Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) on Macy's, Inc. (Macy's) and Macy's Retail Holdings, Inc. (MRHI) at 'BBB+' and the short-term IDR at 'F2'. The Rating Outlook has been revised to Negative from Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The Negative Outlook reflects a projected 10% decline in EBITDA in 2015, with a lack of visibility into a sales acceleration that would meaningfully improve profitability over the next 18-24 months. As a result, leverage, which is expected to come in at 2.7x in 2015 (compared to the 2.2x-2.3x maintained between 2012 and 2014) could remain elevated on operational weakness and/or management's willingness to drift towards the high end of its targeted leverage range to maintain a healthy level of shareholder returns.

The company has been able to sustain a healthy level of share buybacks in the range of $1.2 billion to $1.6 billion annually since 2012, primarily using internally generated free cash flow (FCF). Fitch views these levels as unsustainable given current expectations of annual FCF of $500 million to $700 million over the next 24 months, versus $1 billion to $1.3 billion previously. Macy's is exploring various real estate opportunities to enhance shareholder returns and Fitch believes that any change to Macy's capital structure will be credit neutral at best.

EBITDA Expected to Be Flat to Lower in 2016

Macy's comparable store sales trends have decelerated over the course of 2015 from -0.1% in the first quarter (1Q) to an expected -4.7% in 4Q. While the second half (2H) was admittedly impacted by weak sell-through of seasonal merchandise due to persistently warm weather, Fitch expects the general malaise in apparel sales, particularly in the mid-tier space, and decline in international tourist traffic to persist in 2016 and for Macy's comps to be flat to modestly negative.

Macy's is proactively taking steps to continue to rightsize its cost structure and has identified $400 million in SG&A expense reduction in 2016. The company has also shown a willingness to close underperforming stores with 40 stores that contributed $375 million to sales (just under 1.5% of revenue) slated to close by spring 2016. However, EBITDA - which Fitch expects at $3.5 billion in 2015 - could be flat to down 5% in 2016 on our flat comp expectation and as Macy's continues to invest in its omni-channel strategy and the long-term health of the business. Fitch expects EBITDA margin to remain in the 13% range versus 14.2% in 2014 mainly due to fixed-cost deleveraging.

Longer term, Fitch views Macy's as well positioned to drive market share gains in the mid-tier department store space as it continues to benefit from its My Macy's localization initiatives, invest in its omni-channel and other growth initiatives, and maintains a healthy store portfolio relative to some of its peers. Looking at the overall larger domestic apparel, accessories, and home-related categories, Fitch expects a market consolidator would need to generate top-line growth of 2% or above to maintain market share versus other channels such as specialty, discount, and online. Macy's could generate this with relatively flat to modest comps growth at the store level and mid-teens growth from online sales, which would contribute roughly 200 basis points (bps) to overall comps.

Monetization of Real Estate

The company continues to pursue the creation of shareholder value through real estate initiatives originally announced on Nov. 11, 2015. The company has engaged Eastdil Secured, a leading real estate-focused investment bank, to approach potentially interested parties to form partnerships or joint ventures for the company's mall-based properties as well as Macy's flagship real estate assets in Manhattan, San Francisco, Chicago and Minneapolis.

The ultimate structure and deployment of any proceeds is expected to be credit neutral to negative against Fitch's expectation for Macy's to maintain leverage at or below the mid-2x level to support current ratings.

KEY ASSUMPTIONS

--Comp store decline of approximately 3% in 2015 and flat to modestly negative in 2016;

--EBITDA margin in the 13% range versus 14.2% in 2014;

--Annual FCF of $500 million to $700 million;

--Adjusted debt/EBITDAR in the mid-2.5x range.

RATING SENSITIVITIES

A negative rating action could result if negative same-store sales trends persist and/or the company changes its financial strategy leading to leverage metrics increasing to the high 2x range on a sustained basis.

A positive rating action could result if comps outperformance and share gains is sustained despite increasing pricing competition and promotional pressure in the middle market, while maintaining adjusted leverage under 2.0x. This is not anticipated at this time given Macy's publicly stated target of maintaining leverage in the 2.5x to 2.8x range (using the company's calculation methodology).

LIQUIDITY

Liquidity was supported by a cash balance of $474 million at the end of the third quarter (Oct. 31, 2015). In addition, Macy's had $709 million available under its $1.5 billion credit facility due May 2018, reflecting $791 million in commercial paper outstanding to fund seasonal working capital. Liquidity at third-quarter end is a seasonal trough and Fitch expects total liquidity (including credit facility) to be between $2.5 billion and $3 billion at year end.

Fitch expects annual FCF to be in the range of $500 million to $700 million between 2015 and 2017, significantly lower than the range of $1 billion to $1.3 billion over the last four years. Fitch expects annual capex to be in the $975 million to $1 billion range in the next two to three years as the company invests in its store base and continues to fund growth-related initiatives. Macy's does not currently need to fund its pension plan due to its strongly funded status at the end of 2014.

FULL LIST OF RATING ACTIONS

Fitch has affirmed Macy's, Inc. ratings as follows:

Macy's, Inc. (Macy's)

--Long-term Issuer Default Rating (IDR) at 'BBB+';

Macy's Retail Holdings, Inc. (MRHI):

--Long-term IDR at 'BBB+';

--$1.5 billion bank credit facility at 'BBB+';

--Senior unsecured notes and debenture at 'BBB+';

--Short term IDR at 'F2';

--Commercial paper at 'F2'.

The Rating Outlook has been revised to Negative from Stable.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997846

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997846

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.