(M) Macy’s New Strategy Lowers Interest

Going with its new strategy, Macy’s Inc. (M), one of the leading department store retailers in the United States, entered into a new four-year bank credit agreement with a consortium of world’s leading investment bankers.

The new $1.5 billion agreement is scheduled to mature on June 20, 2015 and overrides the previous $2 billion agreement, which was set to mature on August 30, 2012.

According to Karen M. Hoguet, chief financial officer of Macy’s, the company’s strong cash flow and sturdy balance sheet facilitated it to strike the deal with more favorable terms and pricing. Moreover, J. P. Morgan, Bank of America Merrill Lynch, Credit Suisse, U.S. Bank and Wells Fargo emerged as the major contributor to the new credit line facility.

Under the new agreement, the company will save around $8 million in interest expense and forecasts interest expenses of $442 million in the current fiscal. Earlier, Macy’s forecasted an interest expense of $450 million for the current year.

Macy’s, which competes with J. C. Penney Company Inc. (JCP), currently operates approximately 850 department stores in 45 states, the District of Columbia, Guamand Puerto Rico.

Macy’s in an attempt to increase sales, profitability and cash flows, is taking quite a number of initiatives including integration of operations, consolidation of divisions, customer-centric localization initiatives, as well as developing e-commerce business and online order fulfillment centers. Moreover, Macy’s continues to focus on price optimization, inventory management and merchandise planning to drive traffic.

However, Macy’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels. All these may negatively impact their discretionary spending, and in turn, the company’s growth and profitability.

Currently, we have a long-term ‘Neutral’ rating on the stock. However, Macy’s holds a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ rating.

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