CLOSE

We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website https://www.hermes-investment.com, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2017, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept
CLOSE

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

By clicking Proceed I confirm I have read the important information and agree to the terms of use.

Proceed

The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.

Macy’s in a muddle

Home / Press Centre / Macy’s in a muddle

Fraser Lundie, CFA, Co-Head of Credit and Senior Credit Portfolio Manager
17 January 2017
Credit

Despite an improving domestic economy, the US retail industry is under pressure. Changing consumer preferences, falling tourist numbers, unseasonal weather and the rise of fashion e-retailers are among the reasons why US retailers – and department stores in particular – are struggling. Fraser Lundie, Co-Head of Credit, and Ilana Elbim, Credit Analyst at Hermes Investment Management, explain how they responded to this structural change with a defensive trade involving Macy’s, whose flawed strategy for reviving sales has proved one of the least effective in the sector.

Last November, we assessed how changing industry dynamics are increasingly affecting US retailers and focused on two department stores, Macy’s and JCPenney, in our Spectrum publication. We concluded that despite similar elements in their respective strategies, such as a focus on private brands and exclusive products, Macy’s should ultimately underperform given specific weaknesses in its plan.

Macy’s November-December trading statement, released in early January, provided evidence of its deterioration while JCPenney, as expected, continues to reduce its debt. JCPenney started 2017 by announcing the sale of one of its buildings for $353m and its intention to use the proceeds to pay down debt, which is positive for its credit profile.

Festive fail: Macy’s soft Christmas trading

Macy’s reported poor November and December trading, with like-for-like sales declining by -2.7%. While this is a sequential improvement compared to the past few quarters, it remains weak – especially considering the anaemic sales of the previous festive period, and falls below the management team’s expectations.

Management indicated that comparable sales in 2016 should reach the low end of the -2.5% to -3.0% guidance provided. It forecasts 2017 like-for-like sales to remain consistent with those in November and December, and downgraded its earnings-per-share expectations for 2016. We continue to be concerned about some of the company’s strategic priorities, such as closing 100 stores (which would undermine its click-and-collect offering) and dedicated heavy-discount sections (which risk cannibalising sales of higher-margin products).

What happened to the debt buyback?

In its Q3 2016 conference call with investors, Macy’s management team described how it aims to use excess cash. After capital expenditure commitments and distributions to shareholders, it opened the door to paying down some of its debt after reviewing the company’s leverage position at the end of the financial year. While this was well-received by investors, we wonder whether it will be revisited in light of the company’s recent performance and profit warning.

Macy’s debt-to-EBITDA is high, at 3.3x compared to its leverage range guidance of 2.5x to 2.8x. Credit ratings agency Moody's assigned a negative outlook to the company last year. On 5 January, Standard & Poor’s reacted to Macy’s performance and placed the company on negative watch, indicating that it could be downgraded in the coming months, with Fitch following suit the next day, designating a negative outlook for the retailer. A reduction in debt would be a positive step, credit-wise, for Macy’s.

Our trade in Macy’s

To express our negative view on the US retail industry, and on Macy’s in particular, we exercised the flexibility inherent in our approach to establish a defensive position through the company's credit-default swaps (CDSs). This was implemented at a low following the announcement of the potential debt buyback. While the November-December trading statement was released after the US market closed on 4 January, spreads on Macy’s CDS instruments had already widened by 25bps to 208bps. We believe they should continue to widen, at least until the company reports its Q4 2016 performance on 21 February and provides more details about the impacts of industry dynamics and how it is using its excess cash.

Expressing our view on Macy’s

credit

Source: Bloomberg as at 4 January 2017.

This position features in the Hermes Multi Strategy Credit strategy, which aims to generate absolute returns that capture the majority of the high-yield bond market’s upside with significantly less volatility. It seeks this through a combination of high-conviction, return-seeking investments and defensive trades. For the calendar year 2016, the strategy has provided 10.08% gross of fees in US dollar terms.[1]

The views and opinions contained herein are those of the authors and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products. The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future results and targets are not guaranteed.

[1] Source: Hermes as at 31 December 2016. Performance shown in base currency gross of fees. A full GIPS disclosure report is available in the latest factsheet. Past performance is not a reliable guide to future performance. The above information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

Share this post:
Fraser Lundie CFA, Co-Head of Credit and Senior Credit Portfolio Manager Fraser joined Hermes in February 2010 and is lead manager on the Hermes range of Credit strategies and co-head of credit. Prior to this he was at Fortis Investments, where he responsible for Euro High Yield.  Fraser graduated from the University of Aberdeen with an MA (Hons) in Economics and earned an MSc in Investment Analysis from the University of Stirling. He is a CFA® charterholder and member of the Association for Investment Management and Research (AIMR), having gained the UKSIP Level 3 Certificate in Investment Management (IMC). In 2013, Fraser featured  in Financial News’s ‘40 Under 40 Rising Stars of Asset Management’, an editorial selection pick of the brightest up-and-coming men and women in the industry, and in January 2015, Fraser was named as one of the top 10 star fund managers of tomorrow by The Daily Telegraph. Further information about Hermes Credit. CFA® is a trademark owned by the CFA Institute.
Read all articles by Fraser Lundie

Find posts by author

  • Alex Knox, ACA
  • Andrew Parry
  • Eoin Murray
  • Ilana Elbim
  • Louise Dudley
  • Mark Sherlock, CFA
  • Martin Todd
  • Michael Russell, CFA
  • Michael Vaughan
  • Neil Williams
  • Nina Röehrbein
  • Philip Nell
  • Saker Nusseibeh
  • Tatiana Bosteels
  • Tim Crockford
  • Tommaso Mancuso
  • Yasmin Chowdhury

Find posts by category

  • credit

Press contacts