Macy’s debt upgrade on performance boost
S&P Global Ratings has upgraded the issuer credit rating of Macy’s Inc. as the department store chain reported strong operating results and deleveraging despite a challenging U.S. retail environment.
Macy’s raised its issue-level rating 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, along with good inventory management through fiscal 2022 and prudent capital allocation priorities.
S&P said in its analysis, “Macy’s has made meaningful progress toward improving liquidity and operating performance while maintaining credit metrics well below our 3x upside leverage threshold, even in this volatile year for apparel and department store companies.The company today released its third quarter ended October 29, 2022, reaffirming its sales guidance and increasing its earnings forecast for 2022. We expect a festive season moderate but profitable, with the inclusion of Toys R Us and own merchandise positions.
“Although the performance of the pandemic in 2020 was weak, it also brought more activity to the company’s e-commerce platform, perhaps in the long term, as did the operational improvement strategy Company Polaris. We expect adjusted lease leverage to remain below 2x for the fiscal year ending January 2023 (fiscal year 2022) and low leverage of 1x based on reported debt for 2022, given that more 60% of the debt is leases.
“We expect flat sales but gross margin compression of 150 basis points (bps) in fiscal year 2022. We expect approximately 300 bps of reported EBITDA margin compression for full year 2022 , but note that the past year has been exceptionally strong for the company, and that brings the company back to more normalized pre-pandemic levels.
“We expect fourth quarter 2022 EBITDA to decline 35% from the prior year period. We believe it would take a much steeper decline in the next quarter to achieve leverage 3x adjusted for S&P Global Ratings leases in FY2022 This would be a material miss which we view as unlikely We expect a milder holiday amid recessionary pressures with some downsides, but don’t think this will be an unseen season compared to last year.We also note that while third quarter adjusted EBITDA by company is down to $439 million from $765 million a year ago, that number was $159 million in Q3 2020.
“We believe management is committed to staying well below S&P Global Ratings’ adjusted lease leverage of 3x in fiscal year 2023 and beyond, with a leverage target of 2x or less on its adjusted basis. Macy’s has made significant progress in deleveraging its balance sheet in recent years. We believe it will repay more of its notes if debt to EBITDA exceeds 2x in 2023. We expect that the company will have at least $700 million to $800 million of cash on the balance sheet this year and next.
“We note that Macy’s completed approximately $600 million in share buybacks in the first quarter of 2022. It has $1.4 billion authorized for the year and today said its outlook does not take into account the impact of any potential future stock repurchases associated with its current stock repurchase authorization.
“The company’s capital structure is now predominantly unsecured and we understand management’s priorities in order are liquidity, deleveraging, organic and Polaris growth, mergers and acquisitions (M&A), dividends, then share buybacks We note that the company has proactively managed its debt maturity profile with no major maturities over 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 for this third quarter of 2022, on a twelve-month basis, was relatively stable until 2021, while many competitors’ inventories increased by double digits this year compared to previous ones. We believe the company is planning inventory very conservatively for the first two quarters of 2023. Due to this strong operational efficiency, we have revised our management and governance score down one notch to fair.
“The stable outlook reflects our view that Macy’s will be able to navigate successfully through a potentially challenging 2023 fiscal year, capitalizing on its strong commodity and capital allocation strategies and maintaining S&P lease-adjusted leverage. between 2x and 3x over the coming year.”