Macy’s Inc. and Kohl’s Corporation: Financial Analysis

📄 Words:	1068
📝 Subject:	Financial Management
📑 Pages:	4
✍️ Type:	Essay

Introduction
Corporate Profiles
Common Size Analysis
Financial Ratio Analysis
Conclusion
References
Appendix

Introduction

The U.S. departmental stores sector is led by prominent brands that offer broad range of products. In this report, two competitor companies that are Macy’s Inc. and Kohl’s Corporation are selected and their financial performance in the last three years is analyzed using common size statements and financial ratios. The analysis is presented in the form of a discussion of selected key indicators and their trends over a three-year period along with a review of management’s report and other information related to the companies’ performance.

Corporate Profiles

Macy’s Inc. (Macy’s) is a leading premium brand retailer of the U.S that operates 870 stores throughout the U.S. The company owns various subsidiaries that are directly controlled and managed to support the parent company’s business. The company also sells products through its website that serves both local and international customers (Macy’s Inc. – About Us, 2016). The company reported revenues of almost $27 billion in 2015 making it one of the largest retail companies operating in the U.S. (Macy’s Inc. – SEC Form 10-K, 2016)The company’s stock symbol is M, and it is listed on NYSE. Kohl’s Corporation (Kohl’s) operates a chain of 1162 departmental stores throughout the US. It is a direct competitor of Macy’s and sells similar products. The company reported sales of $19 billion in 2015 (Kohl’s Corporation – SEC Form 10-K, 2016). The company’s stock symbol is KSS, and it is also listed on NYSE.

Common Size Analysis

The vertical analysis of income statement and balance sheet indicated commonalities in the financial performance and position of both companies in the last three years. Both Macy’s and Kohl’s reported a decline in their cash and cash equivalents in 2015. The management report indicates that these companies failed to understand the changing trends in the U.S. market that affected their sales. Consumers are spending less on non-food items, and this trend is affecting all businesses in the retail sector. Moreover, the unexpected change in the weather affected sales of both companies (Macy’s Inc. – SEC Form 10-K, 2016; Kohl’s Corporation – SEC Form 10-K, 2016).

Subsequently, poor cash flows affected the solvency position of both companies as they issued additional long-term debt in the last two years. However, the management report indicated that Macy’s secured debt at lower rates as compared to Kohl’s. Furthermore, the analysis showed the net income of both companies dropped in 2015. Both companies adopted similar strategies to focus on their discount stores (Coolidge, 2016). Another report indicated that Macy’s and Kohl’s are facing tough competition from Amazon and low-cost retailers, and it has forced the management of both companies to close down poor performing stores and restructure some of their stores to lower their cost of operations (Ramakrishnan, 2016).

The horizontal analysis reflected a declining trend in the financial performance of both companies in the last three years. It could be noted that receivables and inventories of both companies were increased in 2015. It indicated that these companies faced difficulties in generating renewed sales that slowed down their receivable turnover and inventory turnover and lowered their cash position.

Furthermore, the analysis indicated that Macy’s reported high solvency costs resulted from the closure of its stores that lowered its reported net income. The management report highlighted the company’s strategy to close down its stores and focus more on increasing sales by lowering profit margin. On the other hand, Kohl’s also reported ‘other expenses’ related to the closure of its stores in its income statement. It could be inferred that both companies are facing similar business and market conditions, and they need to reshape their business models and focus on the threats arising from cost-effective entities.

Financial Ratio Analysis

The three key ratios selected for discussion include current ratio, profit margin ratio, and debt/equity ratio.

		2015	2014	2013
Current Ratio	Current Asset/Current Liabilities	1.34	1.69	1.52
Profit Margin Ratio	Net Income/Total Sales	0.04	0.05	0.05
Debt/Equity Ratio	Total Liabilities/Owner’s Equity	3.84	2.97	2.46

Table 1: Macy’s Financial Ratios.

		2015	2014	2013
Current Ratio	Current Asset/Current Liabilities	1.87	1.95	1.93
Profit Margin Ratio	Net Income/Total Sales	0.04	0.05	0.05
Debt/Equity Ratio	Total Liabilities/Owner’s Equity	1.48	1.39	1.4

Table 2: Kohl’s Financial Ratios.

The calculations indicated that the value of Macy’s current ratio declined in the last three years. It was mainly due to the company’s failure to generate positive cash flows in 2015. Furthermore, the company borrowed short-term funds to fulfill its operational obligations. The slowdown in the business led to delays in the settlement of accounts payable and accrued liabilities that reflected the company’s liquidity problem. On the other hand, the liquidity position of Kohl’s remained strong in the last three years. It controlled its liabilities better than Macy’s by managing its accounts payable effectively. However, its current ratio value declined in 2015, and analysts are of the view that the company is likely to face further problems due to the slowdown in its business (Ramakrishnan, 2016).

The profit margin of Macy’s and Kohl’s remained weak in the last three years. Both companies only generated 4% return on sales in 2015. The management of both companies realized that the dynamics of the retail market have changed in recent years, and customers are spending less on shopping. It affected the companies’ position in the market and allowed competitors to benefit by offering alternative business models.

The analysis of debt to equity ratio indicated that both companies had solvency problems. Kohl’s had a better position than Macy’s as its ratio value was 1.48 in 2015 as compared to 3.84 of Macy’s. Macy’s reported that the company issued short-term and long-term debentures in the last three years to support its operational and strategic requirements. The company’s focus remained on expanding its discount stores network that required a substantial investment using external sources (Macy’s Inc. – SEC Form 10-K, 2016). On the other hand, Kohl’s restricted its external borrowing and a slight increase in the value of debt/equity ratio could be noted.

Conclusion

Although both companies faced similar situations, Kohl’s performed better than Macy’s in the last three years. Macy’s high indebtedness can create problems for the company as analysts are of the view that the retail sector is likely to underperform in 2016 as well. The company can have liquidity issues, and it can lead to further loss of business. Both companies need to adopt strategies that are cost effective and they should focus more on e-retailing.

References

Coolidge, A. (2016). Macy’s profits decline, expanding beauty and discount chains. Web.

Kohl’s Corporation – SEC Form 10-K. (2016). Web.

Macy’s Inc. – About Us. (2016). Web.

Macy’s Inc. – SEC Form 10-K. (2016). Web.

Ramakrishnan, S. (2016). Kohl’s warns 2016 sales may fall. Web.

Appendix

Macy’s Vertical Analysis.

	January 30, 2016		January 31, 2015		February 1, 2014
ASSETS
Current Assets:
Cash and cash equivalents	$1,109	5.39%	$2,246	10.53%	$2,273	10.51%
Receivables	558	2.71%	424	1.99%	438	2.03%
Merchandise inventories	5,506	26.76%	5,417	25.40%	5,557	25.70%
Prepaid expenses and other current assets	479	2.33%	493	2.31%	420	1.94%
Total Current Assets	7,652	37.19%	8,580	40.23%	8,688	40.19%
Property and Equipment net	7,616	37.01%	7,800	36.57%	7,930	36.68%
Goodwill	3,897	18.94%	3,743	17.55%	3,743	17.31%
Other Intangible Assets net	514	2.50%	496	2.33%	527	2.44%
Other Assets	897	4.36%	711	3.33%	732	3.39%
Total Assets	$20,576	100.00%	$21,330	100.00%	$21,620	100.00%
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities:
Short-term debt	$642	3.12%	$76	0.36%	$463	2.14%
Merchandise accounts payable	1,526	7.42%	1,594	7.47%	1,691	7.82%
Accounts payable and accrued liabilities	3,333	16.20%	3,109	14.58%	2,810	13.00%
Income taxes	227	1.10%	296	1.39%	362	1.67%
Deferred income taxes					400	1.85%
Total Current Liabilities	5,728	27.84%	5,075	23.79%	5,726	26.48%
Long-Term Debt	6,995	34.00%	7,233	33.91%	6,714	31.05%
Deferred Income Taxes	1,477	7.18%	1,443	6.77%	1,273	5.89%
Other Liabilities	2,123	10.32%	2,201	10.32%	1,658	7.67%
Shareholders Equity:
Common stock (310.3 and 340.6 shares outstanding)	3	0.01%	4	0.02%	4	0.02%
Additional paid-in capital	621	3.02%	1,048	4.91%	2,522	11.67%
Accumulated equity	6,334	30.78%	7,340	34.41%	6,235	28.84%
Treasury stock	(1,665)	-8.09%	(1,942)	-9.10%	(1,847)	-8.54%
Accumulated other comprehensive loss	(1,043)	-5.07%	(1,072)	-5.03%	(665)	-3.08%
Total Macy’s, Inc. Shareholders Equity	4,250	20.66%	5,378	25.21%	6,249	28.90%
Noncontrolling interest	3	0.01%
Total Shareholders’ Equity	4,253	20.67%	5,378	25.21%	6,249	28.90%
Total Liabilities and Shareholders Equity	$20,576	100.00%	$21,330	100.00%	$21,620	100.00%

	2015		2014		2013
Net sales	$27,079	100.00%	$28,105	100.00%	$27,931	100.00%
Cost of sales	(16,496)	-60.92%	(16,863)	-60.00%	(16,725)	-59.88%
Gross margin	10,583	39.08%	11,242	40.00%	11,206	40.12%
Selling, general and administrative expenses	(8,256)	-30.49%	(8,355)	-29.73%	(8,440)	-30.22%
Impairments, store closing and other costs	(288)	-1.06%	(87)	-0.31%	(88)	-0.32%
Operating income	2,039	7.53%	2,800	9.96%	2,678	9.59%
Interest expense	(363)	-1.34%	(395)	-1.41%	(390)	-1.40%
Premium on early retirement of debt			(17)	-0.06%
Interest income	2	0.01%	2	0.01%	2	0.01%
Income before income taxes	1,678	6.20%	2,390	8.50%	2,290	8.20%
Federal, state and local income tax expense	(608)	-2.25%	(864)	-3.07%	(804)	-2.88%
Net income	1,070	3.95%	1,526	5.43%	1,486	5.32%
Net loss attributable to noncontrolling interest	2	0.01%

Net income attributable to Macy’s, Inc.shareholders	$1,072	3.96%	$1,526	5.43%	$1,486	5.32%

Macy’s Horizontal Analysis.

	January 30, 2016			January 31, 2015			February 1, 2014
ASSETS
Current Assets:		$ Change	% Change		$ Change	% Change
Cash and cash equivalents	$1,109	-1,137	-50.62%	$2,246	-27	-1.19%	$2,273
Receivables	558	134	31.60%	424	-14	-3.20%	438
Merchandise inventories	5,506	89	1.64%	5,417	-140	-2.52%	5,557
Prepaid expenses and other current assets	479	-14	-2.84%	493	73	17.38%	420
Total Current Assets	7,652	-928	-10.82%	8,580	-108	-1.24%	8,688
Property and Equipment net	7,616	-184	-2.36%	7,800	-130	-1.64%	7,930
Goodwill	3,897	154	4.11%	3,743	–	0.00%	3,743
Other Intangible Assets net	514	18	3.63%	496	-31	-5.88%	527
Other Assets	897	186	26.16%	711	-21	-2.87%	732
Total Assets	$20,576	-754	-3.53%	$21,330	-290	-1.34%	$21,620
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities:
Short-term debt	$642	566	744.74%	$76	-387	-83.59%	$463
Merchandise accounts payable	1,526	-68	-4.27%	1,594	-97	-5.74%	1,691
Accounts payable and accrued liabilities	3,333	224	7.20%	3,109	299	10.64%	2,810
Income taxes	227	-69	-23.31%	296	-66	-18.23%	362
Deferred income taxes							400
Total Current Liabilities	5,728	653	12.87%	5,075	-651	-11.37%	5,726
Long-Term Debt	6,995	-238	-3.29%	7,233	519	7.73%	6,714
Deferred Income Taxes	1,477	34	2.36%	1,443	170	13.35%	1,273
Other Liabilities	2,123	-78	-3.54%	2,201	543	32.75%	1,658
Shareholders Equity:
Common stock (310.3 and 340.6 shares outstanding)	3	-1	-25.00%	4	–	0.00%	4
Additional paid-in capital	621	-427	-40.74%	1,048	-1,474	-58.45%	2,522
Accumulated equity	6,334	-1,006	-13.71%	7,340	1,105	17.72%	6,235
Treasury stock	(1,665)	277	-14.26%	(1,942)	-95	5.14%	(1,847)
Accumulated other comprehensive loss	(1,043)	29	-2.71%	(1,072)	-407	61.20%	(665)
Total Macy’s, Inc. Shareholders Equity	4,250	-1,128	-20.97%	5,378	-871	-13.94%	6,249
Noncontrolling interest	3
Total Shareholders’ Equity	4,253	-1,125	-20.92%	5,378	-871	-13.94%	6,249
Total Liabilities and Shareholders Equity	$20,576	-754	-3.53%	$21,330	-290	-1.34%	$21,620

	2015			2014			2013
Net sales	$27,079	-1,026	-3.65%	$28,105	174	0.62%	$27,931
Cost of sales	(16,496)	367	-2.18%	(16,863)	-138	0.83%	(16,725)
Gross margin	10,583	-659	-5.86%	11,242	36	0.32%	11,206
Selling, general and administrative expenses	(8,256)	99	-1.18%	(8,355)	85	-1.01%	(8,440)
Impairments, store closing and other costs	(288)	-201	231.03%	(87)	1	-1.14%	(88)
Operating income	2,039	-761	-27.18%	2,800	122	4.56%	2,678
Interest expense	(363)	32	-8.10%	(395)	-5	1.28%	(390)
Premium on early retirement of debt				(17)
Interest income	2	–	0.00%	2	–	0.00%	2
Income before income taxes	1,678	-712	-29.79%	2,390	100	4.37%	2,290
Federal, state and local income tax expense	(608)	256	-29.63%	(864)	-60	7.46%	(804)
Net income	1,070	-456	-29.88%	1,526	40	2.69%	1,486
Net loss attributable to noncontrolling interest	2

Net income attributable to Macy’s, Inc. shareholders	$1,072	-454	-29.75%	$1,526	40	2.69%	$1,486

Kohls’ Vertical Analysis.

Period Ending	Jan 30, 2016		Jan 31, 2015		Feb 1, 2014
Assets
Current Assets
Cash And Cash Equivalents	707,000	5.20%	1,407,000	9.82%	971,000	6.76%
Net Receivables	–		–		142,000	0.99%
Inventory	4,038,000	29.68%	3,814,000	26.61%	3,874,000	26.98%
Other Current Assets	331,000	2.43%	359,000	2.50%	327,000	2.28%
Total Current Assets	5,076,000	37.31%	5,580,000	38.93%	5,314,000	37.01%
Property Plant and Equipment	8,308,000	61.06%	8,515,000	59.41%	8,745,000	60.91%
Other Assets	222,000	1.63%	238,000	1.66%	298,000	2.08%
Total Assets	13,606,000	100.00%	14,333,000	100.00%	14,357,000	100.00%
Liabilities
Current Liabilities
Accounts Payable	2,587,000	19.01%	2,749,000	19.18%	2,619,000	18.24%
Short/Current Long Term Debt	127,000	0.93%	110,000	0.77%	139,000	0.97%
Total Current Liabilities	2,714,000	19.95%	2,859,000	19.95%	2,758,000	19.21%
Long Term Debt	4,581,000	33.67%	4,638,000	32.36%	4,722,000	32.89%
Other Liabilities	563,000	4.14%	547,000	3.82%	560,000	3.90%
Deferred Long Term Liability Charges	257,000	1.89%	298,000	2.08%	339,000	2.36%
Total Liabilities	8,115,000	59.64%	8,342,000	58.20%	8,379,000	58.36%
Stockholders’ Equity
Common Stock	4,000	0.03%	4,000	0.03%	4,000	0.03%
Retained Earnings	12,329,000	90.61%	12,008,000	83.78%	11,462,000	79.84%
Treasury Stock	-9,769,000	-71.80%	-8,744,000	-61.01%	-8,052,000	-56.08%
Capital Surplus	2,944,000	21.64%	2,743,000	19.14%	2,598,000	18.10%
Other Stockholder Equity	-17,000	-0.12%	-20,000	-0.14%	-34,000	-0.24%
Total Stockholder Equity	5,491,000	40.36%	5,991,000	41.80%	5,978,000	41.64%
Total Shareholder Equity and Liabilities	13,606,000	100.00%	14,333,000	100.00%	14,357,000	100.00%

Period Ending	Jan 30, 2016		Jan 31, 2015		Feb 1, 2014
Total Revenue	19,204,000	100.00%	19,023,000	100.00%	19,031,000	100.00%
Cost of Revenue	12,265,000	63.87%	12,098,000	63.60%	12,087,000	63.51%
Gross Profit	6,939,000	36.13%	6,925,000	36.40%	6,944,000	36.49%
Selling General and Administrative	4,452,000	23.18%	4,350,000	22.87%	4,313,000	22.66%
Others	934,000	4.86%	886,000	4.66%	889,000	4.67%
Operating Income or Loss	1,553,000	8.09%	1,689,000	8.88%	1,742,000	9.15%
Earnings Before Interest And Taxes	1,384,000	7.21%	1,689,000	8.88%	1,742,000	9.15%
Interest Expense	327,000	1.70%	340,000	1.79%	338,000	1.78%
Income Before Tax	1,057,000	5.50%	1,349,000	7.09%	1,404,000	7.38%
Income Tax Expense	384,000	2.00%	482,000	2.53%	515,000	2.71%
Net Income	673,000	3.50%	867,000	4.56%	889,000	4.67%

Kohls’ Horizontal Analysis.

Period Ending	Jan 30, 2016			Jan 31, 2015			Feb 1, 2014
Assets
Current Assets
Cash And Cash Equivalents	707,000	-700,000	-49.75%	1,407,000	436,000	44.90%	971,000
Net Receivables	–			–			142,000
Inventory	4,038,000	224,000	5.87%	3,814,000	-60,000	-1.55%	3,874,000
Other Current Assets	331,000	-28,000	-7.80%	359,000	32,000	9.79%	327,000
Total Current Assets	5,076,000	-504,000	-9.03%	5,580,000	266,000	5.01%	5,314,000
Property Plant and Equipment	8,308,000	-207,000	-2.43%	8,515,000	-230,000	-2.63%	8,745,000
Other Assets	222,000	-16,000	-6.72%	238,000	-60,000	-20.13%	298,000
Total Assets	13,606,000	-727,000	-5.07%	14,333,000	-24,000	-0.17%	14,357,000
Liabilities
Current Liabilities
Accounts Payable	2,587,000	-162,000	-5.89%	2,749,000	130,000	4.96%	2,619,000
Short/Current Long Term Debt	127,000	17,000	15.45%	110,000	-29,000	-20.86%	139,000
Total Current Liabilities	2,714,000	-145,000	-5.07%	2,859,000	101,000	3.66%	2,758,000
Long Term Debt	4,581,000	-57,000	-1.23%	4,638,000	-84,000	-1.78%	4,722,000
Other Liabilities	563,000	16,000	2.93%	547,000	-13,000	-2.32%	560,000
Deferred Long Term Liability Charges	257,000	-41,000	-13.76%	298,000	-41,000	-12.09%	339,000
Total Liabilities	8,115,000	-227,000	-2.72%	8,342,000	-37,000	-0.44%	8,379,000
Stockholders’ Equity
Common Stock	4,000	–	0.00%	4,000	–	0.00%	4,000
Retained Earnings	12,329,000	321,000	2.67%	12,008,000	546,000	4.76%	11,462,000
Treasury Stock	-9,769,000	-1,025,000	11.72%	-8,744,000	-692,000	8.59%	-8,052,000
Capital Surplus	2,944,000	201,000	7.33%	2,743,000	145,000	5.58%	2,598,000
Other Stockholder Equity	-17,000	3,000	-15.00%	-20,000	14,000	-41.18%	-34,000
Total Stockholder Equity	5,491,000	-500,000	-8.35%	5,991,000	13,000	0.22%	5,978,000
Total Shareholder Equity and Liabilities	13,606,000	-727,000	-5.07%	14,333,000	-24,000	-0.17%	14,357,000

Period Ending	Jan 30, 2016			Jan 31, 2015			Feb 1, 2014
Total Revenue	19,204,000	181,000	0.95%	19,023,000	-8,000	-0.04%	19,031,000
Cost of Revenue	12,265,000	167,000	1.38%	12,098,000	11,000	0.09%	12,087,000
Gross Profit	6,939,000	14,000	0.20%	6,925,000	-19,000	-0.27%	6,944,000
Selling General and Administrative	4,452,000	102,000	2.34%	4,350,000	37,000	0.86%	4,313,000
Others	934,000	48,000	5.42%	886,000	-3,000	-0.34%	889,000
Operating Income or Loss	1,553,000	-136,000	-8.05%	1,689,000	-53,000	-3.04%	1,742,000
Earnings Before Interest And Taxes	1,384,000	-305,000	-18.06%	1,689,000	-53,000	-3.04%	1,742,000
Interest Expense	327,000	-13,000	-3.82%	340,000	2,000	0.59%	338,000
Income Before Tax	1,057,000	-292,000	-21.65%	1,349,000	-55,000	-3.92%	1,404,000
Income Tax Expense	384,000	-98,000	-20.33%	482,000	-33,000	-6.41%	515,000
Net Income	673,000	-194,000	-22.38%	867,000	-22,000	-2.47%	889,000