Macy's Downgraded To 'BB' As Economic Uncertainty Weakens Credit Metrics; Outlook Negative

  • The spread of the coronavirus has led to mass store closures and a downshift in consumer spending for discretionary merchandise.
  • These headwinds complicate mall-based department store operator Macy's Inc.'s turnaround plan and pressure operating performance, potentially resulting in the need to amend its maximum leverage covenant.
  • As a result, we are lowering all of our ratings on Macy's, including the issuer credit rating to 'BB' from 'BB+'.
  • The negative outlook reflects the risk that operating conditions could weaken more than we anticipate, leading to elevated leverage and tighter liquidity.
NEW YORK (S&P Global Ratings) March 25, 2020--S&P Global Ratings today took the rating actions listed above.
The downgrade reflects our expectation that Macy's will significantly underperform our previous base-case forecast.  In response to government mandates in the U.S. for all nonessential business to close, Macy's has temporarily closed its stores for two weeks and we expect closures to extend for a meaningful portion of the fleet. As a result, we now expect Macy's revenues and profits to decline significantly in the first two quarters of fiscal 2020 and for a gradual recovery in the back half of the year. Macy's online business, which represents about 25% of sales, remains operational and could offset some of the major sales deterioration at brick-and-mortar locations. We assume a modest pick-up in overall operating results by year end although this will be against the backdrop of an economic recession and intensified competitive pressures. We forecast leverage will remain elevated in fiscal 2020 but decline to the under 4x the following year. As a result, we are revising our financial risk profile score to significant from intermediate.
The negative outlook reflects the heightened uncertainty regarding the impact of the coronavirus pandemic and impending recession that could impair Macy's ability to reduce leverage to under 4x in 2021 from a spike in 2020. It also reflects our concerns the company may exceed its maximum leverage covenant following weaker near-term profit expectation and higher debt.
We could lower the ratings if we no longer believed Macy's could sustain adequate liquidity because of larger profit declines and cash shortfall, difficulties securing a waiver or amendment to its credit agreement under adequate terms, or an inability to refinance upcoming debt maturities. Additionally, we could lower the ratings if sales and profit remain depressed from a prolonged macroeconomic slump or weakened competitive position such that leverage remains more than 4x in 2021.
We could revise the outlook to stable if Macy's is able to address our liquidity concerns and we see a clear path to sustainable sales and profit growth (off a lower base), with leverage improving to under 4x in fiscal 2021. Under this scenario, we would expect profit growth, rather than debt reduction, to contribute to better leverage. An outlook revision would also require us to believe that the company is able to sustain its market position in the department store sector by growing sales without sacrificing profit margins.
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