Meet the new ‘fallen angels’: Macy’s, Coach- and Michael Kors-parent credits cut to ‘junk’ at Fitch

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Macy’s Inc., Coach-parent Tapestry Inc. and Michael Kors-parent Capri Holdings Ltd. have joined the ranks of “fallen angels,” after Fitch Ratings downgraded their credit ratings to “junk” territory, citing the “unprecedented” impact of the COVID-19 epidemic on the consumer spending on nonessential items.

Fitch cut the long-term issuer default ratings (IDR) of both Macy’s M, -7.64%  and Capri CPRI, -18.86%  by one notch to BB+, the highest speculative-grade, or “junk” rating, from BBB-, and lowered Tapestry’s TPR, -15.06%  IDR by two notches to BB from BBB-.

The outlooks for the IDRs of all three retailers remains negative, which warns of further downgrades, as the “significant business interruption from the coronavirus pandemic and the implications of a downturn in discretionary spending that Fitch expects could extend well into 2021.”

Shares of Macy’s dropped 7.6% in afternoon toward the lowest close since it started trading in February 1992, according to FactSet. The department store chain was also booted from the S&P 500 index SPX, -4.49%  by S&P Dow Jones Indices late Tuesday, and placed in the S&P SmallCap 600 index SML, -6.76%  . Shares of Tapestry tumbled 15% and Capri sank 19%.

Don’t miss: Here’s why stock investors should care about investment-grade credit ratings.

The ratings downgrades and negative outlooks at Fitch are part of a more pessimistic view of the broader discretionary retail sector, given the uncertainty over the duration of closures of stores selling nonessential goods.

“Fitch has assumed a scenario where discretionary retailers in the U.S. are essentially closed through mid-May with sales expected to be down 80%-90% despite some sales shifting online, with a slow rate of improvement expected through the summer,” Fitch said. “Given an increased likelihood of a consumer downturn, discretionary sales could decline in the mid-to-high single digits [on a percentage basis] through the holiday season.”

See related: How the Fed’s latest crisis-era credit facility aims to finally calm rattled markets.

Also read: Cracks are forming in corporate bonds as coronavirus slams Wall Street.

“Fallen angel” is a term used to describe a situation in which a company’s debt rating falls from investment grade to junk status. Typically, a rating isn’t considered junk unless at least two of the three major credit-rating agencies rate them as such. Of the three, Macy’s is the only “official” junk credit, as S&P Global Ratings cut its rating to BB+ in February and Moody’s Investors Service cut its rating to Ba1 — Moody’s highest speculative grade rating — last week.

Tapestry is still investment grade at Moody’s and S&P Global and Capri is investment grade at S&P Global but is not rated at Moody’s.

Fitch also cut on Wednesday the IDRs of Dillard’s Inc. DDS, -20.41%  two notches to BB from BBB-, of Nordstrom Inc. JWN, -12.76%  to BBB from BBB+, of Kohl’s Corp. KSS, -10.90%  to BBB- from BBB, of Levi Strauss & Co. LEVI, -13.76%  to BB from BB+, of Signet Jewelers Ltd. SIG, -0.93%  to B from B+ and of J.C. Penney Corp. JCP, -11.69%  to CCC- from CCC+, while keeping that of Burlington Stores Inc. BURL, -8.32%  at BB+. The outlooks for all the ratings remain negative.

Fitch said that while it expects “significant” sales growth in 2021 off a weak 2020, the level could be as much as 8% to 10% below 2019 sales. Department store sales could fare much worse, Fitch said, with sales projected to decline in the low to midteens percentages in 2021.

“Given the typical timing of a consumer downturn (four to six quarters), revenue trends could accelerate somewhat exiting 2021, with 2022 projected as a modest growth year,” Fitch said.

For Macy’s, Fitch expects 2020 revenue to be nearly 25% below 2019 levels followed by a decline of over 15% in 2021. Tapestry revenue is expected to decline around 25% in 2020 and around 10% in 2021, while Capri revenue is forecast to fall around 25% in calendar 2020 and is expected to decline around 10% in fiscal 2022.

Year to date, shares of Macy’s have plunged 73%, Tapestry have tumbled 59% and Capri have plummeted 77%, while the SPDR S&P Retail exchange-traded fund XRT, -5.67%  has dropped 39% and the S&P 500 has lost 24%.

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