Macy's Debt Could be Cut to Junk Bond

Posted by: Nanette Byrnes on February 02, 2009

Moody’s Investment Service just warned that they’ve put Macy’s debt on watch for a downgrade — into junk territory.

Moody’s action was set off by the $25 billion retailer’s announcement today that its 2009 earnings per share would be between $0.40 and $0.55 per share, about half where management had last guessed they would fall. The company carries a high debt load of almost $10 billion, much of it from the 2005 purchase of May Department Stores for $11 billion. It owes $950 million in interest payments in 2009 alone.

Moody’s has concluded it’s “highly unlikely” the company’s cash flow won’t be swamped by its debt and interest expenses this year.

The mega-chain’s earnings problems aren’t all that different from the woes of other mall-based retailers, unfortunately. According to Tomson Reuters, analysts currently expect January sales at department stores open at least one year to have fallen almost 11%. Macy’s so-called “same store sales” are estimated to have dropped anywhere between 3% and 8%, while Kohl’s, JCPenney, Nordstrom and Sacks are all expected to be far worse.

Those chains are in better shape to weather American’s suddenly parsimonious attitude however, because they only carry a fraction of Macy’s debt.

The looming downgrade could be bad news for Macy’s CEO Terry J. Lundgren, who’s job security was already the subject of speculation, and who championed the May deal.

In this case “charge it” wasn’t the best idea.

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How can you manage smarter? BusinessWeek writers Nanette Byrnes, Patricia O’Connell, Emily Thornton, Matthew Boyle, Michelle Conlin and Diane Brady synthesize insights from the brightest business thinkers, critique the latest management trends, and comment on leaders in the news.

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