DBRS Confirms Wal-Mart at AA, R-1 (middle)

DBRS has today confirmed Wal-Mart Stores, Inc.’s (Wal-Mart or the Company) Senior Unsecured Debt and Commercial Paper ratings at AA and R-1 (middle), respectively, both with Stable trends. Wal-Mart’s earnings profile remains stable and exceptionally strong due to the Company’s dominant market position, efficient operations, resistance to economic cycles and improving geographic diversification. The weak economy and unfavourable trends in foreign currency exchange rates have put increased pressure on growth rates, with net sales actually declining -1% for the first six months of F2010. On a constant currency basis, net sales growth would have been in the positive low-to-mid single-digit range.

Wal-Mart has focused primarily on preserving margins with pricing, cost control, and efficiency improvements as opposed to focusing on maintaining volume and revenue growth. In F2009, Wal-Mart used $2.6 billion of its free cash flow for debt reduction and improved lease-adjusted cash flow-to-debt to 45% (versus 39% yoy), which is at the high-end of its historical range and well within levels comfortable for the current credit ratings. The first six months of F2010 have seen free cash flow tracking expectedly lower than the previous year’s record level due to slightly lower operating cash flow, and moderately higher capex and dividends. Wal-Mart has not used free cash flow for debt reduction so far this year.

Going forward, DBRS expects Wal-Mart’s overall sales growth to be flat for the full year F2010, due primarily to the forex effect, the weak economy and a slower pace of expansion/conversion in the United States. That said, Wal-Mart’s top-line performance should continue to be superior to most retail peers over the course of F2010. Operating margins are expected to remain fairly steady through F2010 as Wal-Mart chooses to preserve margins with pricing actions at the expense of volume growth. Sales growth should return to the positive mid-single-digit range and operating margins should benefit from a recovery in the economy beginning in F2011.

In terms of financial profile, DBRS expects Wal-Mart to remain stable and commensurate with the current rating category, due to steady growth in operating cash flow, moderating domestic capital investment and prudent financial management. Operating cash flow should continue to track operating income and grow in F2011 after being flat to down slightly in F2010. Overall capital expenditures are expected to remain below the high levels of recent years as the rate of domestic expansion continues to slow. DBRS expects share repurchase activity to continue, but in a carefully managed process (balancing investment in growth and taking into account internal leverage targets) to preserve the current ratings.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Food Retailers and Rating Merchandisers, which can be found on our website under Methodologies.

This is a Corporate rating.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.