DBRS Downgrades Macy’s Retail Holdings, Inc. to BB (high)/R-3, Trend Revised to Stable

DBRS has today downgraded the Senior Unsecured Debt and Commercial Paper ratings of Macy's Retail Holdings, Inc. (Macy's or the Company) to BB (high) and R-3 from BBB (low) and R-2 (low). The trends have been revised to Stable from Negative. The downgrades reflect DBRS’s view that Macy’s credit metrics will not recover to a level commensurate with a BBB (low) rating over the near term.

In the lead-up to this action, DBRS notes that on October 16, 2008, following a downward revision to the Company’s full-year 2008 (fiscal year ending January 2009) earnings guidance, DBRS downgraded Macy’s ratings to BBB (low) and R-2 (low) from BBB and R-2 (middle). The downgrade was based on the expectation of credit metrics weakening to a level commensurate with a BBB (low) rating during the weak portion of a normal economic cycle (i.e., lease-adjusted debt-to-EBITDAR of approximately 4.0x (versus 3.1x for F2008) and lease-adjusted cash flow-to-debt of approximately 16% (versus 21% for F2008)). At that time, DBRS also stated that the ratings could be subject to a further downgrade following the holiday season, if the Company’s performance, combined with the 2009 U.S. retail sector outlook, indicated that a recovery in performance was not likely within the next 12 months.

As a result of an extremely weak 2008 holiday period and the expectation of difficult retail conditions persisting through 2009, on February 2, 2009, Macy’s announced various restructuring/cost saving initiatives, debt reduction plans and provided full-year 2009 (F2010) earnings guidance which indicated a considerable decline in profitability. The Company expects 2009 same store sales to be down 6% to 8% and full-year net earnings of between $170 million to $230 million, compared to 2008 (F2009) expected earnings of approximately $500 million (the Company reports actual F2009 earnings on February 24, 2009).

Based on this significantly lower guidance, DBRS forecasts lease-adjusted debt-to-EBITDAR will be approximately 4.6x at year-end 2009 and lease-adjusted cash flow-to-debt will be approximately 15% (based on the lower-end of guidance). DBRS notes that this estimate factors in planned early debt retirement of $950 million, which will be funded via cash on-hand (expected to be $1.3 billion at year end January 31, 2009). Excluding the early debt retirement, these metrics would deteriorate to roughly 5.0x and 13% respectively. Credit metrics under either of these scenarios are no longer commensurate with an investment grade rating from DBRS.

DBRS notes that the Company is taking initiatives such as reducing its 2009 capex budget ($450 million compared to $1.1 billion in 2008), employee headcount and dividends (62% reduction) in order to preserve cash flow, which may allow Macy’s the flexibility to reduce debt beyond current guidance in 2009. However, given the weak economic outlook and material reduction in projected earnings, DBRS deems it highly unlikely that the Company will be able to improve credit metrics significantly within the next fiscal year.

While DBRS expects Macy’s overall liquidity to remain adequate, the Commercial Paper ratings have been downgraded to reflect the Company’s lower long-term debt rating – per DBRS policy. DBRS forecasts Macy’s will continue to generate positive free cash flow, due in part to the aforementioned reductions in capex and dividends. In addition, the Company continues to maintain access to its $2 billion credit line, which remains unused at this time.

Despite the U.S. recession and poor outlook for U.S. apparel retailers in the near term, DBRS has revised the trends to Stable from Negative. The Stable trend reflects DBRS’s view that the Company’s latest initiatives (7,000 headcount reduction, national roll-out of the My Macy’s program and further revision of the Company’s organizational structure), combined with the Company’s strong brands, large scale, adequate liquidity and excellent geographic diversification will allow the Company to hold the BB (high) rating through a difficult 2009 and better position it for a recovery in 2010 as market conditions improve. Should the operating environment worsen further than expected, DBRS notes that the Company could continue to preserve cash flow by further reducing capex and dividends and/or rationalize stores.

Notes:
All figures are in U.S. dollars unless otherwise noted.
These ratings are based on public information.

The applicable methodology is Rating Merchandisers, which can be found on the DBRS website under Methodologies.

This is a Corporate rating.