Macy's Inc.'s decision to close 40 stores may help the company, but it could spell trouble for other highly indebted retailers and their creditors.
The department store often pulls shoppers into malls, and when it shuts its doors, traffic can fall for the remaining retailers, Barclays PLC analysts said last week. Macy's identified the stores it was closing on Wednesday, after saying in September that it planned to shutter 35 to 40 locations that were not generating enough sales.
"When a store as big as Macy's leaves, traffic to that mall will significantly drop and it will have a negative impact on other retailers," said Hale Holden, a credit analyst at Barclays in New York.
Any trouble for mall-based retailers underscores that even if U.S. consumers are continuing to spend at high levels, they are not shelling out everywhere equally. Many Americans are increasing expenditures online and at places like restaurants, while reducing purchases at department stores.
J.C. Penney Co. has 19 locations at malls that are losing Macy's stores, Barclays analysts said Wednesday. Sears Holdings Corp. has 16, and Claire's Stores Inc.'s has eight. A spokesman for Sears declined to comment, while Daphne Avila, a spokesman for J.C. Penney, said that "each location is different, therefore it's difficult to speculate" on the effect. Representatives for the other retailers did not immediately comment.
The closest Macy's stores to Arkansas are in the Memphis area, Springfield, Mo., Tulsa and the Dallas-Fort Worth area. One store in Fort Worth is among those being closed.
"Any drop in meaningful traffic will hurt the most levered guys the hardest because they don't have margin for error," said Matthew Duch, lead portfolio manager at Calvert Investments, who manages over $12 billion. Some of the most indebted retailers have the most to lose, and their bonds fell Thursday.
Neiman Marcus' 8 percent notes that mature in October 2021 fell 1.5 cents on the dollar to 74.5 cents in New York, where they yielded 14.7 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Claire's Stores Inc.'s secured bonds maturing in March 2019 dropped 0.75 cent to 61 cents on the dollar.
The forces that are buffeting Macy's could hit other retailers too, analysts said. The strengthening dollar, for example, is reducing demand from international tourists, whose yuan, yen, and euros can buy less in the United States. That's troublesome for retailers like Neiman Marcus, said Steven Ruggiero, a credit analyst at RW Pressprich & Co.
"People expect if Macy's performance is off, Neiman Marcus has a problem too because it also has a big international exposure," Ruggiero said.
Stock investors were not concerned about the news, sending Macy's shares 2 percent higher on Thursday, even as the broader U.S. market sold off. In addition to announcing a 4.7 percent decline in sales at stores open for at least a year and forecasting weaker-than-expected fourth quarter earnings, the department store said it was cutting about $400 million of annual costs through measures including layoffs and shutting 36 stores.
Some investors and analysts view Macy's trouble, and any effect on other retailers, as temporary. Macy's said 80 percent of its sales decline came from warm winter weather, which cut into sales on goods like coats and sweaters. J.C. Penney and L Brands Inc. reported solid holiday-season sales figures on Thursday.
Customers who shy away from malls after a department store closes often come back, said RW Pressprich's Ruggiero.
"Remember when Sears was closing stores? Guess who picked up the sales? It was J.C. Penney in the same malls," he said.
Still, some are not so positive about the outlook for retail credits.
In a note late last week, analysts at Standard & Poor's said they may cut Macy's ratings, which currently stand at BBB+, or three steps above junk. They said the apparel industry faces significant pressures in 2016, including declining mall traffic and increased consumer spending online.
Any weakness at malls could also influence bonds backed by commercial mortgages. The long-term pressures that are weighing on stores like Macy's, most notably rising Internet sales, are not going away and may force investors to rethink the bonds' exposure to retailers, said Lisa Pendergast, a Jefferies Group LLC strategist.
Information for this story was contributed by Lindsey Rupp and Matt Scully of Bloomberg News.
SundayMonday Business on 01/10/2016