DBRS Confirms Ratings of Macy’s Retail Holdings Inc. at R-2 (middle) and BBB

DBRS has today confirmed the ratings for Macy’s Retail Holdings, Inc., the wholly-owned operating subsidiary of Macy’s, Inc. (Macy’s or the Company) at R-2 (middle) and BBB with a Stable trend. The rating is supported by the Company’s strong retail banners, large national footprint and excellent geographic diversification. The ratings continue to reflect the post acquisition effects of the less profitable former May stores, the challenges in improving performance and relatively high financial leverage.

F2007 marked the first full year of May store contributions within Macy’s consolidated results. Top-line gains and stable gross margins during the year were largely offset by higher SG&A expenses – reflecting in part the impact of the former May stores. Going forward, DBRS expects Macy’s earnings to benefit from: 1) the completion in F2007 of the May stores conversion to the Macy’s banner - performance improvements have been noted in the re-branded stores; 2) Macy’s launch of an exclusive line of Martha Stewart Living products which could be a material contributor to Macy’s results; and 3) realization of benefits from the national “Macy’s” branding/marketing campaign started in F2006. DBRS expects improvement in operating performance beginning in F2009 and beyond will place Macy’s more comfortably within the current rating category.

In terms of financial profile, Macy’s improved cash flow-to-debt to 26% at the end of F2007 (from post acquisition 19%), as it funded share repurchases and debt repayment with receivable sales and planned asset dispositions (including 65 duplicate stores and May’s bridal group businesses). However, the Company has continued with aggressive share repurchases in H1 F2008 and is expected to buyback a total of $4.0 billion in shares for the full year F2008. Incremental debt required to fund these share repurchases in F2008 should cause leverage metrics to return some of the improvement that followed the F2007 debt reduction, but remain acceptable for the rating.

DBRS believes that further (and meaningful) deterioration in financial metrics (cash flow to debt) resulting from weakness in operations or debt financed share repurchases could pressure current ratings.

Note:
This rating is based on public information.