Fitch affirms Macy's long-term Issuer Default Rating at BBB, with stable outlook, reflecting company's strong, growing market share of department-store sector, above-average operating margins, strong free cash flow, stable credit metrics
April 18, 2014
– Fitch Ratings has affirmed the ratings of Macy's, Inc. (Macy's) and Macy's Retail Holdings, Inc. (MRHI), including the long-term Issuer Default Rating (IDR) at 'BBB' and short-term IDR at 'F2'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The ratings reflect Macy's strong and growing market share of the department store sector, above-average operating margins, strong free cash flow (FCF) and stable credit metrics. Fitch expects Macy's will continue to take market share in the near- to intermediate-term, although long-term secular trends in the department store space remain negative and the decline in mall traffic has accelerated.
Leading Position in Middle Market: Macy's is well-positioned in the traditional department store space, which has seen a lot of consolidation over the past decade. The company's comps trends have outperformed the department stores under Fitch's coverage by an average of over 200 basis points (bps) over the past three years (on a sales weighted basis), clearly indicating the company's strong position as a market share gainer. Macy's strong operating momentum has benefited from its 'My Macy's' localization, omnichannel offerings (Fitch estimates internet sales currently account for more than 10% of total sales), and MAGIC selling strategies.
Macy's share of the department store segment has grown to 15.7%, gaining an additional 3.4% of the market after being relatively stable at around 12.3% (using NAICS codes for department store industry sales) over 2006-2009. Fitch expects Macy's will continue to take market share over the next three years on top-line growth of 2%-3% relative to Fitch's industry growth expectation of minus 1% to minus 2%.
Looking at the overall domestic apparel, accessories, and home-related categories, Fitch expects a market consolidator would need to generate top-line growth 2% or above to ward off competition from other channels such as specialty, discount, and online. This could be achieved by relatively flat to modest comps growth at the store level and mid-teens growth from online sales, which would contribute roughly 200 bps to overall comps.
As a result, Fitch expects Macy's will continue to outperform its department store peers and maintain or modestly grow its share of the overall domestic apparel, accessories, and home-related categories in the near- to intermediate-term.
Stable Credit Metrics: Macy's generates above-average operating margins, with EBITDA margin expansion of over 100 bps over the last three years to 13.8% on strong top-line growth. Adjusted debt/EBITDAR was at 2.3x at the end of 2013 and Fitch expects adjusted debt/EBITDAR to remain in the mid-2.0x over the next two-three years, assuming low single-digit growth in comps and EBITDA.
Liquidity remains strong, supported by a cash balance of $2.3 billion as of Feb. 2, 2014. Macy's liquidity position is also supported by its $1.5 billion unsecured credit facility due in May 2018.
Macy's annual FCF has averaged more than $1 billion over the past four years and Fitch expects the company to generate annual FCF in the range of $1 billion to $1.2 billion over the next three years. Capex is expected to be in the range of $1.1 billion in the next two to three years as the company invests more in its store base and continues to fund growth-related initiatives. Macy's currently no longer needs to funds its pension plan due to its fully funded status at the end of 2013.
Fitch expects the company to refinance upcoming debt maturities and manage share buybacks within the context of maintaining its targeted adjusted leverage of 2.4x-2.7x.
A positive rating action could result if Macy's comps outperformance and share gains against the increasing pricing competition and promotional pressure in the middle market continue and it maintains leverage in the low 2.0x range.
A negative rating action could result in case of a return to negative same-store sales trends and/or an aggressive financial strategy leading to leverage metrics increasing to above 3.0x.
Fitch has affirmed Macy's ratings as follows:
Macy's, Inc. (Macy's)
--Long-term IDR at 'BBB'.
Macy's Retail Holdings, Inc. (MRHI)
--Long-term IDR at 'BBB';
--$1.5 billion bank credit facility at 'BBB';
--Senior unsecured notes and debentures at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Monica Aggarwal, CFA, +1-212-908-0282
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Isabel Hu, CFA, +1-212-908-0672
Mike Weaver, +1-312-368-3156
Brian Bertsch, New York, +1-212-908-0549
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