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Macy’s CDS Retracement

03 September 2020 by jbchevrel

Macy’s (FD) sales collapsed by more than a third (-36%) in the quarter ended Aug 1. FD recorded another -$431m in net losses, bringing the total to more than $4bn for H1. But CDS tightened -2% yesterday despite that. FD 5y CDS closed 27.5% while it had reached wides of 36.5%% during Q2. For reference, during GFC, the wides had been below 22%, on a close to close basis. This retracement tighter occurred not because results were good, they weren’t. But they were less disastrous than expected (-36% vs -37% expected, on sales). On the positive side, there was a jump in online sales, which accounted for more than half of the quarterly total. Backstage (off-price segment) and Bloomingdale’s (luxury goods) did particularly well, reflecting the U-curve of consumers interests nowadays. The cost cutting effort continues, FD is cutting jobs and closing stores (125 through 2022, permanently). In terms of liquidity, FD managed to raise $4.5b in debt. They raised $1.3b from a bond sale backed by its RE and secured access to $3b loan using its inventory as collateral. That buys them some time. Again, H1 net loss was -$4b, and FD has $1.8b in debt maturities between now and 2023. That leaves them especially vulnerable to a 2nd wave this autumn, in case no vaccine’s available. Macy’s sector has been battered: US apparel sales declined -21% year over year in July and 25% in June, according to the Commerce Department. And Macy’s is under-performing, with its sales drop -36% yoy. COVID to date, 4 US big department store chains (JC Penney, Neiman Marcus, Stage Stores and Lord & Taylor) have filed for bankruptcy. One could think that FD may grab some market share from them going forward, but the reality is that the whole cake has diminished: mall traffic collapsed, and US shoppers prefer to stock up at big box stores such as Target (5y CDS: 12bp) and Walmart (5y CDS: 15bp).