Macy’s Shifts Focus to Investments, Buybacks After Paying Down Covid Debt

The new senior notes, which were offered in two tranches, will mature in 2030 and 2032, leaving Macy’s with no significant maturities—apart from $6 million coming due in 2025—until 2027, when it needs to repay $71 million in debt with a 6.79% interest rate.

The new debt has coupon rates of 5.875% and 6.125%, respectively, which is lower than what Macy’s paid for short-term debt it took out in 2020. Macy’s in August repaid $1.3 billion in secured notes with an 8.375% interest rate, at the time one of the highest rates in its debt portfolio, Chief Financial Officer Adrian Mitchell said.

The company on Tuesday removed the collateral on a second-lien loan consisting of several retail stores and distribution centers, a move aimed at freeing real-estate assets from debt, he said.

“We’ve focused on removing those really expensive towers [of debt] that were driven by the Covid pandemic and we put ourselves in a much better position with a much more reasonable rate of return,” said Mr. Mitchell, who has been in the role since November 2020. “The focus can now shift to investing in the growth of the business and building capabilities.”

Macy’s was in danger of running out of cash even before the onset of the coronavirus pandemic, as consumers adjusted their shopping habits, including making fewer visits to malls. The company’s business has recovered in recent quarters, freeing up cash that Macy’s allocated toward paying down some of its debt.

Overall sales climbed 28% to $8.67 billion during the quarter ended Jan. 29, compared with the prior-year period, thanks to stronger consumer spending. Net income rose to $742 million from $160 million a year earlier, Macy’s said.

The company over the next three years plans to spend $3 billion on capital investments in areas such as its distribution and digital operations, including $1 billion this year. Macy’s said last year it allocated $597 million for capital expenditures, after spending $466 million the year before.

Macy’s, which last year dedicated $500 million to buying back its own shares, in February said its board approved a $2 billion repurchase program. “We do expect to have meaningful repurchases over the next several years,” Mr. Mitchell said.

The company’s net debt totaled $1.58 billion as of Jan. 29, down 50.2% from a year earlier, Macy’s said.

“They’ve had a big reversal in their fortunes over the last year, so they’ve been able to clean up the balance sheet,” said David Swartz, an equity analyst at the research arm of financial services firm Morningstar Inc.

Macy’s leverage ratio—measured by comparing its net debt with earnings before interest, taxes, depreciation and amortization—was 1.3 times as of Jan. 29, down from 30.8 times a year before and 2.9 times at the end of fiscal 2019, according to data provider S&P Global Market Intelligence.

Mr. Mitchell said the company isn’t particularly exposed to rate increases by the Federal Reserve, as the coupon rates on all of its debt are fixed. The interest rates on its remaining debt are manageable, he said.

Macy’s continues to seek an upgrade from S&P Global Ratings and Moody’s Investors Service to investment grade after the ratings firms downgraded its debt in 2020. Fitch Ratings Inc. last month elevated Macy’s debt to investment-grade status after the retailer’s fourth-quarter earnings report.

“What’s important for us is to maintain an investment-grade profile and investment-grade metrics,” Mr. Mitchell said. The company is in conversations with both Moody’s and S&P, he said.

The company’s recent debt-related moves show that it is combing through its debt structure and looking for opportunities to fine-tune its position, said Stephanie Wissink, a managing director at investment bank Jefferies Group. “Certainly, that would give banks a lot of confidence in the ability to lend credit at lower rates,” Ms. Wissink said.

Write to Mark Maurer at [email protected]