DBRS Confirms Macy’s Retail Holdings, Inc. at BBB, Revises Trend to Negative

DBRS has today confirmed the ratings of Macy’s Retail Holdings, Inc. (Macy’s or the Company) at BBB and R-2 (middle) and revised the rating trends to Negative from Stable. The trend change reflects DBRS’s concern that Macy’s operating performance relative to its peers continues to weaken, resulting in increasing pressure on credit metrics that were already weak for the current rating category.

DBRS expected Macy’s to deliver relatively stable earnings and cash flow for the fiscal year ended February 2, 2008, and display improvement in fiscal 2009, in order to become more comfortably positioned in the BBB rating category. Although Macy’s same-store sales declined in-line with peers (-1.3% for the year), operating margins deteriorated more than its peers (-0.5%) leading to a substantial decline in earnings and cash flow for 2008 that was well below DBRS’s expectations. DBRS notes, that while most U.S. retailers have seen softer same-store sales due to the tougher-than-expected U.S. retail environment, margins and earnings have not been impacted to the same degree. DBRS attributes Macy’s relatively weaker operating performance to several operational/structural challenges, including the integration of its acquired May stores (i.e., re-branding, merchandising and marketing), management of excess mall-based retail space which is experiencing lower customer traffic, management restructuring and localization initiatives and inferior performance in certain private brand product lines.

Given the operational issues facing Macy’s, the earnings set-back in fiscal 2008 and DBRS’s expectation that the U.S. retail sector will continue to remain soft throughout fiscal 2009, DBRS is increasingly concerned that Macy’s will not be able to display a level of recovery/improvement in operating income that would be adequate to stabilize the earnings profile over the near term. The ratings have also become more sensitive to weakness in the earnings profile due to the recent increase in Macy’s debt level. Debt increased by $1.2 billion in fiscal 2008 (to $9.1 billion), in order to finance share repurchases of $3.0 billion during the year. The Company has stated that it will slightly reduce its capital expenditures in fiscal 2009 and curtail share repurchases until the operating environment stabilizes.

DBRS believes if Macy’s is successful in improving its operating performance relative to its peers and begins to return credit metrics towards pre-May acquisition levels over the course of fiscal 2009, the rating trend could stabilize. Further deterioration in credit metrics as a result of continued weakness in sales/earnings relative to peers and/or share repurchase activity could result in a ratings downgrade

Notes:
All figures are in U.S. dollars unless otherwise noted.
These ratings are based on public information.