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May Department Stores Rating Lowered

On July 8, 2002, Standard & Poor's lowered its corporate credit and senior unsecured ratings on retailer May Department Stores Co. to single-'A' from single-'A'-plus. The downgrade reflects May's below-average operating performance compared with that of its peers for the past two years.

Standard & Poor's also affirmed its 'A-1' commercial paper rating on the St. Louis-Mo.-based May Department Stores. The company had $4.7 billion in debt outstanding as of May 4, 2002. The outlook is stable.

May Department Stores' credit protection measures during the past two years have deteriorated as a result of its below-average operating performance and higher leverage. The latter is due to ongoing aggressive share repurchases, heavy spending for internal expansion, and acquisitions.

Although Standard & Poor's expects that May's results will progress over time, management's relatively aggressive financial policies are likely to temper improvement in credit ratios.

May Department Stores Co. has enjoyed a long history of success in department store retailing. The company leads the industry in overall and store-level performance, and it has also enjoyed historically strong credit-protection measures. However, in fiscal 2001, the company saw the end of 25 consecutive years of annual earnings growth and further declines in fiscal 2001 and the first quarter of 2002. Along with its competitors, May has suffered from lagging consumer confidence, a recession aggravated by the events of September 11, significant setbacks in the stock market, and a growing unemployment rate that has pared disposable personal income.

With the exception of free cash flow, which increased, all of May Department Stores' fiscal 2001 credit measures receded after already having fallen the year before. Operating margins fell to 14% from 15%. Return on capital dropped to 17.9% in fiscal 2001 from 22.6% in fiscal 2000 and more than 25% in fiscal 1999.

The outlook for May and for other moderately priced department stores remains problematic for 2002, as the sector continues to be challenged by economic difficulties and intense competition. Although positive comparisons should be much easier to achieve during the second half of the year, consumer spending remains closely tied to a fragile economy.

The company's debt leverage has increased substantially in recent years, partly because of aggressive expansion, acquisitions, and share repurchases. This, in combination with the company's lagging performance, resulted in higher leverage, including a total debt to EBITDA of 1.9 times (x) in 2001, versus only 1.1x in 1999. EBITDA interest coverage was 6.5x last year versus more than 10x in 1999. Funds from operations to total debt was 37%, compared with 43% in 2000 and 63% the year before that. Despite these increases, May's credit protection measures remain relatively strong, and they are expected to recover moderately in 2002. The company's financial flexibility is very good: May has a demonstrated ability to access the capital markets, and liquidity is provided by a five-year $700 million revolving credit facility that expires in July 2006 and a $300 million 364-day facility.

The stable outlook incorporates expectations that May will be able to turn around its department store business and that its profitability and other credit measures will recover somewhat from depressed levels. Standard & Poor's also believes that May will continue its relatively aggressive financial policies to expand, acquire, and repurchase shares, but that such spending will be done within the context of the current rating. From Standard & Poor's CreditWire

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