More Trouble In Store?

A 34-page missive labeled "privileged and confidential" hit the desks of R. H. Macy & Co.'s creditors on Aug. 28. Optimistically titled Rebuilding Macy's, the document was supposed to build confidence about Macy's ability to pull itself out of bankruptcy.

The outline does contain a few positive surprises, unearthed by Macy's consultants Kurt Salmon Associates. Macy's, for instance, has a core of loyal, affluent shoppers who look more often for fashion than for bargains. They visit the store 20 times annually, are younger than the average department store shopper--37.9 vs. 43.9--and report a hefty $66,300 in annual household income.

`TERRIFIC!' But beyond that, the outline does virtually nothing to quash concerns about Macy's future as a growing concern. Since filing for Chapter 11 protection in January, Macy's has reported huge operating losses. In June alone, the most recent month reported, the retailer's operating loss was nearly $33 million (chart). The company has also lost a number of managers to other companies, including Harold Kahn, the former chairman of Macy's South, now president of Montgomery Ward & Co. Macy's bond prices have fallen over 20% in the last month: The junk debt maturing in 1998 trades for 28 on the dollar, down from 49 in May. Plus, there are concerns that Macy's may default on its bank covenants after Christmas.

Still, when asked how he's doing, Macy's co-CEO Myron Ullman responds: "Terrific!" He and co-CEO Mark Handler "have never had more fun," he says. What about the crummy results? "We don't think we have a victory," he admits. "But it's difficult to anticipate job loss, and unrest and earthquakes in California." Ullman insists that results will improve, and he points to $42 million in savings this quarter from store closings, inventory management, and the sale of the corporate airplane.

Despite the dire conditions at Macy's, Ullman can afford to be upbeat. Backing him is a bank group led by Chemical Bank and Bankers Trust. These creditors, which already hold $700 million of Macy's prebankruptcy debt, have made an additional $600 million available in debtor-in-possession financing to help the retailer meet expenses. These obliging lenders have twice lowered their covenants, the standards of performance a borrower must meet to avoid having a loan placed in jeopardy. The new covenants require Macy's to generate $130 million in cash flow for the Christmas quarter, down from an earlier minimum of $150 million. Macy's should make that number, says Michael N. Cha, a high-yield analyst at J. P. Morgan Securities Inc., despite a stunningly negative $142 million cash flow during last year's yuletide season.

But whether Macy's can make its bank covenants for the quarter ending in April isn't so sure. Cha says the covenants call for Macy's to earn $55 million in that post-Christmas period, and many analysts doubt Macy's is up to it. "Yes, it's fair to say that the company would face some covenant issues in early '93," says one bank official. Ullman says it's too soon to tell. The immediate challenge is Christmas, when Macy's expects 1.1% increases at stores open a year or more. Same-store sales declined 8.4% in 1991.

NEW FACES? Ullman isn't the only one who wants sleigh bells to ring. "My biggest concern is that the deterioration continues unabated," says Jack Hersch, director of research at M. J. Whitman, junk bond traders. A lousy Christmas, he says, could prompt creditors to push for a management change.

Robert Miller, counsel to Macy's bondholders' committee, is more optimistic. "We thought we could take this company out of Chapter 11 lickety-split, but the problems are much more severe than we anticipated. The best I can say is that management seems to have taken a number of steps reasonably calculated to improving the situation." If things don't improve, different management may be issuing the next recovery plan.

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