Do Macy's Debt Levels Indicate Weakness?

This analysis compares a portion of the balance sheets for these retailers: Macy's (M), Sears (SHLD), Wal-Mart (WMT) and JC Penney (JCP). I’ve also included a word about the circumstances of Eddie Bauer (EBHI) compared to Macy's.

Based on these numbers, Macy's ratio of debt to revenue looks out of proportion compared to its competitors:

• Macy's: .35 (8.85B/25B)
• Sears: .07
• Wal-Mart: .10
• JC Penney: .19

In other words, Macy's has almost twice the comparable debt load of JCP and five times the debt load of Sears.

Yes, this debt load difference is reflected in the relative prices of the stock of the companies but the recent Chapter 11 filing of Eddie Bauer (EBHI) brings the Macy’s debt into question.

At the time of filing, EBHI reported 1B in revenue with 222M in debt and 206M in cash. This is a debt/revenue ratio of .22, considerably less than the Macy's number. While JCP may at first glance look weak, consider its 2.14B of cash.

Finally, earnings/share for the industry is -1 dollar. Macy's earnings/share is -11

Disclosure: I do not have a position in any of the stocks mentioned in this analysis.

Comments

[Wolfhounds:]

Your point of debt load of M and SHLD is misplaced, although important. The real problem is not comparing debt to revenue, but to FCF. M FCF has declined 50% the past 2 fiscal years and it has not reduced inventory, as most retailers have, as a means to increase cach flow even as revenue declines. That is why I believe M will not be able to roll over it's debt in an environment of declining sales. SHLD, which has declining y/y same store sales since 2005, keeps pushing down inventory to save cash. How long this will last remains to be seen, but is has substantial cash to keep afloat.

Jun 22 09:38 AM

[China Expert:]

I have never heard of a debt to sales ratio, I must have missed that in my Corp Fin 101 course. All that matters is the Net/Debt to EBITDA ratio, EBITDA/interest and EBITDA/FCF. Does M generate enough EBITDA to support its interest payments and fund its capital expenditures ? True free cash flow FCF has decreased in this recession like all retailers but couldn't M do a sale- leaseback to raise cash as M owns many of its stores ? The key with most retailers is to have enought cash/liquidity to last out the storm. I see the asset value in the stores as a key source of liquidity if necessary. With M holdings bonds maturing in 2017 yielding almost 11%, I'd say the market is betting that chances of a refi are fairly good.

Jun 22 10:39 AM

[DerekNJND:]

I wish macys did more marketing, particularly advertising , because it is the walmart of high-end dept stores, stealing revenues with a high volume low margin strategy. I dont think enough ppl know that, and most of their current ads focus on ome-time sales or events, i stead of branding the store based on its competitive advantage: price. U would think madison ave is close enough to pitch them on a better advertising strtegy

Jun 29 01:04 AM

[DerekNJND:]

Actually, all that really matters is a good candlestick chart. Buy using the same technical indicators institutions are using, buy more after 5% or more corrections. What else do you need to know? EBIDTA? GAAAP? EPS? ROI? ROE?

how about BUY? lol

On Jun 22 10:39 AM China Expert wrote:

> I have never heard of a debt to sales ratio, I must have missed that
> in my Corp Fin 101 course. All that matters is the Net/Debt to EBITDA
> ratio, EBITDA/interest and EBITDA/FCF. Does M generate enough EBITDA
> to support its interest payments and fund its capital expenditures
> ? True free cash flow FCF has decreased in this recession like all
> retailers but couldn't M do a sale- leaseback to raise cash as M
> owns many of its stores ? The key with most retailers is to have
> enought cash/liquidity to last out the storm. I see the asset value
> in the stores as a key source of liquidity if necessary. With M holdings
> bonds maturing in 2017 yielding almost 11%, I'd say the market is
> betting that chances of a refi are fairly good.

Aug 09 01:40 AM