a) Macy's and JC Penney - Questions (revised) (1)

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Apr 3, 2024

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Macy’s & JC Penney - Questions 1. Using the guidelines provided below, compute financial ratios for fiscal years 2009, 2010, and 2011 (ending on January 30, 2010, January 30, 2011, and January 2012, respectively). Macy’s □ Details of Macy's Financial Ratios Financial Ratio Year Macy's (Ticker: M) Return on Equity 2011 0.219 = 1256/(0.5*(5933+5530)) 2010 0.166 = 847/(0.5*(5530+4653)) 2009 0.070 = 329/(0.5*(4701+4646)) Profit Margin 2011 0.048 = 1256/26405 2010 0.034 = 847/25003 2009 0.014 = 329/23489 Gross Margin 2011 0.404 = (26405-15738)/26405 2010 0.407 = (25003-14824)/25003 2009 0.405 = (23489-13973)/23489 Asset Turnover 2011 1.236 = 26405/(0.5*(22095+20631)) 2010 1.193 = 25003/(0.5*(20631+21300)) 2009 1.081 = 23489/(0.5*(21300+22145)) A/R Turnover 2011 74.802 = 26405/(0.5*(368+338)) 2010 66.675 = 25003/(0.5*(392+358)) 2009 65.429 = 23489/(0.5*(358+360)) Inventory Turnover 2011 3.187 = 15738/(0.5*(5117+4758)) 2010 3.163 = 14824/(0.5*(4758+4615)) 2009 2.978 = 13973/(0.5*(4615+4769)) Debt-Equity Ratio 2011 2.724 = (22095-5933)/5933 2010 2.731 = (20631-5530)/5530 2009 3.531 = (21300-4701)/4701 Current Ratio 2011 1.401 =8777/6263 2010 1.362 = 6899/5065 2009 1.545 = 6882/4454 Quick Ratio 2011 0.510 = (2827+368)/6263 2010 0.366 = (1464+392)/5065 2009 0.459 = (1686+358)/4454 Times Interest Earned 2011 5.403 = (1256+712+447)/447 2010 3.280 = (847+473+579)/579 2009 1.902 = (329+178+562)/562

□ Details of JCPenny Financial Ratios

Financial Ratio Year Macy's (Ticker: M) Return on Equity 2011 0.0321 = 152/(0.5*(4010+5460)) 2010 0.0756 = 389/(0.5*(5460+4778)) 2009 0.0562 = 251/(0.5*(4778+4155)) Profit Margin 2011 0.0088 = 152/17260 2010 0.022 = 389/17759 2009 0.014 = 251/17556 Gross Margin - 2011 0.360 = (17260-11042)/ 17260 2010 0.392 = (17759-10799)/ 17759 2009 1.606 = (17556-10646)/ 17556 Asset Turnover 2011 1.409 = 17260/(0.5*(11424+13068)) 2010 1.385 = 17759/(0.5*(13068+12581)) 2009 1.428 = 17556/(0.5*(12581+12011)) A/R Turnover 2011 Missing Data 2010 2009 Inventory Turnover 2011 3.603 = 11042/(0.5*(2916+3213)) 2010 3.463 = 10799/(0.5*(3213+3024)) 2009 3.389 = 10646/(0.5*(3024+3259)) Debt-Equity Ratio 2011 1.849 = (11424-4010)/4010 2010 1.389 = (13042-5460)/5460 2009 1.633 = (12581-4778)/4778 Current Ratio 2011 1.540 =11424/7414 2010 1.720 = 13042/7582 2009 1.612 = 12581/7803 Quick Ratio 2011 1.208 = (2916+413)/2756 2010 1.339 = (3213+334)/2647 2009 1.052 = (3024+395)/3249 Times Interest Earned 2011 2.009 = (152+77+227)/227 2010 3.515 = (378+203+231)/231 2009 2.550 = (249+154+260)/260 2. Based on past profitability ratios, which firm is likely to be more profitable in the future and why? Discuss in detail. Use the component ratios of return on equity to explain the reasons for the difference in profitability across the two firms. In other words, is profit margin, asset turnover, and/or financial leverage responsible for the difference in profitability? Based on the profitability ratios Macy’s seems to be more profitable than JCPenney due to the profit margin being

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higher than JCPenney. This shows that Macy’s has a better handle on cost management and is efficient in controlling costs. Compared to JCPenney the fluctuation of profitability increasing and decreasing seems to be unsteady and cause instability in profits. One main reason could be the higher net income in Macy’s compared to JCPenney that can contribute to the difference in profitability between the two companies. As for whether or not the profit margin, asset turnover and financial leverage affect profitability all the factors to affect the profitability. JCPenney have a consistently higher asset turnover that help with the ROE as well as a low debt to equity ratio. This shows that JCPenney is more efficient with assets for sales. 3. Based on the risk ratios, which firm is likely to be more risky in the future and why? Based on the risk ratios Macy’s is most likely to be a riskier firm than JCPenney because Macy’s has a higher risk ratio compared to JCPenney. However while JCPenney is relatively low at the moment the risk ratio does show an increase in overall risk ratio so based on future predications it could be that JCPenney can be become more risky of a company if the trend continues. And while Macy’s is relatively high at the moment, it does show an eventually decrease so future predictions could indicate that the risk ratio maybe lower than JCPenney in the near future. 4. Based on the information contained in the Statement of Cash Flows, which firm faces greater liquidity risk? Discuss in detail by considering separately cash flows from operations, investment and financing activities, and the major components contained within each of these activities. The firm with the greater risk of liquidity risk would be JCPenney due to the decline in cash over the period of three years. Comparing the operating activities from Macy’s to JCPenney, Macy’s net cash provided by operating activities has increased over the years, most notably the increase in merchandise and in accounts payable contribute greatly to the net cash showing a positive increase. With JCPenney the net cash in operating activities declined in 2010 but increase by roughly $300 in 2011 however not as much as in 2009 where the total was $1573. The sudden decrease in cash seems to have been contributed by merchandise accounts payable. When comparing the investing activities, Macy’s has an increasing spending in investing activities over the years as well as JCPenney. Much of the spending has been for property and equipment. From financing activities, Macy’s has been able to decrease the amount they spend on financing over the years while JCPenney spending has significantly increased contributed to less cash on hand. 5. Use the information in notes 17 and 20 of the 2011 fiscal year financial statements of JC Penney for evaluating its risk. There seems to be a high risk with JCPenney looking at the financial statements we can see that there are many financial, operational and industry risks that are associated. There seems to be a decrease in net income in the lat quarter of 2011 that seem to hinder the stability of profitability within the company. There also seems to be challenges in managing properties. There also seems to be fluctuations within the company with stock prices and can be due to a multitudes of issues. Overall JCPenney has a higher risk than Macy’s 6. As a potential investor, what other information you would be useful to you, and where is it available? Potential investors would benefit from additional information such as key financial data and company performance metrics. This information can be found in company filings, external databases, and sources for investment, and other financial providers. By leveraging these resources, investors can thoroughly analyze a company's financial status, industry comparisons, and performance metrics to make informed investment decisions. Guidelines to compute ratios for JC Penney & Macy’s - Return on Equity = Net income/Avg. Total Equity - Profit Margin = Net income/Sales - Gross Margin = (Net sales – Cost of Sales)/Net Sales

- Total Asset Turnover = Net sales/Avg. Total Assets - Accounts Receivable Turnover = Sales/Avg. Accounts Receivable - Inventory Turnover Ratio = Cost of Goods Sold/Avg. Inventory - Debt to Equity Ratio = Total Liabilities/Total Equity - Total Liabilities = Total Assets – Total Equity - Current Ratio = Current Assets/Current Liabilities - Quick Ratio = (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities - Times Interest Earned = Income before Interest and Taxes/Interest Expense Note: JC Penney does not provide a separate amount for Accounts Receivables (it is included in “Cash in banks and in transit). You may just indicate missing data for Accounts Receivable Turnover ratio.