Dive Brief:
- S&P Global Ratings upgraded Macy's credit rating to BB- after the retailer reported better-than-expected sales and a margin expansion for the second quarter.
- The ratings agency kept its positive outlook for Macy's after raising it from negative to positive in the spring as the COVID-19 vaccine rollout, and new stimulus spending lifted the prospects for apparel and other retailers.
- The analysts also noted that Macy's EBIDTA has outpaced 2019 levels, and its debt load has shrunk since last year.
Dive Insight:
At the outset of 2021, even with vaccines beginning to roll out, the path forward for apparel retailers, department stores and others hit hardest by the pandemic was not at all clear. Questions remained about the depth of pent-up demand, wardrobe needs and how consumers would approach shopping after a year where many avoided in-store shopping as much as possible.
The recovery has been rapid, though, and broad-based, surpassing many analysts' initial expectations. Broadly across retail mall traffic is up as are sales, as are margins for many (although in many cases that is due to a dearth of inventory amid ongoing supply chain woes).
In that environment, Macy's reported Q2 sales up 58.7% year over year to $5.6 billion, just up over 2019 levels. Just as importantly, the company swung to a profit of $345 million, compared to the $431 million net loss from Q2 last year. As sales and profits this year have increased, the department store has also been paying off debt.
The vote of confidence from S&P shortly followed the quarterly report. "The upgrade reflects the ongoing progress Macy's is achieving in reducing leverage and strengthening operating results, supported by a favorable macroeconomic backdrop," S&P analysts said in a release.
CEO Jeff Gennette told analysts that the company's Polaris turnaround strategy was back on track and "working" after COVID-19 dealt the retailer a major financial blow and prompted the company to take on more than $1 billion in new debt as a liquidity buffer.
The good news is that Macy's is catching back up with its pre-pandemic performance. The bad news is the retailer's pre-pandemic performance left a lot to be desired, which is why it has the Polaris strategy in the first place. That plan looks to digital, off-price, private label and new brick-and-mortar formats to boost Macy's sales and relevance with customers.
All the pre-pandemic challenges remain in play, and some have been exacerbated by COVID-19, including the rise of digital shopping and competition, and the ongoing hollowing of the American middle class.
"[O]ur longer-term view is that changing consumer preferences will be difficult to navigate," the S&P analysts said. "Declining mall traffic, shifting category preferences, and online price transparency are persistent risks for Macy's business." The S&P team added that they thought Macy's could speed up or even expand its previously announced plans to close a chunk of its stores.
