CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AA' to Wal-Mart Stores, Inc. (Walmart) $1 billion issue of five-year notes and $750 million of 30-year notes. The Rating Outlook is Stable. The proceeds from the issues will be used for general corporate purposes. 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, a strong position in the UK, and a growing presence in other markets such as China, Brazil, Central America and South Africa. Also considered is Walmart's low cyclicality, consistent free cash flow (FCF) and steady financial leverage despite ongoing debt-financed share repurchases.
These factors are balanced by a more challenging economic environment pressuring the company's core customer base, and growing competition from dollar stores and hard discounters, among others.
Walmart's success flows from its broad selection and sharp prices, made possible by its low operating costs and significant buying power. Despite these strengths, comparable store (comp) sales in Walmart's U.S. segment (which excludes Sam's Clubs and accounted for 71% of consolidated operating earnings in 2012) declined by 1.1% in the first half of 2013 (ending July 26, 2013), following increases of 1.8% in 2012 and 0.3% in 2011.
This decline reflects the difficult environment facing low-income consumers, including the payroll tax increase that was implemented as of Jan. 1, 2013. For full-year 2013, Fitch expects modestly positive comps, in part due to easier comparisons as the year progresses.
Despite soft top-line results, Walmart has been able to maintain a steady operating margin at or near 6% (5.9% in the LTM ended July 31, 2013), as modest gross margin pressure has been offset by expense leverage. Going forward, Fitch expects operating margins will remain consistent with historical levels.
Steady operating results have enabled Walmart to generate stable credit metrics over time, with adjusted debt/EBITDAR of 1.7x-2.0x and EBITDAR/interest plus rents of 7.8x-8.3x over the past five years.
Fitch expects FCF after dividends will track at around $8 billion to $10 billion annually over the next two years, compared with $7.3 billion in 2012, due to earnings growth and tight control of capital outlays. Share repurchases are expected to continue to exceed FCF, and to be partly debt-financed, as Fitch expects the company will manage its adjusted debt/EBITDAR ratio at or under 2.0x, in the context of maintaining its 'AA' rating.
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 and/or more pronounced gross margin pressure that cannot be offset by expense leverage.
Fitch currently rates Walmart as follows:
Wal-Mart Stores, Inc.
--Long-term Issuer Default Rating (IDR) 'AA';
--Senior unsecured debt 'AA';
--Bank credit facility 'AA';
--Short-term IDR 'F1+';
--Commercial paper 'F1+'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' dated Aug. 5, 2013.
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=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=803310
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