SAO PAULO--(BUSINESS WIRE)--Fitch Ratings expects the severe deterioration in Brazil's macroeconomic environment to continue challenging operating profitability for Brazilian retailers in the short to medium term. Fitch expects some margin compression during the second half of 2015 and early 2016 while retailers adjust their operations to current weak demand levels.
Companies are likely to stimulate demand by dropping down prices and avoid additional inventory mark downs. Weak consumer confidence remains pressuring sales volumes and forcing retailers to drop down prices to entice consumers, as competition has intensified as a result of strong supply and demand imbalances, which Fitch believes will widen further.
Fitch also forecasts cash flow from operations (CFFO) of Brazilian retailers will weaken meaningfully. The scenario of increasing interest costs combined with higher working capital needs, mainly driven by excessive inventories, are likely to put pressure in operating cash flow in the coming quarters. In this sense, most Brazilian retailers still have some operational flexibility to limit free cash flow erosion by reducing discretionary capital expenditures.
Fitch expects some pressure in weaker retailers' ratings in the near term. The agency is more concerned on companies with higher refinancing needs, volatile demand levels and tight operating margins, including Profarma and Martins. Companies that operate a more defensive businesses and stands an above average financial discipline, such as CBD and Lojas Americanas, are less susceptible against rating downgrades through the cycles. However, lower credit availability and higher interest rates will continue to challenge liquidity and profitability of these retailers. Therefore, keeping a healthy financial flexibility is key to the maintenance of the sector's ratings in the medium to long term.
Additional information is available on www.fitchratings.com