By Tomi Kilgore, MarketWatch
Macy’s Inc., Coach-parent Tapestry Inc. and Michael Kors-parent Capri Holdings Ltd. have joined the ranks of “fallen angels," after Fitch Ratings downgraded their credit ratings to “junk” territory on Wednesday, citing the “unprecedented” impact of the COVID-19 epidemic on the consumer spending on nonessential items.
Fitch cut the long-term issuer default ratings (IDR) of both Macy’s /zigman2/quotes/201854387/composite M -6.88% and Capri /zigman2/quotes/206301876/composite CPRI -8.12% by one notch to BB+, the highest speculative-grade, or “junk” rating, from BBB-, and lowered Tapestry’s /zigman2/quotes/207417762/composite TPR -2.79% IDR by two notches to BB from BBB-.
The outlooks for the IDRs of all three retailers remains negative, which warns of further downgrades, as the “significant business interruption from the coronavirus pandemic and the implications of a downturn in discretionary spending that Fitch expects could extend well into 2021.”
Shares of Macy’s tumbled 9.8% to the lowest close since it started trading in February 1992, according to FactSet. The department store chain was also booted from the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.48% by S&P Dow Jones Indices late Tuesday, and placed in the S&P SmallCap 600 index /zigman2/quotes/210599868/delayed SML -1.03% . Shares of Tapestry sank 14.5% and Capri plunged 17.4%.
/zigman2/quotes/206301876/composite CPRI 15.04, -1.33, -8.12%
/zigman2/quotes/207417762/composite TPR 13.60, -0.39, -2.79%
The ratings downgrades and negative outlooks at Fitch are part of a more pessimistic view of the broader discretionary retail sector, given the uncertainty over the duration of closures of stores selling nonessential goods.
“Fitch has assumed a scenario where discretionary retailers in the U.S. are essentially closed through mid-May with sales expected to be down 80%-90% despite some sales shifting online, with a slow rate of improvement expected through the summer,” Fitch said. “Given an increased likelihood of a consumer downturn, discretionary sales could decline in the mid-to-high single digits [on a percentage basis] through the holiday season.”
“Fallen angel” is a term used to describe a situation in which a company’s debt rating falls from investment grade to junk status. Typically, a rating isn’t considered junk unless at least two of the three major credit-rating agencies rate them as such. Of the three, Macy’s is the only “official” junk credit, as S&P Global Ratings cut its rating to BB+ in February and Moody’s Investors Service cut its rating to Ba1 — Moody’s highest speculative grade rating — last week.
Tapestry is still investment grade at Moody’s and S&P Global and Capri is investment grade at S&P Global but is not rated at Moody’s.
Fitch also cut on Wednesday the IDRs of Dillard’s Inc. /zigman2/quotes/200348006/composite DDS -1.12% two notches to BB from BBB-, of Nordstrom Inc. /zigman2/quotes/203902116/composite JWN -10.98% to BBB from BBB+, of Kohl’s Corp. /zigman2/quotes/210414114/composite KSS -4.47% to BBB- from BBB, of Levi Strauss & Co. /zigman2/quotes/204763189/composite LEVI -1.03% to BB from BB+, of Signet Jewelers Ltd. /zigman2/quotes/204614427/composite SIG -0.66% to B from B+ and of J.C. Penney Corp. to CCC- from CCC+, while keeping that of Burlington Stores Inc. /zigman2/quotes/203203718/composite BURL -1.76% at BB+. The outlooks for all the ratings remain negative.
Fitch said that while it expects “significant” sales growth in 2021 off a weak 2020, the level could be as much as 8% to 10% below 2019 sales. Department store sales could fare much worse, Fitch said, with sales projected to decline in the low to midteens percentages in 2021.
“Given the typical timing of a consumer downturn (four to six quarters), revenue trends could accelerate somewhat exiting 2021, with 2022 projected as a modest growth year,” Fitch said.
For Macy’s, Fitch expects 2020 revenue to be nearly 25% below 2019 levels followed by a decline of over 15% in 2021. Tapestry revenue is expected to decline around 25% in 2020 and around 10% in 2021, while Capri revenue is forecast to fall around 25% in calendar 2020 and is expected to decline around 10% in fiscal 2022.
Year to date, shares of Macy’s have plunged 73.9% through Wednesday, Tapestry have tumbled 59.0% and Capri have plummeted 76.6%, while the SPDR S&P Retail exchange-traded fund /zigman2/quotes/206947004/composite XRT +0.15% has dropped 39.1% and the S&P 500 has lost 23.5%.