Fitch Ratings said Macy’s Inc. is wrapping up a tough year but is prepared to bounce back.
The debt watchdog rated Macy’s $500 million in new debt “BBB-plus” — an investment grade score that’s in line with the retailer’s long-term issuer default rating. Macy’s is going to use the proceeds to refinance $636 million coming due next year.
“This year has been challenging for the whole sector given weaker than expected demand for apparel and a slowdown in tourism due to the strong dollar that has hurt Macy’s in its key markets,” Fitch said. “Operating [earnings before interest, taxes, depreciation and amortization] is expected to decline 13 percent in 2015 to $3.5 billion on a comparable-store sales decline of 2 percent, including licensed departments.”
Still, Fitch said Macy’s could hold its own despite some store closures.
“While comps have declined year-to-date and are expected to decline 3 percent in the fourth quarter, Fitch expects Macy’s to hold its solid position over the medium term given localization initiatives, omnichannel offerings — we estimate Internet sales currently account for 12 percent of total sales — and strong customer service.”
Fitch said Macy’s would need to return its comp growth to 2 to 3 percent to keep its share in the apparel, accessories and home categories. The debt agency pegs Macy’s for comp growth of 2 percent next year.
That’s a trick made all the harder by the situation at the mall.
“Macy’s is a predominantly mall-based retailer and Fitch remains concerned about mall traffic declining over the next few years, which may accelerate with significant operating weakness at some of its co-anchors,” the rating agency said.
Fitch also noted that the company’s “revenue growth is being dampened somewhat by the company’s proactive closing of underperforming units, although Fitch views the store closings as necessary given the secular headwinds.”
Macy’s has the financial capacity to build its omnichannel offerings and its new off-price format, Backstage.
The company’s annual free cash flow is expected to fall to $500 million this year, according to Fitch, down from $1 billion to $1.3 billion over the last four years.
“Should top-line trends return to positive in the low single-digit range, Fitch expects Macy’s can sustain annual free cash flow at around $1 billion despite modestly higher [capital expenditures] levels,” the rating agency said.