NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'BBB' to Macy's Retail Holdings' $550 million issue of 20-year senior unsecured notes. The proceeds from the issue will be used to refinance 2015 debt maturities ($69 million of 7.5% notes due June 1, 2015 and $407 million of 7.875% notes due July 15, 2015) and for general corporate purposes. The Rating Outlook is Stable. A full list of ratings is shown below.
KEY RATING DRIVERS
The ratings reflect Macy's, Inc.'s (Macy's) strong and growing market share of the department store sector, above-average operating margins, strong free cash flow (FCF) and stable credit metrics. Fitch expects Macy's will continue to take market share in the near to intermediate term, although long-term secular trends in the department store space remain negative and the decline in mall traffic has accelerated.
Leading Position in Middle Market: Macy's is well-positioned in the traditional department store space, which has seen a lot of consolidation over the past decade. The company's comps trends have outperformed the department stores under Fitch's coverage by an average of over 200 basis points (bps) over the past three years (on a sales weighted basis), clearly indicating the company's strong position as a market share gainer. Macy's strong operating momentum has benefited from its 'My Macy's' localization, omnichannel offerings (Fitch estimates internet sales currently account for more than 10% of total sales), and MAGIC selling strategies.
Macy's share of the department store segment has grown to 16%, gaining almost four percentage points over the past five years (using NAICS codes for department store industry sales). Fitch expects Macy's will continue to take market share over the next three years on top-line growth of 1% projected for 2014 and 2% in 2015/2016 relative to Fitch's industry growth expectation of minus 2% to minus 3%.
Stable Credit Metrics: Macy's generates above-average operating margins, with EBITDA margin expansion of over 150 bps over the last four years to 13.8% on strong top-line growth. Adjusted debt/EBITDAR was at 2.3x at the end of 2013 and Fitch expects adjusted debt/EBITDAR to remain in the mid-2.0x over the next two-three years, assuming low single-digit growth in comps and EBITDA.
Liquidity remains strong, supported by a cash balance of $1 billion as of Nov. 1, 2014. Macy's liquidity position is also supported by its $1.5 billion unsecured credit facility due in May 2018.
Macy's annual FCF has averaged more than $1 billion over the past four years, and Fitch expects the company to generate annual FCF in the range of $1 billion to $1.2 billion annually over the next three years. Capex is expected to be in the range of $1.1 billion in the next two to three years as the company invests more in its store base and continues to fund growth-related initiatives. Macy's currently no longer expects to fund its pension plan due to its being frozen as well as its fully funded status at the end of 2013.
Fitch expects the company to refinance upcoming debt maturities and manage share buybacks within the context of maintaining its targeted adjusted leverage of 2.4x-2.7x.
RATING SENSITIVITIES
A positive rating action could result if Macy's comps outperformance and share gains against the increasing pricing competition and promotional pressure in the middle market continue and it maintains leverage in the low 2.0x range.
A negative rating action could result in case of a return to negative same-store sales trends and/or an aggressive financial strategy leading to leverage metrics increasing to above 3.0x.
Fitch currently rates Macy's as follows:
Macy's, Inc. (Macy's)
--Long-term Issuer Default Rating (IDR) 'BBB'.
Macy's Retail Holdings, Inc. (MRHI)
--Long-term IDR 'BBB';
--$1.5 billion bank credit facility 'BBB';
--Senior unsecured notes and debentures 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
The Rating Outlook is Stable.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=922255
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