S&P cuts Macy’s credit rating to one notch above junk

Macy’s can’t catch a break.

The Cincinnati-based department store’s credit rating was downgraded by S&P Global to ‘BBB-’ from ‘BBB’ — leaving it one notch above junk status — with a negative outlook.

The ratings agency said the downgrade followed disappointing fourth quarter results and the department store’s “weakened” competitive standing given industry challenges with low traffic and competition from online, fast fashion and off-price retailers. On Tuesday, Macy’s posted better-than-expected earnings but said sales had slipped more than feared.

While the company has unveiled plans to lay off as many as 10,000 employees, begun shuttering stores and extracted $675m in cash proceeds from its real estate transactions — that it is reinvesting in its business — in an effort to lower costs and streamline operations, S&P warns that the company will need to further reduce its debt next year.

Helena Song, credit analyst, said:

The downgrade reflects our view of the company’s sustained weakened operating performance and our expectation that adjusted debt to EBITDA will remain about 3x in the next 12 months, despite the company’s plan for debt reduction. Accordingly, we think there could be a need for further debt reduction in 2018 for leverage to drop below 3x.

She added:

We believe meaningful industry secular and cyclical headwinds have more than offset the company’s various operating initiatives and hurt the company’s competitive standing on a
sustained basis and that these challenges will continue through 2017 and 2018.”

The negative rating outlook indicates a one-in-three chance that S&P could lower ratings in the next 12 to 24 months. Rival ratings agencies Fitch and Moody’s have Macy’s listed two notches above junk.