Macy's Lowers Forecast, Moody's Cuts Rating

James Mammarella, October 20, 2008

On Oct. 10, Macy's Inc. lowered its earnings forecast, prompting Moody's Investors Service, five days later, to lower its outlook on Macy's to "negative" from "stable."

Macy's cited depressed sales as it lowered its earnings forecast for the year to $1.30 to $1.50 per diluted share. It had previously expected earnings for share for the year of $1.70 to $1.85.

As sales trends weakened at the 850-store department store chain, August and September comps combined fell 5.8%. Year-to-date, comps have slipped 3.2%.

"If weaker trends continue, same-store sales in the fall season could be down 3% to 6%," the company said in a statement. Macy's had originally projected fall season comps down 1%.

Macy's said its year-to-date cash flow is stronger than anticipated despite the slowing sales. The $26.3 billion retailer said it had approximately $740 million in cash and cash equivalents at the end of September. It currently has no borrowings under its $2 billion bank credit agreement led by Bank of America and J.P. Morgan, which is committed through August 2012, according to the statement.

To reduce the need for cash, Macy's earlier suspended its share repurchase program and reduced capital spending. The company said it has been keeping tight control on inventories and expenses.

Credit rater Moody's explained its lowered outlook, and also affirmed its other ratings on Macy's including its senior unsecured rating of Baa3.

"The negative outlook reflects Moody's concerns regarding the expected deterioration of the company's credit metrics following the company's announcement that it had reduced its earning guidance for this fiscal year ending Jan.31, 2009 to a range of $1.30 to $1.50 from $1.70 to $1.85 per diluted share," the service said.

"This degree of earnings decline — if it occurs — could result in debt protection measures that are too weak for the current Baa3 rating," Moody's continued.

"Should operating performance decline by more than the company expects, then — barring other changes in the company's capital structure or cash flow expectations — debt protection measures could weaken further and be more appropriate for a lower, non-investment grade rating," Moody's warned.

Non-investment grade is typically referred to as "junk" status.

The Macy's Inc. instrument ratings as affirmed by Moody's:

  • Macy's, Inc. Senior Unsecured Shelf = (P) Baa3

  • May Department Stores Company Senior Unsecured = Baa3

  • Macy's Retail Holdings, Inc. Senior Unsecured = Baa3

  • Macy's Retail Holdings, Inc. Subordinate Shelf = (P) Ba1

  • Macy's Retail Holdings, Inc. Commercial Paper = Prime-3

"The last rating action on this company," Moody's noted, "was a downgrade of Macy's senior unsecured rating to Baa3 from Baa2 and a downgrade of its commercial paper rating to P-3 from P-2 on May 15, 2008."

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