Fitch Affirms Macy's, Inc.'s IDR at 'BBB-'; Outlook to Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its long-term Issuer Default Rating (IDR) for Macy's, Inc. (Macy's) at 'BBB-' and has affirmed the following ratings on Macy's Retail Holdings, Inc. (MRHI):

--Long-term IDR at 'BBB-';

--$2 billion bank credit facility at 'BBB-';

--Senior unsecured notes and debentures at 'BBB-';

--Short term IDR at 'F3';

--Commercial Paper at 'F3'.

The Rating Outlook has been revised to Stable from

Negative.

The Outlook revision to Stable reflects better than expected same-store sales trends and the resulting improvement in EBITDA and credit metrics. In addition, the ratings reflect Macy's strong and stable market share in the department store sector, above-average operating margins, and the company's ability to generate strong free cash flow in the face of a challenging operating environment.

Fitch expects adjusted debt/EBITDAR to improve to 3.1 times (x)-3.2x in 2010 from 3.7x in 2009 and 4.0x in 2008, bringing leverage to pre-recession levels. This assumes 9%-10% growth in EBITDA on comparable-store sales growth of just over 3% as well as debt reduction of $740 million, including $500 million of 2011/2012 debt that the company paid down in February 2010. For 2011 and 2012, leverage is expected to improve modestly to just below 3.0x assuming flat EBITDA on low single-digit comparable-store sales growth. Fitch assumes Macy's will pay down 2011 debt maturities of $600 million and while the company would have the ability to pay down 2012 debt maturities of $1.2 billion, Fitch has conservatively assumed that this would be refinanced in its projections. Should Macy's choose to pay down 2012 maturities as well, leverage would be 2.5x in 2012, under Fitch's projections. Risks to achieving these credit metrics primarily stem from a material shortfall in sales and/or earnings.

Fitch expects Macy's to be a share consolidator over the intermediate term and this is a key consideration to its ratings as it will continue to facilitate the company's ability to improve its credit metrics. Macy's is particularly well-positioned in the mid-tier department store space which has seen a lot of consolidation over the last decade. Macy's market share has been relatively stable at around 12.2% (using NAICS codes for industry sales) over the last four years. However, Fitch expects Macy's to take market share over the next three to five years on top line growth of 2%-3% relative to Fitch's industry growth expectation of 0%-1%.

Macy's same-store sales trends turned positive in December 2009 along with other major department stores. However, of more importance is that Macy's same-store sales trends for the first half of 2010 of positive 5% (based on the run rate through June) are well ahead of Fitch's expectation of 3.5% for department stores under Fitch's coverage (on a sales weighted basis). Macy's comparable store sales trends provide early signs that initiatives introduced under its 'My Macy's' localized structure in 2008/2009 are beginning to take hold and are resulting in positive comparable-store sales trends at core retail Macy's stores. In addition, the company is benefiting from above company average sales growth at Bloomingdales and its Internet businesses.

Macy's liquidity remains strong, supported by a cash balance of close to $1 billion as of May 1, 2010 and no borrowings under its $2 billion bank credit facility expiring on Aug. 30, 2012. Fitch does not anticipate that Macy's will draw on the facility for seasonal working capital needs this year. Macy's generated free cash flow of $1.2 billion in 2009 and Fitch expects Macy's to generate annual free cash flow in the range of $700 million to $800 million over the next three years, post capital expenditures, dividends and cash pension contributions.

Free cash flow assumptions include capital expenditures of $550 million in 2010 growing to $800 million as the company invests more in its existing store base and introduces some growth related spending. In terms of pension contributions, Macy's defined benefit pension plans were underfunded by $1 billion with a funded status of 65% at the end of 2009. Macy's made a cash contribution of $325 million in February 2010 to its pension plans on top of the $370 million in 2009. Fitch estimates Macy's will have to make similar annual contributions to its pension plans over the next few years. Besides expectation for debt reduction noted above, Fitch expects that excess cash flow could be used to resume share buybacks as early as next year.

These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include:

--'Fitch Ratings' Process for Reviewing Existing, Updated and New Criteria, Models, and Securities' dated Dec. 16 2009;

--'Corporate Rating Methodology' dated Nov. 24, 2009;

--'Operating Leases: Updated Implications for Lessees' Credit' dated Aug. 13, 2009;

--'Evaluating Corporate Governance' dated Dec. 12, 2007;

--'Liquidity Considerations for Corporate Issuers' dated June 12, 2007;

--'Short-Term Ratings Criteria for Corporate Finance' dated June 12, 2007.

Additional information is available at www.fitchratings.com.

Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489018

Operating Leases: Updated Implications for Lessees' Credit

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462222

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=363502

Liquidity Considerations for Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

Short-Term Ratings Criteria for Corporate Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328670

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.