S&P turns positive on Macy's as apparel, economy gain steam
S&P Global Ratings raised its outlook for Macy's from negative to positive, signaling that the retailer could get an upgrade from its current B+ credit rating in the coming months.
Explaining the reasons behind the outlook change, S&P analysts Helena Song and Sarah Wyeth said in a release, "Encouraging signs of an accelerating economic recovery are emerging, and we believe operating conditions for apparel retailers are fast improving."
The analysts also cited lower-than-expected profit and sales declines at Macy's in the fourth quarter as well as momentum going into Q1.
At the outset of 2020, Macy's had deep, evident troubles amid the persistent doldrums of the department store sector. After the holiday season of 2019, the retailer posted a small sales decline for Q4 and unveiled yet another turnaround plan aimed at changes in retail that many speculated were leaving Macy's behind.
The year turned out so much worse and more transformative than anybody could imagine. As the pandemic took hold, Macy's, along with its peers, shuttered stores and hoarded cash. Massive sales declines persisted through the year, even after retail reopened. For 2020, Macy's racked up a net loss approaching $4 billion.
At the same time, Macy's business went through an accelerated evolution that the company had more or less planned on going into that year. In Q4, Macy's digital sales rose by 21%, reaching 44% of net sales. Macy's CEO Jeff Gennette told analysts in February that management expects $10 billion in sales to come from the digital channels by 2023, according to a Seeking Alpha transcript.
Over the course of 2020, Macy's was downgraded by S&P multiple times. About a year ago, when S&P lowered Macy's rating to B+, analysts with the agency said that more downgrades could come "if sales and profits remain depressed from a prolonged pandemic or macroeconomic slump."
The twelve months that have passed since then have made a world of difference. More than 40% of the U.S. population has received at least one dose of the COVID-19 vaccine, according to The Washington Post, and consumers are starting to change their habits as a result. Along with vaccines, multiple rounds of federal stimulus have lifted consumer spending. Retail sales overall spiked more than 28% year over year in March, and apparel sales rose by 105%, putting them at pre-pandemic levels.
S&P's Song and Wyeth noted that Macy's, as digital sales expanded, boosted its omnichannel capabilities during the year, including enhanced buy online, pick up in store and curbside pickup. That puts it in a stronger position going forward. The analysts also noted that Macy's picked up new customers as competitors J.C. Penney and Belk filed for bankruptcy, giving the retailer an opportunity to expand its market share, especially in digital shopping.
All of which is good news. But competitors in department stores and apparel retail have fallen into bankruptcy for a reason — persistent traffic declines at malls and intense competition from online and discount players has wreaked havoc on a wide swath of the industry. Macy's has responded with plans to trim its footprint, expand into strip centers, double down on its off-price Backstage unit, and keep investing in digital and private label, among other efforts. Time will tell if those efforts are enough.
"[O]ur longer-term view is that changing consumer preferences will be difficult to navigate," Song and Wyeth said. "Declining mall traffic, shifting category preferences, and online price transparency are persistent risks for Macy's business."