DBRS Confirms Wal-Mart Stores, Inc. at AA and R-1 (middle) with Stable Trends

DBRS Limited (DBRS) has today confirmed Wal-Mart Stores, Inc.’s (Walmart or the Company) Senior Unsecured Debt and Issuer Rating at AA and Commercial Paper at R-1 (middle). The trends remain Stable. The rating confirmations reflect 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 and its gen¬eral resilience to swings in economic cycles. The rating confir¬mations also consider intense competition in the retail industry, the mature nature of the Company’s core U.S. market and risks associated with international expansion.

The Company’s revenues increased by 2.0% YOY to $486 billion in F2015. Top-line growth was driven by a 3% increase in global selling space, partially offset by the negative impact of currency rate fluctuations. EBITDA margins remained at 7.5% in F2015 as operating leverage was moderated by an increase in health care expenses and higher expenses related to digital retail and closing of underperforming stores in Japan.

Cash flow from operations increased by 0.7% to $26.2 billion in F2015 resulting from the growth in operating income. Walmart’s capital expenditure (capex) at $12.2 billion in F2015 was almost a billion dollars lower than the previous year. Dividend payments however increased moderately to $ 6.1 billion in F2015. Higher operating cash flow and lower capex resulted in a notable in¬crease in free cash flow (before changes in working capital) to $7.9 billion in F2015 from $6.8 billion in F2014. Walmart used its free cash flow to reduce balance sheet debt by approximately $5.0 billion and repurchase $1 billion of outstanding stock. As a result, lease-adjusted debt-to-EBITDAR decreased to 1.71 times (x) in F2015 from to 1.91x in F2014.

Going forward, DBRS expects the Company’s revenue to in¬crease in the low single digits in F2016, as mid-single-digit gains in the Neighborhood Markets segment and strong growth in e-commerce is likely to be offset by weakness in Supercenters and Discount Stores. EBITDA margins are not expected to grow in the near future because of increased expenses related to invest¬ments in associate wages, training and e-commerce, and are like¬ly to be around 7.25% in F2016. As such, DBRS expects EBITDA to be approximately $36 billion in F2016.
DBRS anticipates that cash flow from operations will continue to track operating income in F2016. Capex in F2016 is expected to be between $11.6 to $12.9 billion primarily for Supercenters in the United States, Neighborhood Market stores and e-commerce platform. Dividend outlay in F2016 is likely to remain steady at around $6 billion. As such, DBRS forecasts free cash flow (be¬fore changes in working capital) in the $7.0 billion to $7.5 billion range in F2016. DBRS expects Walmart to use its free cash flow, cash on hand and additional debt to repurchase shares, while main¬taining lease-adjusted debt-to-EBITDAR around 2.0x. Relatively stable financial leverage along with strong free cash generating capacity will continue to impart stability to the Company’s credit risk profile.

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.

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

The applicable methodology is Rating Companies in the Merchandising Industry (January 2015), which can be found on our website under Methodologies.

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.