Fitch Affirms Macy's IDR at 'BBB-'; Outlook Stable

Published: 2025-05-07 05:02:20 ET M

Published on 05/07/2025 at 05:02

Fitch Ratings has affirmed Macy's, Inc.'s, Macy's Retail Holdings, LLC's and Macy's Inventory Funding LLC's, Long-Term Issuer Default Ratings (IDRs) at 'BBB-'.

The Rating Outlook is Stable.

Macy's ratings reflect its industry leadership, good cash flow and reasonable balance sheet management, enabling it to navigate the challenging department store industry and maintain market share. The ratings recognize Macy's need to reposition its portfolio, including plans to close about 150 locations during 2024-2026 from a base of about 500 full-line and furniture locations as of early 2024, reflecting the challenges affecting mall-based retailers.

Fitch expects Macy's and its discretionary retail peers to experience near-term operational challenges resulting from softening consumer sentiment and the evolving tariff policy. Longer term, Macy's ratings assume the company can generate annual EBITDA of around $1.7-$1.8 billion with EBITDAR leverage below 3.0x.

Key Rating Drivers

Industry Leader: With $23 billion in 2024 total revenue, Macy's is the clear leader in the U.S. department store space. The company's scale, physical and digital infrastructure, cash flow, and relationships with vendors and customers are assets that, if used effectively, could allow Macy's to defend market share in a difficult space.

The company has recently demonstrated some success in managing operations and expenses, with Fitch forecasting EBITDA margins around the mid-8% range in the medium term, similar to 2019, despite around 10% revenue declines and the absorption of cost inflation. However, Macy's ongoing store portfolio activity, including its target of closing about 150 locations between 2024 and 2026, underscores the shifting shopping mall landscape. Secular challenges include consumers spending less time in malls, changes to apparel buying behavior, and competition from value-oriented and online channels.

Focus on Productive Stores: In February 2024, new CEO Tony Spring, who previously managed Macy's luxury Bloomingdale's nameplate, announced a number of top-line initiatives and portfolio actions to drive long-term business growth. The company announced the closure of about 150 of its less-productive Macy's locations through 2026, yielding a more focused and profitable group of about 350 Macy's-branded department stores, plus its Bloomingdale's and Bluemercury divisions.

The company indicated the stores targeted for closure generated less than 10% of overall revenue in 2023, and Fitch assumes limited EBITDA contribution. The closures could allow the company to redirect capital and management attention to its better-performing locations. The company plans to expand square footage over time through new Bloomingdale's and Bluemercury locations and off-mall Macy's stores.

Near-Term Volatility: Fitch expects the U.S. retail sector to face near-term challenges, including declines in consumer sentiment, business disruption and rising costs related to evolving U.S. tariff policies. Discretionary categories could see revenue down as much as mid-single digits with outsized EBITDA declines given tariff-related cost pressure. Macy's could see about 20% EBITDA declines in 2025 with FCF near $150 million, although the company has good liquidity to withstand near-term volatility and no material maturities before July 2027, when about $60 million of unsecured notes are due.

Department Store Challenges: Mall-based retailers will continue to face secular headwinds over the longer term. Companies with scale, an omnichannel platform, including good store and supply chain infrastructure, a robust online presence, strong vendor and customer relationships, and good cash flow for business reinvestment have the best opportunities to maintain share in a difficult environment. Near-term headwinds include a soft selling environment for many discretionary goods categories, such as apparel and home, which could be exacerbated by tariffs impacting inflation.

Customer Relationship, Supply Chain Enhancements: Macy's plans to strengthen customer relationships by improving its digital platform, removing friction from the shopping experience and refreshing its assortment, including some private-label relaunches. If executed effectively, these steps could support customer loyalty and market share stabilization. However, execution risk remains somewhat elevated given secular headwinds across the regional mall landscape, and Fitch ultimately expects Macy's initiatives to yield flat comparable-store sales results in the medium term.

EBITDAR Leverage Below 3.0x: Macy's credit profile is supported by its net debt paydown of about $1.5 billion between 2020 and 2023, yielding $2.8 billion of debt today. Although the company raised its EBITDAR leverage target to at or below 2.5x (similar on a Fitch-defined basis) from at or below 2.0x, which aligns with its pre-pandemic target range of 2.3x to 2.8x, Fitch expects Macy's to operate with flattish debt levels, yielding EBITDAR leverage between 2.5x and 3.0x.

Good Liquidity and FCF: Macy's FCF averaged around $150 million over the past three years and Fitch expects annual FCF to average around $300 million beginning 2026. Macy's ability to invest around $800 million annually in capital projects is a competitive advantage, particularly given shifts in consumer behavior and a challenging competitive environment. In addition, the company's good cash flow generation supports its ability to manage through economic cycles with opportunities to improve competitive positioning, particularly if weaker players are forced to retrench.

Parent-Subsidiary Linkage: Fitch's analysis includes a weak parent/strong subsidiary approach between the parent and its subsidiaries, Macy's Retail Holdings, LLC (BBB-/Stable) and Macy's Inventory Funding LLC (BBB-/Stable). Fitch assesses the quality of the overall linkage as high, which results in an equalization of IDRs across the corporate structure.

Peer Analysis

Aside from Macy's, Fitch-rated U.S. department store coverage includes national competitors Kohl's Corporation (BB-/Negative) and Nordstrom, Inc. (BB/Stable), and regional player Dillard's Inc. (BBB-/Positive). These retailers face industry headwinds and are continuously refining strategies to defend market share. Initiatives include investments in omnichannel models, portfolio reshaping to reduce exposure to weaker indoor malls, and enhancing merchandise assortments and service levels.

These initiatives have seen mixed success. Dillard's has shown the best operating trajectory with significant upside potential given its long history of underperformance. Nordstrom and Kohl's have produced the weakest top-line and profitability results, while Macy's has experienced top-line declines mitigated by good inventory and expense management, limiting EBITDA contraction.

Structurally, Macy's, Kohl's and Nordstrom are well-positioned to accelerate investment and transformation efforts given greater relative scale and cash flow generation. Kohl's off-mall locations and Nordstrom's off-price segment and high-end merchandise positioning of its full price locations should be advantages. However, both have struggled to capitalize on these strengths, which Fitch expects is likely due to execution challenges.

Pre-pandemic, the three national players maintained EBITDAR leverages below 3.5x (closer to mid-2x for Kohl's) to support investment-grade ratings. While EBITDA is below 2019, Macy's leverage remains similar due to proactive debt reduction. Dillard's has lower leverage than peers due to limited debt. EBITDAR leverage is expected to be around 3x and low-4x for Nordstrom and Kohl's, respectively.

Key Assumptions

Fitch projects Macy's revenue to decline around 5% in 2025 toward high-$21 billion on negative low single digit comparable store sales and a lower store count given efforts to close about 150 Macy's locations between 2024 and 2026. Assuming some improvement to consumer sentiment and successful implementation of the company's top-line initiatives, revenue could improve toward mid-$22 billion in 2026;

EBITDA, which was $1.9 billion in 2024, could moderate to about $1.5 billion in 2025 on revenue declines and higher tariff expenses. EBITDA could rebound toward $1.6 billion in 2026 assuming sales stabilize. Fitch assumes limited profit impact from store closures due to weak profitability. Fitch expects the company to continue to source efficiency gains, which will likely be spent on top-line investments. EBITDA margins could decline to high-6% in 2025 and improve to mid-7% in 2026, lower than the 8.2% achieved in 2024;

Annual FCF (after dividends) is expected to be about $150 million but improve toward $300 million range in 2026, assuming neutral working capital. Fitch projects annual capex of around $800 million, with dividends projected in the $200 million range;

EBITDAR leverage, which was 2.6x in 2024, could be modestly above 3.0x in 2025 given projected EBITDA declines but trend below 3.0x beginning 2026;

Macy's capital structure primarily consists of unsecured debt with fixed interest rates.

RATING SENSITIVITIES

Factors That Could, Individually Or Collectively, Lead To Negative Rating Action/Downgrade

A downgrade to 'BB+' could result from weaker-than-expected operating results, including market share declines or margin degradation worse than Fitch's expectation, such that EBITDAR leverage sustained above 3.0x.

Factors That Could, Individually Or Collectively, Lead To Positive Rating Action/Upgrade

An upgrade could occur if Macy's sustained positive low-single-digit revenue and EBITDA growth, yielding EBITDAR leverage sustained below 2.5x.

Liquidity and Debt Structure

Macy's ended 2024 with $1.3 billion of cash and no borrowings under its secured asset-backed loan (ABL) facility. In April 2025, the company downsized the ABL to $2.1 billion from $3.0 billion given limited usage and extended the maturity to 2030 from 2027. Borrowings under the ABL facility are subject to a borrowing base based on 90% of net orderly liquidation value (NOLV) of inventory minus customary reserves. Fitch has affirmed the ABL at 'BBB', up one notch from the IDR given its collateral package.

The company's liquidity is supported through Fitch's forecast of around $300 million in FCF annually beginning 2026, after the payment of about $200 million in dividends. Fitch expects excess cash could be used for share repurchases in the context of the company's publicly articulated financial policy of maintaining EBITDAR leverage at or below 2.5x.

Macy's has about $2.8 billion in total unsecured debt due between 2025 and 2043. Near term maturities are limited and include $61 million in 2027 and $176 million due 2028. Fitch has affirmed Macy's unsecured notes at 'BBB-'.

Issuer Profile

Macy's is the largest department store in the U.S. with $23 billion in retail revenues in 2024 ($24 billion in total revenue including credit card fees and retail media network revenue).

Summary of Financial Adjustments

Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:

EBITDA adjusted for stock-based compensation;

Fitch uses the balance sheet reported lease liability as the capitalized lease value when computing lease-equivalent debt.

Sources of Information

The principal sources of information used in the analysis are described in the Applicable Criteria.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.