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Rating Action:

MOODY'S DOWNGRADES THE MAY DEPARTMENT STORES COMPANY'S RATINGS (SENIOR UNSECURED TO Baa1 FROM A2; COMMERCIAL PAPER TO PRIME-2 FROM PRIME-1); OUTLOOK STABLE

16 Jun 2003
MOODY'S DOWNGRADES THE MAY DEPARTMENT STORES COMPANY'S RATINGS (SENIOR UNSECURED TO Baa1 FROM A2; COMMERCIAL PAPER TO PRIME-2 FROM PRIME-1); OUTLOOK STABLE

Approximately $5.6 Billion of Debt Instruments Downgraded

New York, June 16, 2003 -- Moody's Investors Service lowered the ratings of The May Department Stores Company (senior unsecured to Baa1 from A2 and commercial paper to Prime-2 from Prime-1). The rating outlook is stable. This rating action concludes the review for possible downgrade begun on March 7, 2003.

The downgrade reflects the negative impact on debt protection measures from predominately negative comparable store sales for the last 24 months as competition from other retail formats, apparel price deflation, a slower economy and sated apparel appetites have challenged the company's ability to grow sales and profitability. Credit metrics also deteriorated as a result of May's aggressive share repurchases through fiscal 2001.

Like many of the other full-line department stores, May has experienced anemic or negative comparable store sales for several years. The improving apparel merchandise at discounters has appealed to low-end customers during a slow economy, and the good value proposition and easy shopping experience offered by the expanding Kohl's concept have intensified the challenges to building profitable sales in the department store segment. May's comparable store sales have often fallen more than some of its direct competitors; the company's private label merchandise and national assortments may be resonating less with consumers than the offerings of other department store retailers. In addition, May's geographic diversity has meant that it has absorbed the competitive impact of non-traditional retailers earlier and in more markets than some other department stores. May has responded with the introduction of new private brands, especially those targeting underserved and younger consumers. The company has edited national assortments, and is re-establishing Lord & Taylor as an upscale retailer of fashion and style. The new Superior Value program will emphasize May's price competitiveness. The company has also built a significant bridal and formalwear business through acquisition, in an effort to convert young bridal and prom shoppers to department store customers. Some capital expenditures are appropriately being devoted to a better shopping experience. While these initiatives are likely to be successful, it could take time for lapsed and new consumers to learn about and appreciate them.

Nonetheless, the growth of May's sales and profitability during the flourishing retail environment that ended in 1999 has given the company one of the highest profit margins in the industry. Strong operating cash flow in fiscal 2002 allowed debt to be reduced, although cash flow to debt metrics weakened. May's ownership of its receivables and most of its stores are credit positives. The company's capital structure is conservative, with the largest current portion of long term debt over the next 34 years at a manageable $260 million and with commercial paper appropriately used primarily for seasonal working capital needs. However, the erosion in credit metrics that began in fiscal 2000 was exacerbated by aggressive share repurchases. Fixed charge coverage fell from 5.4 times in fiscal 1999 to 3.1 times in fiscal 2002. Leverage has risen due to weaker cash flow from operations in combination with higher debt levels as a result of share repurchases in 2000 and 2001. Moody's notes that May's share repurchases in fiscal 2002 were modest and anticipates that capital structure will remain stable in the intermediate term.

The stable outlook is based on Moody's belief that May's solid cash flow generation, efficient operations, conservative capital structure and efforts to improve merchandising and the shopping experience should preserve debt protection measures even in an unforgiving retail environment. Given the challenging operating environment that May faces, there is unlikely to be upward rating momentum over the intermediate term. Longer term, an upgrade would require a sustained and sustainable improvement in comparable store sales, market shares in major trade areas and credit metrics. Ratings could be lowered if comparable store sales seem unlikely to rebound in the intermediate term, if margins are sacrificed to grow revenues, or if May makes a significant debt-financed acquisition.

Ratings lowered:

The May Department Stores Company:

Senior unsecured notes, bank agreement, senior notes, debentures, amortizing notes, MTN program and bonds, guaranteed by parent holding company, to Baa1 from A2.

Issuer rating to Baa1 from A2.

Senior unsecured shelf to (P)Baa1 from A2.

Commercial paper, guaranteed by the parent holding company, to Prime-2 from Prime-1.

Strawbridge & Clothier:

Senior unsecured notes assumed by The May Department Stores Company to Baa1 from A2.

Headquartered in St. Louis, The May Department Stores Company operates 447 department stores, in addition to David's Bridal, After Hours Formalwear, and Priscilla of Boston stores. Department store banners are Lord & Taylor, Famous-Barr, Filene's, Foley's, Hecht's, Kaufmann's, L.S. Ayres, Meier & Frank, Robinsons-May, Strawbridge's and The Jones Store.

end

New York
Angela Jameson
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Elaine E. Francolino
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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