Macy’s Strategies Produce Results

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Macy’s has continually posted solid results, as the firm’s operating strategies produce incremental results. Comparable-store sales improvements can continue for at least the next few seasons, as many of the merchandising initiatives and employee training initiatives are still taking effect. In 2013, the firm increased its share re-purchase program by $1.5 billion, bringing the new authorization to $2.6 billion, and the dividend from $0.20 per share to $0.25 per share. Still, management stated that it continues to target lease-adjusted leverage in the 2.4 to 2.7 times range (currently at the low end), and a mid-BBB credit rating. Debt is increasingly manageable with healthy free cash flow generation of around 5% of sales, or well above $1 billion annually.

Macy’s has successfully refinanced debt at attractive rates and also has paid down debt with cash on hand. Given its well-spread-out maturities and a Cash Flow Cushion above 1 times, many expect this to continue. The firm has begun to return more cash to shareholders, which  indicates that management is happy with its leverage trajectory. The firm reined in dividends and share repurchases in 2008 until it returned to investment grade in 2011. Macy’s operates around 850 Macy’s and Bloomingdale’s stores in the U.S. and Puerto Rico, as well as Macys.com and Bloomingdales.com in 45 states, Guam, and Puerto Rico. Its stores are primarily in malls and sell family apparel, accessories, cosmetics, home furnishings, and other consumer goods. Issuer Profile Credit Metrics (USD Mil) Operating Summary (USD Mil) Capital Structure Source.

As of January 2013, the company had $6.8 billion in long-term debt and just $124 million of short-term debt on the balance sheet. Debt is increasingly manageable as the company improves operations and pays down obligations. The company is generating more than $1.3 billion in free cash flow and has minimal store-opening capital needs. EBITDA is projected to cover interest over 9 times, up from 3 times during the recession.

Capital Structure As of the year ended January 2013, Macy’s had $6.8 billion in long-term debt and nearly $14 billion in total invested capital. Leased stores represent an additional $1.8 billion in debt, assuming 8 times minimum annual rent payments.We believe Macy’s will have ample cash flow in 2013 to buy back a modest amount of shares and continue to refinance debt as it comes due, perhaps at only slightly lower levels. Enterprise Risk Prolonged weakness in consumer spending could weigh on performance. Macy’s is a national retailer serving mostly middle-class consumers and has a high correlation to the national economy. There is also risk from underperforming stores and stores in weak or declining malls, which could continue to deteriorate, especially if they are located near declining or stagnating demographic areas.

There is the risk that specialty retailers and more value-oriented department stores continue to eat away at the market share of traditional department stores, which could lead to a slow and steady decline in Macy’s business.Macy’s has had success with more intensive development of in-house and exclusive brands. But it faces the risk that consumers might one day change tastes and preferences, and the brands and labels Macy’s has developed might fall out of favor.

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