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Fitch affirms Macy's long-term IDR at 'BBB'
21
Apr '14
Fitch Ratings has affirmed the ratings of Macy's, Inc. (Macy's) and Macy's Retail Holdings, Inc. (MRHI), including the long-term Issuer Default Rating (IDR) at 'BBB' and short-term IDR at 'F2'. The Rating Outlook is Stable.
 
KEY RATING DRIVERS
The ratings reflect Macy's strong and growing market share of the department store sector, above-average operating margins, strong free cash flow (FCF) and stable credit metrics. Fitch expects Macy's will continue to take market share in the near- to intermediate-term, although long-term secular trends in the department store space remain negative and the decline in mall traffic has accelerated.
 
Leading Position in Middle Market: Macy's is well-positioned in the traditional department store space, which has seen a lot of consolidation over the past decade. The company's comps trends have outperformed the department stores under Fitch's coverage by an average of over 200 basis points (bps) over the past three years (on a sales weighted basis), clearly indicating the company's strong position as a market share gainer. Macy's strong operating momentum has benefited from its 'My Macy's' localization, omnichannel offerings (Fitch estimates internet sales currently account for more than 10% of total sales), and MAGIC selling strategies.
 
Macy's share of the department store segment has grown to 15.7%, gaining an additional 3.4% of the market after being relatively stable at around 12.3% (using NAICS codes for department store industry sales) over 2006-2009. 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 minus 1% to minus 2%.
 
Looking at the overall domestic apparel, accessories, and home-related categories, Fitch expects a market consolidator would need to generate top-line growth 2% or above to ward off competition from other channels such as specialty, discount, and online. This could be achieved by relatively flat to modest comps growth at the store level and mid-teens growth from online sales, which would contribute roughly 200 bps to overall comps.
 
As a result, Fitch expects Macy's will continue to outperform its department store peers and maintain or modestly grow its share of the overall domestic apparel, accessories, and home-related categories in the near- to intermediate-term.

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