Fitch Affirms Wal-Mart Stores, Inc.'s IDR at 'AA'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Wal-Mart Stores, Inc. (Walmart) as follows:

--Long-term Issuer Default Rating (IDR) at 'AA';

--Bank credit facility at 'AA';

--Senior notes at 'AA';

--Short-term IDR at at 'F1+';

--Commercial paper at 'F1+'.

The Rating Outlook is Stable. Walmart had approximately $47 billion of debt outstanding as of April 30, 2010.

The affirmation reflects Walmart's dominant market position in North America, a strong position in the U.K., and a growing presence in other markets such as China and Brazil. Also considered is Walmart's steady financial profile despite ongoing debt-financed share repurchases. These factors are balanced by a more challenging economic environment pressuring its core customer base, reflected in weaker top line sales growth over the past year.

Walmart's success flows from its low operating costs, which allow it to be the price leader in most product categories. Despite its competitive strength, comparable stores sales in Walmart's U.S. segment (which excludes Sam's Clubs and accounted for 75% of consolidated operating earnings in fiscal 2010) declined by 0.7% in fiscal 2010 and 0.8% in the first quarter of fiscal 2011. This is due to the soft economy, as reflected in lower store traffic and food price deflation, as well as tough competition and a change in merchandising strategy in which the company is reducing the number of SKUs (items) sold in its stores.

The SKU reduction is part of the Project Impact initiative which involves improving the store environment with cleaner aisles and displays as well as shorter check-out lines in order to provide a better customer shopping experience. The company is partially reversing the SKU reduction strategy and giving more emphasis to price rollbacks in order to boost store traffic and sales.

Despite the pressure on Walmart's top-line, the company has been able to maintain a steady operating margin of around 5.7-5.9% (5.8% in the LTM ended April 2010). This has been accomplished by a continued increase in the gross margin, offsetting a gradually increasing SG&A ratio in recent years. The company is clearly focused on restoring top line growth, though Fitch expects margins will remain consistent with historical levels.

Walmart generates strong free cash flow (FCF), which reached close to $10 billion in fiscal 2010 due to lower capital expenditures and tight inventory management. At the same time, share repurchases were kept to a level less than FCF during fiscal 2010, enabling adjusted debt/EBITDAR to improve from 1.8 times (x) at fiscal year end 2009 to 1.7x at fiscal year end 2010. EBITDAR/interest plus rents improved from 7.8x to 8.3x over the same period.

FCF is expected to remain robust in fiscal 2011, though not at the level of fiscal 2010. At the same time, share repurchases are expected to increase this year under a $15 billion authorization, and they will be partly debt-financed, which will cause leverage to increase modestly. However, management is committed to its 'AA' rating, and Fitch expects the company will manage adjusted debt/EBITDAR at its historical level of under 2.0x.

The ratings reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and include:

-- 'Fitch Ratings' Process for Reviewing Existing, Updated and New Criteria, Models and Securities', dated Dec. 19, 2009;

-- 'Corporate Rating Methodology', dated Nov. 24, 2009;

-- 'Operating Leases: Updated Implications for Lessees' Credit', dated Aug. 13, 2009;

-- 'Evaluating Corporate Governance', dated Dec. 12, 2007;

-- 'Liquidity Considerations for Corporate Issuers', dated June 12, 2007;

-- 'Short-term Ratings Criteria for Corporate Finance', dated June 12, 2007.

Additional information is available at 'www.fitchratings.com'.

Related Research:

Fitch Ratings' Process for Reviewing Existing, Updated, and New Criteria, Models, and Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=491780

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489018

Operating Leases: Updated Implications for Lessees' Credit

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462222

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=363502

Liquidity Considerations for Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

Short-Term Ratings Criteria for Corporate Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328670

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