Fitch Rates Macy's Proposed 10-Year Notes 'BBB'

Business Wire

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a rating of 'BBB' to Macy's Retail Holdings, Inc.'s proposed issue of $400 million 10-year senior unsecured notes. The new notes are expected to be used for general corporate purposes, which may include working capital, capital expenditures, retirement of indebtedness and repurchasing outstanding common stock of Macy's, Inc. (Macy's). As of Aug. 3, 2013, Macy's had $6.9 billion of debt outstanding, including capital leases. A full list of ratings appears at the end of this release.

KEY RATING DRIVERS

Macy's ratings reflect the company's strong and growing market share of the department store sector, above-average operating margins, and the company's ability to generate strong free cash flow (FCF). While Macy's first-half sales performance was weaker than expected, Fitch expects the company's EBITDA (adjusted for stock-based compensation) will remain above $3.8 billion and FCF to be around the $1 billion level in 2013.

Fitch expects Macy's will continue to take market share over the next three years on top-line growth of 2%-3% relative to Fitch's industry growth expectation of flat to minus 1%. Fitch expects Macy's to maintain leverage in the mid-2.0x range in the next two years, assuming low single-digit growth in comps and EBITDA.

Fitch expects Macy's annual FCF to remain at the $1 billion level over the next three years, which along with incremental debt is expected to be directed toward share repurchases. Capital expenditures are expected to be in the range of $925 million to $1 billion as the company invests more in its store base and continues to fund growth-related initiatives. Macy's currently has modest funding needs for its pension plan due to its 95% funded status.

Macy's liquidity remains strong, supported by a cash balance of $1.4 billion as of Aug. 3, 2013 and a $1.5 billion credit facility. 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. Debt maturities over the next 12 months include $453 million due July 2014.

RATING SENSITIVITIES

A positive rating action could result if Macy's continues its comps outperformance, and share gains against increasing pricing competition and promotional pressure in the middle market and maintains leverage in the low 2.0x range.

A negative rating action could result in the 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 rates Macy's as follows:

Macy's, Inc.

--Long-term Issuer Default Rating (IDR) 'BBB'.

Macy's Retail Holdings, Inc.

--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 at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 08, 2012);

--'Evaluating Corporate Governance' (Dec. 12, 2012);

Applicable Criteria and Related Research:

Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649

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Contact:
Fitch Ratings
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Monica Aggarwal, CFA, +1 212-908-0282
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
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Associate Director
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Committee Chairperson
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Senior Director
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