Macy's Valuation Report

1. Executive Summary

As the department sector will gently recover over the following several years, it is assumed that Macy's net sales will grow at the average rate of 4.0% for the period 2011-2015. And because of the fact that Macy's announced plans during the year of 2010 to launch a new Bloomingdale's Outlet store, and the company announced the "My Macy's" localization initiative which was developed with the goal of accelerating sales growth, Macy's sales growth after the year of 2015 is assumed to be 4.5% per year.

Cash, accounts receivable, inventory, accounts payable and accruals are spontaneous assets and liabilities, they increase or decrease for the same percentage with sales. Therefore, operating working capital will go up by the growth rate of sales. After calculation, free cash flow of Macy's from the year of 2011 to 2015 is projected to increase roughly 12% yearly. Since Macy's sales will grow consistently at the rate of 4.5% after 2015, its NOPAT is about to rise spontaneously. As Macy's will not require much fund to invest in its operating capital to expand its business largely, the investment in operating capital will slowly drop down in the near future. Therefore, it is assumed that free cash flow of Macy's after the year of 2015 will increase at the same rate (4.5%) as the sales growth rate (4.5%).

After the risk free rate of return, market rate of return, Macy's Beta, cost of debt and its capital structure were obtained, the weighted average cost of capital of Macy's was calculated (13.89%) via Capital Asset Pricing Model.

After all the numbers required to evaluate the value of Macy's were obtained, the value of the firm, which is $18.422 million, was calculated by discounting Macy's future cash flow by the WACC of Macy's. Since the company does not disclose to issue any new common stocks or preferred stocks in the future, per share price of Macy's should be $37.21. This value is under Macy's current stock price, which means that Macy's is currently undervalued.

2. Brief over-view of the firm and economy

Macy's is a retail organization operating retail stores and Internet websites under two brands (Macy's and Bloomingdale's) that sell a wide range of merchandise. According to Macy's Management Discussion and Analysis, the company announced the "My Macy's" localization initiative which was developed with the goal of accelerating sales growth in the year of 2008, and its plans during the year of 2010 to launch a new Bloomingdale's Outlet store, its sales growth rate is also expected to accelerate. Although throughout 2008 and into 2009, consumer spending levels were adversely affected by the financial crisis, the retailing sector will gently recover over the following several years, as the US economy recovers, Macy's sales will grow faster than its sales growth rate in the past period. Therefore, with the foreseeable US economy growth, Macy's sales will grow at a relatively high rate.

3. Explanation of

a. FCF Forecasting

Free cash flow of Macy's from the year of 2011 to 2015 is projected to increase roughly 12% yearly. Since Macy's sales will grow consistently at the rate of 4.5% after 2015, its NOPAT is about to rise spontaneously. As Macy's is in its mature period of the business cycle, it will not require much fund to invest in its operating capital to expand Macy's business largely. Instead, the investment in operating capital will slowly drop down in the near future. Therefore, it is assumed that free cash flow of Macy's after the year of 2015 will increase at the same rate (4.5%) as the sales growth rate (4.5%).

b. Cost of Equity Calculation using CAPM

CAPM estimate of rs begins with the risk-free rate, rRF. Then a risk premium that is equal to the risk premium on the market, RPM, is added, scaled up or down to reflect the particular stock's risk as measured by its beta coefficient.

i. Beta Calculation

Macy's beta is obtained