It’s been a little more than two months since I covered the necessary dividend suspension at retailing giant Macy’s (M). With the coronavirus forcing stores to close and sales to slow, many in the sector have seen a great deal of financial pain. This week, the company took another step in this ongoing process, one that will hurt in the short term but was needed for long run security.
As I discussed in that previous article, Macy’s drew down $1.5 billion from its credit facility in addition to the dividend suspension in order to help with its financial flexibility. The company has since been looking for additional financing, although the name probably wasn’t as close to bankruptcy as some others in the space have been.
It was announced on Tuesday that Macy’s had launched a debt offering in an effort to pay back those funds borrowed under the credit facility. Originally looking to raise $1.1 billion, the company ended up receiving more investor interest, and the deal was upsized to $1.3 billion at an 8.375% annual coupon. That means that annual pre-tax interest expenses would be about $109 million. The company only reported $205 million in interest expense last year, so this borrowing will obviously impact the bottom line a bit in the short term.
Despite the company’s recent past, that interest rate is actually pretty good. If you look at the 10-K filing, you might not think that, given none of the company’s major debts (at least $300 million) had a rate above 4.50%. However, when you consider that most of Macy’s bonds have been trading at annual yields in the low to mid teens as seen below, percentage wise, and were much smaller offerings, getting well over a billion dollars in the high single digits isn’t too bad.
(Data sourced from Finra)
Macy’s still isn’t out of the woods, not by a long shot. The company’s most recent sales update came in much weaker than the street was expecting, with the company expecting to report a very large loss for the quarter as you might figure. The company also reported an estimated net debt position at the end of the fiscal Q1 period of $4.134 billion, up from $3.475 billion at the end of the fiscal year. While management has talked about improving sales traffic in recent weeks, it remains to be seen how the rest of the year will play out.
Like the overall market, Macy’s shares have rebounded quite a bit from their coronavirus lows. Shares closed Wednesday up $3 from the bottom, a rally of more than 68%, but they are still down more than 70% over the past year. The stock seemed to get some additional support once it passed the 50-day moving average, the purple line in the chart below. The next interesting level is the 100-day trend line, another $3 above here currently but declining about a dime a day at this point.
(Source: Yahoo! Finance)
While the Macy’s debt offering is a tough pill to swallow for the company’s bottom line as it looks to turn things around, it does provide some additional financial flexibility that other retailers haven’t been able to afford. While a somewhat high interest rate was a given in this uncertain coronavirus period, the company did pretty good considering where most of its debt was trading. Now the company will be able to tap its credit facility again if need be, but improving sales trends could help avoid that. Macy’s shares have gotten some legs under them, and perhaps we could see a further rally if the coronavirus situation improves in the near term.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.