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

DBRS has today confirmed Wal-Mart Stores, Inc.’s (Wal-Mart or the Company) Senior Unsecured Debt and Issuer Rating at AA and Commercial Paper Rating at R-1 (middle). The trends remain Stable. The confirmation is based on Wal-Mart’s stable earnings profile, as well as its consistently strong free cash flow generation. The ratings continue to be supported by Wal-Mart’s large scale and dominant market position, its efficient operations and its general resilience to swings in economic cycles. The ratings also consider the increasingly competitive environment and the mature nature of Wal-Mart’s home market.

Wal-Mart’s top-line growth in recent years has been primarily driven by aggressive retail square footage growth in the emerging markets. During F2013, however, Wal-Mart slowed its pace of expansion in its international segment and refocused its efforts on improving productivity in that region. Meanwhile, in the U.S., Wal-Mart expanded its focus beyond its recent Supercenter conversions to include new smaller express format stores to capture a broader spectrum of consumers.

The effect of such a shift was evident in F2013, as Wal-Mart’s overall top-line growth moderated. Revenue increased by 5% to $469 billion in F2013 (versus 6% a year earlier) despite modest improvement in U.S. comparable store sales (2.1% in F2013 vs. 0.9% in F2012) and the increased focus on growth in the United States. EBITDA margins remained flat at 7.8% year-over-year as continued investment in price (“Every Day Low Price,” or EDLP), global merchandise mix and e-commerce capabilities offset efficiency improvements and operating leverage achieved during the year. As such, growth in EBITDA grew at the same pace of sales, increasing to $36.5 billion in F2013 from $34.6 billion a year earlier.

In terms of financial profile, Wal-Mart continues to possess strong and stable free cash flow generating capacity that has historically been coupled with generally prudent financial management. Lower capex and a modest dividend increase resulted in nearly $7.5 billion of free cash flow during F2013 (versus $5.7 billion in F2012), which was used towards share repurchases totaling $7.6 billion.

Debt level remained relatively steady during F2013 ($54.1 billion versus $53.4 billion in F2012) and Wal-Mart’s key credit metrics improved modestly, including a decline in lease-adjusted debt-to-EBITDAR to 1.70x from 1.74x a year earlier.

Going forward, DBRS expects Wal-Mart’s earnings profile will remain stable and relatively strong, based on the Company’s inherent strengths, as well as its improving geographic and store format diversification. DBRS estimates Wal-Mart’s top-line growth will continue to moderate and remain in the low-to-mid-single digits, based on disciplined global retail square footage growth and modest improvements in comparable store sales in the United States and from the Company’s recent investment in its e-commerce capabilities. EBITDA margins are expected to improve modestly in the near term, as Wal-Mart balances its EDLP price investment against the backdrop of an increasingly competitive environment with benefits from its ongoing cost-cutting initiatives. As such, DBRS forecasts that EBITDA should continue to grow at a pace that is consistent with revenue growth.

DBRS expects Wal-Mart’s financial profile to remain strong on the back of its robust free cash flow generating capacity. Capex is expected to remain stable and in the range of $12 billion to $13 billion, while dividends are expected to increase substantially towards $6.4 billion (versus 5.4 billion in F2013) in F2014. That said, Wal-Mart should still continue to generate a healthy level of free cash flow before changes in working capital in the range of $8 billion to $8.5 billion. DBRS expects Wal-Mart will continue to use free cash flow and perhaps some incremental debt to complete share repurchases and/or acquisitions in F2014 while keeping key credit metrics in line with the current rating category.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.