CHICAGO--()--Fitch Ratings has affirmed its ratings on Burlington Coat Factory Warehouse Corp. (BCF), including the company's long-term Issuer Default Rating (IDR) of 'B-', the 'BB-/RR1' rating on the asset-based revolver, the 'B-/RR4' rating on the senior secured term loan and the 'CC/RR6' rating on the senior unsecured notes. The Rating Outlook is Stable. BCF had $1.5 billion in debt outstanding as of July 30, 2011.
The affirmation reflects BCF's significant geographic reach with 462 stores across 44 states and Puerto Rico, positive free cash flow generation and adequate liquidity. The ratings also consider BCF's high leverage, comparatively sluggish same store sales trends and underperformance relative to some of its larger off-price and department store peers.
BCF has a hybrid business model, coupling the low prices of off-price retailers with the branded merchandise typically associated with department stores. Fitch believes that the company's merchandise offering and positioning is a good fit with the macroeconomic environment, as consumers continue to be focused on value and are sensitive to price. Notably, Burlington has added approximately 100 stores over the last five years (since Bain acquired the company in 2006). This level of store growth is somewhat unique in the retail sector over recent years.
Since the buyout by Bain in 2006, EBITDA has grown from mid-$200 million to $344 million (latest 12 months [LTM] ended July 30, 2011) on the back of store growth, not positive same store sales. BCF's annual same store sales have ranged from (5.2%) to (0.2%) over the last five years and have generally trailed those of both department stores as well as other off-price retailers such as Ross Stores, Inc. and TJX Companies, Inc. BCF did report positive same store sales of 2.1% for the first six months of 2011, which still trails the 3% level posted by TJX Companies, Inc. and 4% level reported by Ross Stores, Inc. Furthermore, while EBITDA margins have improved over the last few years and are now in the 9% area, they remain somewhat on the lower end of the retail spectrum. Fitch expects margins to be relatively flat going forward. Seasonality is significant as the fourth quarter typically accounts for about half of EBITDA. In addition to seasonality in the business, the cadence around markdown activity can vary from quarter to quarter which can cause swings in profitability.
With lease-adjusted leverage in the 5.6 times (x) area, BCF's leverage is high. Financial policy is aggressive, as evidenced by the dividend recap transaction that closed in February 2011 in which a $300 million distribution was paid to shareholders (primarily Bain, which owns approximately 97% of the company). While Fitch expects Burlington to generate positive cash flow (3%-4% of total debt), leverage is likely to remain high in the mid-5x range over the next one to two years. Assuming debt levels remain largely unchanged, EBITDA would have to be in the $400 million context for leverage to fall below 5.0x. Given a muted economic environment and a pressured consumer, Fitch does not anticipate Burlington to achieve this sort of performance in the near-to-intermediate term.
Burlington has adequate financial flexibility. Liquidity was $304 million as of July 30, 2011, made up of $32 million in cash and $272 million in revolver availability. An amount of $79 million was drawn on the $600 million ABL as of July 30, 2011. Cash on the balance sheet is essentially cash in the system; the company borrows on its ABL revolver to run store operations day in and day out. Working capital peaks in the October-November timeframe and the revolver is typically at its lowest in the first quarter. Burlington generated free cash flow (FCF) of $76 million in 2010. Assuming the company can post minimally positive comps and maintain margins, Fitch expects BCF to maintain this level of FCF generation over the next few years.
Given that the company recently re-set its capital structure due to the dividend recap in February 2011, the nearest maturity is the $600 million ABL revolver in 2016. Under the company's term loan agreement, Burlington is subject to two maintenance financial covenants, a leverage covenant (starting level is 6.75x with stepdowns) and an interest coverage covenant (1.75x with step-ups). Fitch does not anticipate any near-term covenant violations.
The ratings on the various securities reflect Fitch's recovery analysis which is based on a liquidation value of BCF in a distressed scenario of around $900 million. Applying this value across the capital structure results in an outstanding recovery prospect (91%-100%) for the asset-based revolver. This revolver is rated 'BB-/RR1' and is collateralized by a first lien on inventory and receivables and a second lien on real estate and property and equipment. The term loan is rated 'B-/RR4', reflecting average recovery prospects (31%-50%), and is collateralized by a first lien on BCF's real estate and property and a second lien on inventory and receivables. The unsecured senior notes are rated 'CC/RR6' reflecting poor recovery prospects (0%-10%).
Fitch's ratings on BCF are as follows:
Burlington Coat Factory Investment Holdings, Inc.
--Long-term IDR 'B-'.
Burlington Coat Factory Warehouse Corp.
--Long-term IDR 'B-';
--$600 million asset-based revolver 'BB-/RR1';
--$1 billion term loan 'B-/RR4';
--$450 million senior unsecured notes 'CC/RR6'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process other than through the medium of its public disclosure. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', (Aug. 12, 2011);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers', (May 12, 2011);
--'U.S. Retail Recovery Models -- Second-Quarter 2011 (Sept. 26, 2011);
--'U.S. Retail Stats Quarterly -- Second-Quarter 2011 (Oct. 10, 2011).
Applicable Criteria and Related Research:
U.S. Retail Stats Quarterl --Second-Quarter 2011 -- Amended
U.S. Retail Recovery Models -- Second-Quarter 2011
Recovery Ratings and Notching Criteria for Utilities