S&P Global Ratings raised its issuer credit rating on Macy’s Inc. as the department store chain has delivered solid operating results and deleverage despite a challenging U.S. retail environment.
Macy’s raised its issue-level ratings on Macy’s Retail Holdings LLC senior unsecured notes to ‘BB+’ from ‘BB’. The company’s commercial paper rating remains ‘B’.
The stable outlook reflects faster-than-expected debt reduction, as well as good inventory management through fiscal 2022 and conservative capital allocation priorities.
S&P said in its analysis, “Macy’s has made material progress toward improving liquidity and operating performance while maintaining credit metrics well below our upside leverage threshold of 3x, even in this volatile year for apparel and department store companies. The company posted its third quarter ended October 29 2022 today, reaffirming sales guidance and raising earnings guidance for 2022. We are expecting a muted but profitable holiday season, with the inclusion of Toys R Us and clean merchandise positions.
“While pandemic performance in 2020 was weak, it also brought more business to the company’s e-commerce platform, possibly for the long run, as has the company’s Polaris operational enhancement strategy. We expect lease-adjusted leverage to remain below 2x for the fiscal year ending January 2023 (fiscal 2022) and low-1x leverage on a reported debt basis for 2022, given more than 60 percent of the debt is leasing.
“We forecast flat sales but 150 basis points (bps) of gross margin compression in fiscal 2022. We expect about 300 bps of reported EBITDA margin compression for full-year 2022, but note last year was unusually strong for the company, and this brings the company back to more normalized pre-pandemic levels.
“We expect fourth-quarter 2022 EBITDA to decline 35 percent from the year-ago period. We believe it would take a much steeper decline next quarter to get to S&P Global Ratings’ lease-adjusted 3x leverage in fiscal 2022. This would be a significant miss that we see as unlikely. We expect a softer holiday amid recessionary pressures with some downside, but do not believe it will be an invisible season compared to last year. We also note that while third-quarter adjusted EBITDA by company calculations is down to $439 million from $765 million a year ago, that number was $159 million in the third-quarter 2020.
“We believe management is committed to staying well below S&P Global Ratings’ lease-adjusted leverage of 3x in fiscal 2023 and beyond, with a public leverage target of 2x or below on its adjusted basis. Macy’s has made significant progress in deleveraging its balance sheet in recent years. We believe it will pay down more of its notes should debt to EBITDA rise above 2x in 2023. We expect the company to have at least $700 million-$800 million in balance sheet cash this year and next.
“We note Macy’s completed about $600 million of share buybacks in the first quarter of 2022. It has $1.4 billion authorized for the year and said today its outlook does not consider the impact of any potential future share repurchases associated with its current share repurchase authorization.
“The company’s capital structure is now mainly unsecured and it is our understanding that management’s priorities in order are liquidity, deleveraging, organic growth and Polaris, mergers and acquisitions (M&A), dividends, and then share buybacks. We note the company has proactively managed its debt maturity profile with nothing material due in the next 5 years.
“We also expect Macy’s to continue to outperform many peer retailers this year, with a disciplined approach to inventory management. Inventory turnover this third quarter 2022, on a trailing twelve-month basis, was relatively flat to 2021, while many competitors’ inventory is up double-digit percent this year compared with prior ones. We believe the company is planning inventory very conservatively for the first two quarters of 2023. As a result of this strong operational effectiveness, we revised our management and governance score up one notch to satisfactory from fair.
“The stable outlook reflects our view that Macy’s will be able to navigate a potentially challenging fiscal 2023 successfully, capitalizing on its strong merchandise and capital allocation strategies and maintaining S&P lease-adjusted leverage between 2x to 3x over the coming year.”
Photo courtesy Macy’s