry’s Current Ratio of 1.70. This is an indication that Macy’s is
pg. 8
not able to convert their assets quickly into cash. However, Macy’s Current Ratio is above one, which
specifies that the department store is liquid and very effective at paying their current debt in the shortterm. The quick ratio of 0.47 for 2013 is slightly lower than the industry’s ratio of 0.60 and is a warning
that Macy’s liquid assets are tied to its inventory. Therefore, the department retailer depends on its
inventory to service short-term debt. The lower ratios mean that Macy’s is less likely to sustain in any
downturn in its business. Both the Current Ratio and the Quick Ratio demonstrates that Macy’s is doing
worse compared to industry averages.
5.3. Asset Management Ratios
6. Macy's Inc.
Asset Management
Inventory Turnover Ratio
Total Assets Turnover
2011
3.08
1.20
2012
Department Stores
2013
2013
3.12
3.01
7.06
1.32
1.29
2.70
Days Sales Outstanding
5.09
4.89
5.72
Exhibit 3 represents Macy’s asset management over time and compared to the industry.
Asset Management ratios determine whether a company has adequate or inadequate levels of
various types of assets. Over the last three years, Macy’s ability to sell inventory is very stable at 3.08,
3.12, and 3.01 for 2011-2013. Over the past three years the company is very stable; however, the
company is doing far worse than that of the industry standard of 7.06 times. Total Asset Turnover
valuates how effectively a company uses all of their assets. Over the past three years, Total Asset
Turnover ratio is relatively stable for Macy’s. It is not performing better than the industry average of
2.70. Finally, Days Sales Outstanding explains how quickly Macy’s can collect outstanding debts. Macy’s
required 4.89 days on average to collect an outstanding receivable in 2012, an unfavorable increase of
5.72 days in 2013. There is no industry information found for Days Sales Outstanding.
pg. 9
5.4. Profitability Ratios
Profitability
2011
Profit Margin
4.76%
Macy's Inc.
2012
4.82%
2013
5.32%
Department Stores
2013
2.90%
Return on Equity
21.91% 22.28%
24.16%
21.10%
Return on Assets
5.88%
6.20%
6.97%
8.80%
Exhibit 4 represents Macy’s profitability over time and compared to the industry.
Macy’s did exceptionally well in all of the profitability ratios in comparison to industry and over
time. The Profit Margin Ratio measures net income generated per dollar of sales. This ratio shows how
much money Macy’s makes on its sales after accounting for all of its expenses. Macy’s Profit Margin
from 2011 to 2013 is 4.76%, 4.82%, 5.32%, respectively. The department retailer Profit Margin is steadily
increasing over the last three years and is exceedingly higher than the industry average of 2.90%. Return
on Equity (ROE) measures the firms operating efficiency using its assets and equity. Macy’s ROE are
increasing from 2011 through 2013 at 22.91%, 22.28%, and 24.16%, respectively. Macy’s has also
managed to perform better that the industry average which only generates 21.10% net income on every
dollar of shareholder’s equity. Lastly, Macy’s Return on Assets over the past three years are increasing
and also outperforming the industry average.
5.5. Debt Management Ratios
Solvency
Total Debt Ratio
Macy's Inc.
2011
2012
2013
44.80% 47.00% 44.65%
Department Stores
2013
22.90%
Times Interest Earned
5.39
6.26
6.87
8.9
Exhibit 5 represents Macy’s debt management over time and compared to the industry.
pg. 10
The Total Debt Ratio measures the percentage of long-term debt which is provided through
financing activity. Thus, Total Debt Ratio has decreased from 2012 to 2014; even though, there was
a slight increase from 2011 to 2012. However, in comparison to the industry, Macy’s is heavily
reliant on lenders to finance its operations. The Times Interest Ratio measures a Macy’s ability to
pay its interest obligations with income earned from the primary source of business. The increasing
values of 5.39, 6.29, and 6.87 indicate Macy’s is improving in 2012 to 2014 respectively. Therefore,
Macy’s is 6 times likely to pay their interest expense. However, in comparison to the industry
average of 8.9, Macy’s Times Interest Earned is not as impressive.
5.6. Market Value Ratios
Market Value
2011
Macy's Inc.
2012
2013
Department Stores
2013
P/E Ratio
M/B Ratio
Exhibit 6 represents Macy’s liquidly over time and compared to the industry.
6. Valuation Analysis
6.4. Beta
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 xvariable 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. The
recorded beta is similar to those of Yahoo! Finance, Google Finance, MSN, and Reuters of 0.95, 1.1,
9.4, and 0.94, respectively. We are choosing our beta of 0.91 because it is on par with other financial
sources. Therefore, Macy’s is less risky than the market since its beta is less than 1.0.
pg. 11
6.5. Capital Asset Pricing Model (CAPM)
In order determine the stock value of Macy’s we calculated the retail department stores cost of
equity (ri) using the Capital Asset Pricing Model (CAPAM). To find Macy’s return on stock, we used the
formula, ri = rf + (rm - rf)ßi. We used a 30-year Treasury bond because the value of a firm in theory has an
unlimited lifespan. According to Bloomberg Markets, our risk free rate (rf) on a 30-year Treasury bond is
3.07%. We chose a market risk premium of 5% which is between the suggested spread of 2% - 8%.
Using the substituted values for risk free, market premium, and beta; our equation was: ri = 3.07% +
(5%) x (0.91). As a result, Macy’s return on stock is 7.62%.
6.6. Dividend Discount Model (DDM)
In order to determine the value of Macy’s using the Dividend Discount Model, we first needed to
predict the company’s past growth in dividends. The growth rate was estimated by looking at three
different calculations. First, we calculated the percent change in dividends from year 2012 to year 2014.
The percent change resulted in an estimated g of 10.80%. We also looked at estimates conducted by
financial analysts and, according to Yahoo Finance, analysts estimated Macy’s dividends to grow at
13.30%. Lastly, to calculate growth, we utilized the retention ratio and then multiplied it by the return
on equity. These calculations resulted in a g equal to 19.26%. After looking at the three different
estimations of the dividend growth rate for Macy’s, we decided to use the resulted calculations from the
plowback ratio. We felt that, because the numbers used in the plowback ratio estimation were direct
implications of Macy’s financial statements, the estimated g was the most accurate representation of
the forecasted dividend growth. Therefore, we concluded that dividends would grow at 19.26% for the
next six years before reaching the horizon year and switching to a constant growth rate. We chose to
forecast for six years because we felt the Department Store industry was very mature and so we didn’t
anticipate growth at this rate for more than that amount of time. Furthermore, since the long-run
growth rate of the economy as forecasted by Bloomberg is only 4.03%, we felt this was an appropriate
pg. 12
time model. Since our constant growth rate cannot be more than that of the forecasted long-run growth
rate of the economy, we decided that after the six years of growth at g = 19.26%, growth would slow to
a constant 4%.
In the next steps of the Dividend Discount Model, we used the beta value we had previously
calculated and the CAPM model in order to determine our projected cost of equity. Our calculations
established a cost of equity equal to 7.62%. From there, we were able to use Macy’s dividends paid in
2014 as our starting dividend (D0). As seen in the tables that follow, the starting dividend was increased
for six years by the 19.26% growth rate and then at 4% after the horizon year. Cash flows were
discounted by the cost of equity estimated previously and after all computations, we calculated Macy’s
stock price to be approximately $59.02. Refer to the tables that follow to see the Dividend Discount
Model process and computations.
pg. 13
Dividend Discount Model Timeline and Cash Flow Calculations:
DDM Non-Constant Growth - Using 19.26%
HORIZON YEAR
r = 7.62%
0
1
2
3
4
5
g = 19.26% g = 19.26% g = 19.26% g = 19.26% g = 19.26% g = 19.26%
6
g = 19.26%
7
g = 4%
D0 = .95
D1 = D0(1+g) = .95(1+.1926) = 1.13297
D2 = D1(1+g) = 1.3512
D3 = D2(1+g) = 1.6114
D4 = D3(1+g) = 1.9218
D5 = D4(1+g) = 2.2920
D6 = D5(1+g) = 2.7334
D7 = D6(1+g) = 2.7334(1+.04) = 2.8427
Dividend Discount Model Terminal Value and Stock Price Calculations:
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒6 =
𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒0 =
𝐷7
2.8427
2.8427
=
=
= 78.5276
(𝑟𝐸 − 𝑔) (.0762 − .04)
. 0362
1.13297
1.3512
1.6114
1.9218
2.2920
81.261
+
+
+
+
+
1
2
3
4
5
(1.0762)
(1.0762)
(1.0762)
(1.0762)
(1.0762)
(1.0762)6
CF0 = 0
CF1 = 1.13297
CF2 = 1.3512
CF3 = 1.6114
CF4 = 1.9218
CF5 = 2.2920
CF6 = (2.7334+78.5276) = 81.261
NPV = 59.0179
pg. 14
6.7. Weighted Average Cost of Capital
We found Macy’s credit rating is BBB+1, and according to this credit rating its spread is 3.94%2.
Therefore, the cost of debt is 7.01% by adding 30-year Treasury bond yield (3.07%) to the 3.94% credit
rating spread. After we calculated Macy’s beta to be 0.91, we found its cost of equity to be 7.62% using
CAPM model. Macy’s market value of equity is 22,642 million and its market value of debt is 6,728
million; so its total value is 29,370. Its Debt to value is 22.91% and its equity to value is 77.09%. Macy’s
has higher equity financing than debt financing. According to the formula WACC= rD*(1-T)*(D/V) +r rE
*(E/V), by using the data listed in the table below, we calculated WACC to be 6.92%. We also calculated
terminal WACC to be 7.27% by using terminal cost of equity instead of cost of equity in the same
formula for WACC. The terminal cost of equity is computed by adding 30-year Treasury bond yield
(3.07%) to risk premium rate (5%), which is 8.07%. We decide to use industry WACC (7.87%3) because
we believe it is a better reflection of the retail industry than the one we calculated.
Cost of
Equity
Terminal
Cost of
Debt to
Equity to Tax
WACC
Industry
Cost of
Debt
Value
Value
Rate
WACC
Equity
7.62%
8.07%
7.01%
22.91%
77.09%
35%
6.92%
7.87%
Exhibit 7 represents the components the Weighted Average Cost Capital for Macy’s
Terminal
WACC
7.27%
Macy’s is a well-established retail company, but its sale still can fluctuate under various
economic conditions, especially the U.S. economy is still under anemic recovery from the last financial
crisis. We predict that the company will stabilize in year 10 (i.e. the horizon year is year 10), with a
1
“S&P Raises Macy's (M) to 'BBB+'; Removes from CreditWatch”. BusinessInsider. 4 Dec. 2013.
<http://www.streetinsider.com/Credit+Ratings/S%26P+Raises+Macys+(M)+to+BBB%2B%3B+Removes+f
rom+CreditWatch/8948407.html>
2
BOA Merrill Lynch US Corporate BBB Effective Yield. Fred.
<http://research.stlouisfed.org/fred2/series/BAMLC0A4CBBBEY>
3
Cost of Capital by Sector. NYU Stern. January 2013.
<http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.html.htm>
pg. 15
constant growth rate at 4% after year 10. The terminal value in year 10 is 136,611.68 million, which is
equal to the unlevered free cash flow in year 11 (4,461 million) divided by the difference between
terminal WACC (7.27%) and constant growth rate (4%). The forecasted unlevered free cash flow from
year 1 to year 11 is shown in the table below.
Timeline
1
2
3
4
5
6
Unlevered 1,981 2,026 2,072 2,119 2,167 2,216
Free Cash
Flow
7
2,288
Terminal
49,745.16
Value
Exhibit 8 represents Macy’s forecasted terminal value for ten years. See the attached exhibits in the
Appendix calculations of unlevered free cash flows.
6.8. Free Cash Flow Model
Using the Free Cash Flow Model, we had to find firm value in order to compute Macy’s stock
price Macy’s firm value is $$87,544.87. By taking the Unlevered Free Cash Flows of: CFO= O; CF1= 1,981;
CF2= 2,026; CF3= 2,072; CF4= 2,119; CF5= 2,167 and; CF6=2,288 +49,745.16 and a terminal growth rate
of 3.27%, we proceeded to calculate Macy’s value of equity by adding Firm Value ($41,258) and Cash
and Marketable Securities (2,273) and then subtracting Long-Term Debt (6,728) for a total of $36.803.00
Finally, we calculated stock price by taking the Macy’s value of equity of $36.803.00 and dividing by the
number of shares outstanding (364.9 Million) to get a stock price of $100.86.
Firm Value
(+) Cash & Marketable
Securities
(-) Long Term
Debt
Equity Value
$41,258
2,273
6,728
36,803
Exhibit 9 shows the calculation for Macy’s Inc. value of equity and stock price.
Stock Price
100.86
6.8.1. Stock Valuation
Although we used industry WACC, which is believed to be a better reflection of cost of capital, we
calculated stock price to be $100.86, which is higher than Macy’s current stock price of $62.05. The
pg. 16
reason could be low ratio of capital expenditures as a percentage of net operating cash flow, which
leads to high estimated cash flow and NPV. Macy’s is a well-established company in maturity stage of
life cycle; its capital expenditures tend to be stable and at lower level than in growth stage. In addition,
its revenue growth slowed down dramatically at 0.88% from 2012 to 2013 compared to that of the
previous years, which may imply that its revenue will continue to grow at lower rates than the estimated
rate. It is difficult to predict its future revenue growth because it is sensitive to the dynamic economy.
Therefore, this may also lead to over-estimated cash flows that generate high NPV and stock price.
6.9. Valuation Using Multiples (P/E)
In order to valuate Macy’s using the Valuation Using Multiples method, we first needed to locate the
company’s most recent earnings per share and the Department Store Industry’s price/earnings ratio.
Macy’s earnings per share for November 2014 are equal to 4.20 and the Department Store Industry’s
price/earnings ratio for the same period is equal to 32.50. After multiplying Macy’s earnings per share
ratio by the industry’s price/earnings ratio, we calculated the stock price to be $136.50. Since Macy’s
stock is currently trading at $62.05 (as of November 03, 2014) according to Yahoo Finance, it can be
concluded that Macy’s stock price is undervalued in the market by $74.45 when only considering the
Valuation Using Multiples methodology.
Valuation Using Multiples (P/E):
𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒 = 4.20 × 32.50 = $136.50
7. Conclusion and Recommendations
Macy’s stock is currently trading at a price of $62.05 as of November 03, 2014. We estimated
Macy’s stock price by using three valuation methods: Dividend Discount Model, Free Cash Model,
and P/E Ratio. We weighted P/E ratio as 15% because of its inaccuracy and simplicity of the
valuation. The Dividend Discount Model is weighted at 30% because it is more trustworthy and
accurate method compared to P/E valuation method. Finally, the Free Cash Model is weighted at
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55% due to forecasting of growth for Net Income, Depreciation & Amortization, Net Operating Cash,
Capital Expenditures, Other Investments, Revenues and Expenses. 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.
Valuation Method
Stock Price
P/E Ratio
$136.50
Dividend Discount Model (DDM)
$59.02
Free Cash Flow
$100.86
Weighted Average
$98.79
Exhibit 10 shows Macy’s estimated stock price using different valuation methods.
8. Exhibits
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Works Cited
Isana, Ron. "USATODAY.com - Macy's Gets Ready for Miracle of Holidays." USATODAY.com
- Macy's Gets Ready for Miracle of Holidays. USA Today, 31 Oct. 2004. Web. 30
Nov. 2014.
"Macy's Inc 2013 Annual Report." Macy's Inc 2013 Annual Report. Macy's, Jan.-Feb. 2013.
Web. 30 Nov. 2014.
Macy’s, Inc. At-A-Glance - Macy’s, Inc. Macy’s, Inc. At-A-Glance - Macy’s, Inc. Macy's, n.d.
Web. 30 Nov. 2014.
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