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

DBRS has today confirmed Wal-Mart Stores, Inc.’s (Walmart 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 Walmart’s stable earnings profile, as well as its consistently strong free cash flow generation. The ratings continue to be supported by Walmart’s large scale and dominant market position, its efficient operations and its general resilience to swings in economic cycles. The ratings also consider the highly competitive retail industry, the mature nature of the Company’s core U.S. market and risks associated with international expansion.

Walmart’s earnings profile remains consistent with its rating category, supported by the Company’s size, price leadership and diversification. Walmart’s revenue growth in F2014 moderated to 1.6% (or 2.5% on a constant currency basis) versus 5% in F2013. Revenue growth was mainly a result of a 3.1% increase in square footage, but negatively affected by a 0.6% decrease in U.S. comparable store sales. The decrease in comparable store sales in the United States was due to lower consumer spending and cuts to the SNAP benefits program, despite 5% comparable store sales growth at the Company’s Neighborhood Markets stores. EBITDA margins fell by 30 basis points to 7.5% in F2014, resulting from the Company’s continued investment in price (Every Day Low Price, or EDLP) and one-time costs associated with its E-commerce platform. As such, EBITDA fell by 1.27% versus the prior year, to $36 billion in F2014.

In terms of financial profile, Walmart continues to possess strong and stable free cash flow generating capacity. In F2014 the Company generated $26.1 billion of cash flow from operations, while capital expenditures (capex) grew by 1.7% to $13.1 billion. The Company increased its dividend by almost 15% during the year, for a total outlay of $6.1 billion. As a result, free cash flow before changes in working capital fell to $6.8 billion in F2014 from $8.5 billion in F2013. The Company used a combination of its free cash flow and $3 billion of incremental debt to fund working capital needs and $6.7 billion of share repurchases. This drove lease-adjusted debt-to-EBITDAR from 1.79x in F2013 to 1.91x in F2014.

Walmart’s earnings profile should remain within the parameters of the current rating category on a through-the-cycle basis, supported by the Company’s size, scale and market position. DBRS forecasts revenues to grow in the low single digits in F2015, based on flat comparable store sales in the United States and global square footage growth in the 3% range. DBRS expects comparable store sales to continue to be pressured by headwinds in the United States, such as higher health care costs and cuts to the SNAP benefits program. However, Walmart should continue to benefit from recent price investments and strong growth in the Neighborhood Markets segment and its E-commerce platform. DBRS believes that Walmart will maintain EBITDA margins in the 7.5% range in the near future, using cost savings to continue to invest in price. As such, DBRS anticipates full-year EBITDA to remain in the $36.0 billion range in F2015.

DBRS expects Walmart’s financial profile to remain strong on the back of its robust free cash flow generating capacity. DBRS anticipates that cash flow from operations will continue to track operating income in F2015, while capex is approximately $13 billion. DBRS expects Walmart will return to increasing dividends at about 5% per year, consistent with its historic average. As such, DBRS estimates free cash flow before working capital to be in the $7.8 billion range in F2015. DBRS expects Walmart will use its free cash flow, cash on hand and additional debt to repurchase shares while maintaining lease-adjusted debt-to-EBITDAR below 2.0x, a level that is appropriate for the current rating category.

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

The applicable methodology is Rating Companies in the Merchandising Industry (October 2013), which can be found on our website under Methodologies.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.