Macy’s: Best Department Store Bond To Play On Declining Yields Next Year

Macy’s is a chain of high-end department stores in the United States: it operates 725 stores across 43 states and generates $25 bn in revenues. Most stores are located at urban or suburban sites, principally in densely populated areas across the United States. It focuses on a wide spectrum of apparel, including women’s men’s, sport, fragrances, jewelry and watches, household items and much more. Headquartered in New York City, USA, the company comprises three retail brands: Macy’s, Bloomingdale’s and Bluemercury.

Investment theses:
  • Macy’s has strong financials with stable revenue generation, double digit FCF yield. Macy’s generates over $1 bln in free cash flow and is expected to be cash positive for the foreseeable future. Targeting an adjusted EBITDA margin of 11.5-12% by fiscal 2024 and aims to generate at least $3.0 bln of FCF over the next 3 years.
  • Macy's still has a strong liquidity position despite C&CE reduction compared with last year. Total liquidity is around $3.2 bln including cash and $2.9 billion of availability under its ABL.
  • Refinancing risk is low with the next major maturity in 2029 because Macy’s did debt repayments in the first half of this year.
  • Macy's leverage and margins have improved relative to peers Kohl's and Nordstrom, but they will all face pressure if consumer demand wanes and inventory levels remain elevated
  • Macy's debt has a low risk, being backed by 2x real estate value and stable earnings
  • Macy’s also has strong brand awareness and power. Brand is worth several times more than the current valuation what also pleases us as bondholders.
  • Macy's management consists of professionals, who have been in business for more than a decade with wide experience in other industry giants such as Walmart and Target.
  • Ecommerce for now represents approximately 31% of sales which indicates the successful business transformation and Polaris strategy realization

Macy’s remains the best option to buy in the fixed income universe in the department store segment. We overweight Macy’s bond issue with 10-years duration due to high exposure to interest change and strong financials, which still provide confidence with a large portfolio of diverse real estate and brand recognition.

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