Fitch Affirms Walmart's IDR at 'AA'

CHICAGO--()--Fitch Ratings has affirmed its long-term Issuer Default Rating (IDR) at 'AA' on Wal-Mart Stores, Inc. (Walmart), and its short-term IDR at 'F1+'. The Rating Outlook is Stable. Walmart had $55.5 billion of debt outstanding as of April 30, 2014. A full ratings list is provided at the end of this release.

KEY RATING DRIVERS

The rating reflects Walmart's dominant market position in North America, strong position in the UK, and long-term growth potential from other markets such as Central America, Chile and South Africa. Also considered is Walmart's low cyclicality, consistently positive free cash flow (FCF), and steady financial leverage despite ongoing debt-financed share repurchases.

These factors are balanced by a challenging economic environment pressuring the company's core customers, growing competition from dollar stores and hard discounters, and currently weak results in the key growth markets of China and Brazil.

Walmart's success flows from its broad grocery and general merchandise selection at sharp prices, made possible by its low operating costs and significant buying power. Despite these strengths, Walmart's sales grew only 1.5% in 2013, down from 5% growth in 2012. Comparable store (comp) sales in Walmart's U.S. segment (which excludes Sam's Clubs and accounted for 75% of consolidated operating earnings in 2013) were negative 0.6% in 2013 (ending Jan. 31, 2014), following increases of 1.8% in 2012 and 0.3% in 2011.

This reversal reflects several factors, including the difficult environment facing low income consumers, competition from hard discounters and dollar stores, and low food inflation impacting the grocery business which accounts for 56% of sales at both Walmart U.S. and Sam's Club.

The company is focused on improving top line growth by enhancing merchandise assortments, sharpening prices by reinvesting expense savings, and investing in e-commerce. Walmart's global online sales grew in 2013 by 30% to more than $10 billion, or just over 2% of the company's total sales. However, as the environment remains challenging, Fitch expects comps sales in the Walmart U.S. segment will track in the -1% to +1% range over the next 12-24 months.

Walmart has maintained a steady EBIT margin over time at or near 6%, though it narrowed by 30 basis points (bps) to 5.6% in 2013 from 5.9% in 2012 reflecting weaker results from the international segment. This was due to slower sales growth, price investments in Brazil, Canada and Mexico, one-time costs due in part to store closures in Brazil and China, and investments in e-commerce. Fitch expects operating results from the international segment will gradually improve over the next few years, and that Walmart's consolidated operating margins will remain consistent with historical levels.

FCF after dividends was $4 billion in 2013, down from $7.3 billion in 2012, due to lower earnings and higher dividends. Fitch expects Walmart will continue to generate strong FCF after dividends of around $5 billion - $6 billion annually over the next three years. FCF has been used primarily for share repurchases, but also for acquisitions, the most recent being the minority interest in Walmart Chile, which was acquired in February 2014 for $1.5 billion, bringing Walmart's stake to close to 100%.

Steady operating results have enabled Walmart to generate stable credit metrics over time. Adjusted debt/EBITDAR and EBITDAR/interest plus rents were 2.0x and 7.3x, respectively, at April 30, 2014, compared with 1.9x and 7.9x, respectively, in 2012. Walmart is expected to use FCF in part to reduce debt levels during 2014 to bring adjusted debt/EBITDAR under 2.0x. Longer term, share repurchases are expected to be partly debt-financed, as management seeks to maintain leverage within its historical range of 1.9x-2.0x.

RATING SENSITIVITIES

An upgrade is unlikely, given that the rating is currently at the high end of the rating spectrum and fully captures the company's financial and qualitative strengths.

Future developments that may, individually or collectively, lead to negative rating action include:

--A debt-financed acquisition or accelerated share repurchases that pushed adjusted leverage to over 2x for an extended period;

--Persistently weak comp store sales that result in market share losses and/or more pronounced gross margin pressure that cannot be offset by expense leverage.

Fitch affirms Walmart as follows:

Wal-Mart Stores, Inc.

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

--Senior unsecured debt at 'AA';

--Bank credit facility at 'AA';

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

--Commercial paper at 'F1+'.

The Rating Outlook is Stable.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=840035

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Contacts

Fitch Ratings
Primary Analyst
Philip M. Zahn, CFA
Senior Director
+1-312-606-2336
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Monica Aggarwal, CFA
Senior Director
+1-212-908-0282
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Philip M. Zahn, CFA
Senior Director
+1-312-606-2336
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Monica Aggarwal, CFA
Senior Director
+1-212-908-0282
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com