In another sign of financial recovery after the pandemic took a toll on its operations, Macy's is wiping away a good portion of its debt. The retailer Tuesday said that on Aug. 17 it will redeem the entire $1.3 billion principal of its 8.375% senior secured notes that were due in 2025.
The notes will be redeemed at 100% of their principal amount, plus accrued and unpaid interest, according to a company press release. The move will trigger a pre-tax charge of about $185 million in the third quarter, the company said.
The early redemption puts Macy's "firmly on track" to be at or below its target debt ratio and to achieve an investment-grade financial profile by the end of the year, Chief Financial Officer Adrian Mitchell said in a statement.
Macy's lost nearly $4 billion last year, and, after shoring up its liquidity, earlier this year took its place among those retailers with risky levels of debt. Financially, the company has come a long way since then, aided by consumers eager to get back to stores and buy new clothes.
"The retirement of debt is very much a cleaning up exercise that strengthens the balance sheet and puts Macy's on a firmer financial footing," GlobalData Managing Director Neil Saunders said by email. "They are clearly doing it while the going is good and revenues are strong, which makes perfect sense. The lower debt also gives them a lot more flexibility going forward – both to invest in things and to take on more debt when needed. Generally, investors should welcome the improved debt position."
In his statement Tuesday, Mitchell noted "a return of consumer demand" and a new level of discipline at Macy's over the past 16 months, which he said puts the company in a good position "to also focus on further enhancing our long-term financial stability and value creation."
That may be, but positive financial moves aren't the only improvements Macy's needs to make, warned Saunders, who is among several observers who have detailed sloppy merchandising at Macy's during store checks in recent months.
"While I would never be critical of Macy's for having a firm grip on their finances, I put this under the category of balance sheet housekeeping," he said. "It is important but it doesn't constitute a strategy for growth nor does it negate the need to improve the competitive positioning of the company. Macy's needs to be good at accounting, but it also needs to be good at retailing – and I am not sure it is masterful at the latter."
Mitchell said that alleviating its debt load will enable the department store to make the investments necessary "to deliver strong and sustainable shareholder returns as a digitally led omnichannel retailer." Macy's has tweaked the growth strategy it announced shortly before the pandemic forced the temporary closure of stores, and in June CEO Jeff Gennette said the company has emerged a healthier business more focused on digital sales. With consumers bolstered by pandemic-related financial support, the retailer lately has also enjoyed sales surges in home, beauty and apparel categories. In the first quarter, Macy's reported a 63.9% store comps rise compared to last year, but a 10% decline compared to 2019.
"Macy's is making a lot of its current sales and of the strength of demand right now, which is fair enough as the shopper is spending robustly," Saunders said. "However, once those soft prior year comparatives fade and once the heat comes out of the wider consumer economy – which it will at some point – Macy's will have to contend with a lower growth environment and in those circumstances it will need to do a lot more to engineer success."