Macy’s Inc. has moved into the debt junkyard — at least according to Standard & Poor’s.
The debt watchdog downgraded Macy’s credit rating to “BB-plus” from “BBB-minus.” While that’s just one step down S&P’s ranking, it takes the retailer into speculative, or junk, territory. (Moody’s Investors Service still rates Macy’s as just above the junk level in investment grade.)
The downgrade will likely make it harder for the company to borrow money, but doesn’t signal any kind of immediate cash crunch. Rather it’s a sign of just how far the Macy’s star has waned in recent years and how much work the company has to do in its turnaround.
“We see considerable execution risks as the company attempts to improve its position in the challenging department store sector,” S&P said. “Profitability under the plan is weaker than our prior expectation. This leads us to view Macy’s competitive position as less favorable.”
Equity investors took S&P’s cue and pushed shares of Macy’s down 3.6 percent to $16.07 on Tuesday. That left the firm with a market capital of under $5 billion — down from over $24 billion in the summer of 2015.
Macy’s is one of the few mainstream department stores left, a survivor of decades of consolidation in the sector that saw it gobble up competitors, most dramatically May Co. in a 2005 megadeal that carried an $11 billion equity value.
Now that buying spree is making it hard for the company, which has been criticized for holding on to too many stores as it sought to protect market share, to react to the rapidly evolving consumer.
“Macy’s faces unique challenges among the large national department stores,” S&P said. “A long history of acquisitions and expansion has saddled it with excess stores as shoppers’ shifting preferences move away from mall-based locations and toward more value oriented offerings.
“While we believe management’s strategic plan is a necessary step toward rightsizing the enterprise, it demonstrates to us that the company’s competitive advantage has diminished more than we expected, and to a point that we no longer believe is consistent with an investment-grade rating,” the rating agency said.
S&P expects Macy’s operating performance will “deteriorate over the next several quarters, with declines in comparable same-store sales.”
The outlook on Macy’s credit rating is stable and S&P said the retailer could still manage its credit metrics by reducing debt with its “still good free cash flow generation, supplemented by asset-sale proceeds.”
The downgrade helps illustrate the high-wire act going on at Macy’s, which is spending up to $490 million — $270 million to $290 million in cash — to reinvent.
Over the next three years, the company plans to shutter about 125 stores, representing $1.4 billion in sales, as it gives its “growth treatment” to another 100 stores to boost their performance. The off-price concept, Macy’s Backstage, will also be expanded while a new store format, Market by Macy’s, is tested.
Along the way, the top line will be under pressure.
Macy’s expects sales from 2019 to 2022 to fall, sinking to a range of $23.2 billion to $23.9 billion from $24.5 billion last year.
A Macy’s spokeswoman said: “While we are disappointed in S&P’s decision to lower our credit rating, we remain committed to executing the Polaris strategy…which will stabilize our profitability and set us up for growth in the long term. Macy’s Inc. has a strong, consistent track record of effectively managing our balance sheet, including paying down approximately $3.5 billion of debt over the past four years — and we plan to continue to use excess free cash flow to further reduce our debt. As we have articulated, a fundamental cornerstone of our capital allocation strategy is a commitment to maintaining balance sheet strength and as such, we continue to target an adjusted debt-to-EBITDA multiple of 2.5- to 2.8-times, which, we believe, is commensurate with an investment-grade credit profile.”