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Moody's: May Outlook Now Negative

Moody's Investor Service is holding steady its ratings on May Department Stores debt — however, citing weakening same-stores sales and a sluggish holiday performance, has lowered the retailer's outlook to “negative” from “stable.”

One of the Big Three corporate credit rating agencies, Moody's affirmed its current rating of $6.8 billion in May debt at Baa2, citing the retailer's geographic diversity, historically strong margins and track record of cost containment.

But, said Moody's, credit metrics aren't likely to improve over the next 12 to 18 months to their level before May leveraged up to finance its $3.2 billion buyout of Marshall Field's. And that concern stems directly from weakening same-store sales, said Moody's.

“May's comparable store sales continue to be negative — down 3.8 percent, excluding divested stores, in the important December holiday period — at a time when most of its direct department store competitors have achieved positive comparable store sales,” stated Moody's.

Indeed, said Moody's, “May might well be more challenged than its peers in offering the compelling merchandise and/or shopping experiences necessary to differentiate itself from discounters and from specialty apparel and home goods retailers.”

Moody's added, “May's comparable store sales turned negative in July, and remained so during the important holiday season,” slipping 7.7 percent in November and 3.3 percent in December, excluding discontinued Lord & Taylor stores. Moreover, said Moody's, the sluggish revenue performance comes at a time when the retailer's debt is at a historical high of about $6.8 billion, following the Marshall Field's acquisition.

Moody's said the same-store sales shortfall is mostly due to weakness at core May stores, not the Marshall Field's group, “especially in less fashion oriented items and in home furnishings. May's initiatives — edited assortments, gift offerings during the holidays, more private label offerings, and price checkers in the stores — have clearly not gained traction with shoppers.”

Given the outlook, a “rating upgrade is very unlikely in the intermediate term,” said Moody's. Moreover, Moody's cautioned, “Ratings could be lowered if deterioration in May's competitive position causes erosion in market share and continued negative comparable same-store sales.”

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