1. MGMT 315: Financial Valuation Project Ashli Edwards, Xiang Li, and Katerina Goudouros

2. Table of Contents Introduction to Macys …………….......…………..Ashli Edwards Company Description History SWOT Analysis Department Store and Risk Analysis………………… Financial Analysis………………………………………………Ashli Edwards Valuation Beta………………………………………………………..………Ashli Edwards Capital Asset Pricing Model……………………………..Xiang Li Dividend Discount Model………………………………..Katerina Goudouros Weighted Cost Of Capital………………………………..Xiang Li Free Cash Flow Model…………………………………….Ashli Edwards Stock Valuation………………………………………………Xiang Li Valuation Using Multiples………………………………Katerina Goudouros Recommendations and Conclusion

3. INTRODUCTION TO MACY’S

4. Company Description Macy’s Inc. is America’s premier retail department store headquartered in Cincinnati, Ohio in the United States. A business to consumer firm selling merchandise to demographic population consisting of teens, adults, and children. 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. Operates in almost 850 stores within the United States, District of Columbia, Guam, and Puerto Rico and employs approximately 172, 500 people. Publicly traded under the symbol “M” on the New York Stock Exchange.

5. History 1859: Originally, A fancy dry goods store in New York City 1902: Moved to present trademark location on Herald Square 1922: Went public on the NYSE 1924: Launched the annual tradition of Macy’s Thanksgiving Day Parade 1946: Launched the first annual flower show 1994: Merged with Federated Department Stores 2001: Absorbed Stern’s Department Stores Present: Owns 850 + stores nationwide and U.S. surrounding territories

6. SWOT ANALYSIS StrengthsWeaknesses  Market position  The Macy’s brand  Loss of regional brand value OpportunitiesThreats  Expansion Abroad  Industry competition  Governmental regulations

7. DEPARTMENT STORE INDUSTRY AND RISK ANALYSIS

8. Department Store Industry and Risk Analysis Department Store IndustryRisk Analysis Economic Condition Industry Risk J.C. Penny, Saks, Dillard’s Theft Customer Data Hacking Terrorism Sales declined 40% after 9/11

9. FINANCIAL ANALYSIS

10. 201120122013 Industry Average Liquidity Current Ratio 1.401.551.521.70 Quick Ratio 0.510.430.470.60 Asset Management Inventory 3.083.123.017.06 Days Sales Outstanding 5.094.895.72 Total Assets Turnover Ratio 1.201.321.292.70 Debt Management Total Debt Ratio 44.80%47.00%44.65%22.90% Times Interest Earned 5.396.266.878.9 Profitability Profit Margin 4.76%4.82%5.32%2.90% Return on Assets 5.88%6.20%6.97%8.80% Return on Equity 21.91%22.28%24.16%21.10% Market Value Ratio P/E

11. VALUATION ANALYSIS

12. Beta 0.91  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 x-variable 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.

13. Capital Asset Pricing Model Calculate Return on Equity using CAPM: r i = 3.07% + (5%) x (0.91) r i = 7.62% Risk Free Rate ( ) 30- year Treasury bond yield 3.07% Risk Premium5% Beta ( ))0.91

14. Dividend Discount Model

15. Dividend Discount Model (Notes)

16. Weighted Average Cost of Capital S&P Credit Rating: BBB+ Cost of Debt = 7.01% 3.94% + 3.07% = 7.01% Spread: 3.94% 30-year Treasury Bond Yield: 3.07% Cost of Equity = 7.62% CAPM: r i = r f + (r m - r f )ß i r i = 3.07% + (5%) x (0.91) = 7.62%

17. Weighted Average Cost of Capital Weighted Average Cost of Capital Data Market Value of Debt (Long Term Debt )6,728 Million Market Value of Equity22,642 Million Market Price per Share x # of Outstanding Stock$62.05 x 364.9 = 22,642 Million Total Value29,370 Debt to Value6,728 Million/29,370 Million = 22.91 % Equity to Value22,640 Million/29,370 Million = 77.09% WACC= r D *(1-T)*(D/V) +r r E *(E/V =7.01% *(1-35%) + 7.62%*77.09% = 6.92% Industry WACC (provided by NYU Stern)7.87%

18. Free Cash Flow Model Revenue is projected using 2.40% growth rate from Yahoo! Finance Total expenses is 84.88% of revenues (5-year average) Depreciation and Amortization is 4.48% of revenue (7-year average) Net interest expense is assumed to be constant at 507 (6-year average) Tax Rate is constant at 35% Total other Non-Cash Adjustments is -1.13% of revenue CAPEX/Net Cash Flow from Operating Activities is 22.99% Other Investing Activities/Net Cash Flows from Operating is - 5.42%

19. Free Cash Flow Model Horizon Year : 6 Industry WACC: 7.87% (NYU Stern) Terminal Growth Rate: 3.27% (Trading Economics) Timeline1234567 Unlevered Free Cash Flow 1,9812,0262,0722,1192,1672,2162,288 Terminal Value 49,745.16

20. Free Cash Flow Model Terminal Value= (2,216*3.27%)/(7.87% - 3.27%) = $49,745.16 Firm Value= $41,258 (+) Cash and Marketable Securities= $2,273 (-) Long Term Debt= $6,728 Equity Value= $36,803 Stock Price, 2014= $36,803/364.9 = 100.86

21. Stock Valuation Our calculated stock price: $100.86 Market price: $62.05 UNDERVALUED Overestimated revenue growth rate LOW CAPEX/Net Operating Cash Flow: 29.99%

22. Valuation Using Multiples

23. RECOMMENDATIONS AND CONCLUSIONS

24. Recommendations & Conclusions 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.