Macy's Debt Rating Cut to Junk by S&P

Macy's shares fall after Standard & Poor's cuts the retailer's debt rating to junk status.
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Macy's (M) - Get Report shares were lower after Standard & Poor's Global Ratings cut the company's debt rating to junk status, saying the iconic retailer "faces unique challenges."

The credit-rating company lowered its long- and short-term issuer credit ratings on Macy's to BB+ and "B" from BBB- and A-3, respectively. S&P pared its rating on the company's senior unsecured debt to BB+ from BBB-. 

S&P assigned the retailer a 3 recovery rating. "A recovery rating of 3 denotes an expectation of meaningful (i.e., 50% to 70%) recovery in the event of default," S&P notes on its website.

"Macy's faces unique challenges among the large national department stores," S&P said. "A long history of acquisitions and expansion has saddled it with excess stores as shoppers' shifting preferences move away from mall-based locations and toward more value- oriented offerings."

Earlier this month, Macy's said it planned to close about 125 of its least productive stores over the next three years as part of its so-called Polaris turnaround strategy. As part of the plan, the company will be headquartered in New York, and the Cincinnati HQ offices will close.

The downgrade, S&P said, "reflects our view that Macy's improvement trajectory is weaker than our prior expectations and execution risks are elevated as the company pursues its Polaris strategic plan against an ongoing difficult industry backdrop."

"While we believe management's strategic plan is a necessary step toward rightsizing the enterprise," S&P said, "it demonstrates to us that the company's competitive advantage has diminished more than we expected, and to a point that we no longer believe is consistent with an investment-grade rating."

S&P said it is now projecting that the retailer's operating performance will deteriorate over the next several quarters, with declines in comparable same-store sales.

"However, we recognize the company's ability to manage credit metrics by reducing debt with still-good free-cash-flow generation, supplemented by asset-sale proceeds," S&P said.

Beginning in 2020, Macy's said, it expects the Polaris strategy to generate about $1.5 billion in annual gross savings, which will be fully realized by year-end 2022.

At last check Macy's shares were trading off almost 4% at $16.02.