Credit rating service Standard & Poor's lowered its long-term credit rating on May Department Stores ( MAY) Tuesday, saying the company's debt-financed, $3.2 billion acquisition of 62 Marshall Field's and several Mervyn's stores from Target ( TGT) impairs its credit quality.

S&P lowered May's long-term corporate credit rating to BBB from BBB+ but affirmed its A-2 short-term rating. The ratings were removed from S&P's credit watch, where they were placed on June 10 with "negative implications." Overall, the outlook for May is stable, S&P said.

Tuesday's news follows a similar reduction on Monday from Moody's Investor Service on Monday. Shares of May were lately up 14 cents, or 0.5%, at $26.14.

May said last month that it would buy the Marshall Field's chain, nine Mervyn's stores, three distribution centers and $600 million in credit card receivables from Target. At that time, Target announced a plan to buy back up to $3 billion of stock over the next three years.

S&P said it expects May's leverage to increase substantially on a pro forma basis, even if some of the added debt is from Marshall Field's accounts receivable. It also noted that the acquisition benefits May's overall market-share expansion, most notably in Chicago, Detroit and Minneapolis.

May will likely benefit from certain cost savings, S&P said, but it might need to make considerable investments to help beef up Marshall Field's lagging sales. Sales at Marshall Field's dropped 4% in 2003 to $2.5 billion, while pretax segment profit declined 21% to $107 million, according to Target's financial statements. S&P is concerned that sales improvement at Marshall Field's is potentially problematic.

In addition, the credit rating company cited May's below-average sales and earnings performance overall relative to some of its peers in the past three years. In its latest first quarter, May posted a slight rise in profit to 24 cents a share, from 23 cents a share a year earlier. Net sales rose 3.1% to $2.96 billion.

In comparison, Federated Department Stores ( FD), which had also bid on the Marshall Field's chain, posted first-quarter earnings that more than doubled to 52 cents a share, from 24 cents a share in the prior-year period, on a sales increase of 6.9% to $3.52 billion. Federated operates the Macy's and Bloomingdale's department stores.

St. Louis-based May has also been in the process of changing its floor plans and store appearance to maintain fashion newness.

Overall, S&P called May a "power in department store retailing" with roughly 500 geographically diverse department stores, including the new acquisitions. It cited company's aggressive expansion into the formalwear and bridal business via acquisitions and the prominence of May's other nameplates, which include Lord & Taylor, Filene's and David's Bridal.

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