DBRS Confirms Wal-Mart Stores, Inc. at AA with Stable Trend

DBRS Limited (DBRS) has today confirmed Wal-Mart Stores, Inc.’s (Walmart or the Company) Issuer Rating and Senior Unsecured Debt rating at AA with Stable trends. DBRS has also discontinued and withdrawn Walmart’s Commercial Paper rating. DBRS notes that the discontinuation does not reflect any change in DBRS’s view of Walmart’s credit quality. The confirmations reflect Walmart’s relatively stable earnings and financial profiles while acknowledging lower EBITDA margins as the Company continues to increase spending on its ecommerce business. The ratings continue to be underpinned by Walmart’s large size, dominant market position, relative resilience to economic cycles, operating efficiency and robust cash-generating ability. DBRS notes that the ratings also continue to consider the increasingly competitive retail industry, Walmart’s mature and saturated home market as well as risks associated with the Company’s international expansion.

Walmart’s earnings profile remained relatively stable during the last 12 months ended April 30, 2017 (LTM F2018). Revenues grew to $487 billion from $483 billion during LTM F2018 primarily because of low-single digit comparable sales growth and strong growth from ecommerce sales, albeit partially offset by unfavourable foreign-exchange rate movements. EBITDA margins declined to 6.7% from 6.9% because of increased wages and spending on digital retail and information technology as the Company continues to focus on enhancing its ecommerce business, more than offsetting improved gross margins. As a result, Walmart’s EBITDA decreased to $32.8 billion from $33.2 billion during the period. Free cash flow (after dividends and before changes in working capital) increased to $8.8 billion, primarily as a result of reduced capital expenditures caused by lower new-store openings. Walmart used its free cash flow for share repurchases, debt repayment and acquisitions of primarily online retailers. Consequently, lease-adjusted debt-to-EBITDAR, lease-adjusted EBITDA coverage and cash flow from operations as a percentage of debt remained relatively stable at 1.76 times (x), 10.9x and 43.7%, respectively, during LTM F2018 versus 1.82x, 11.4x and 41.0%, respectively, during LTM F2017.

DBRS believes that Walmart’s earnings and financial profiles should remain appropriate for the current rating over the near to medium term. Revenues in F2018 are expected to grow in the low single digits, driven by low-single digit comparable sales growth and strong growth from the Company’s ecommerce channels. DBRS expects Walmart to continue investing in its ecommerce infrastructure and, consequently, expects EBITDA margins to remain relatively stable and EBITDA to be relatively flat at around $32 billion in F2018. DBRS believes that the Company will continue to use its free cash flow and potentially cash on hand or incremental debt for share repurchases and for acquisitions of primarily online retailers. That said, DBRS expects credit metrics in F2018 to remain commensurate with Walmart’s AA rating. Should lease-adjusted debt-to-EBITDAR increase above 2.0x for a sustained period of time as a result of either weaker-than-expected operating income and/or more aggressive financial management, the ratings could be pressured.

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 principal methodologies are Rating Companies in the Merchandising Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on dbrs.com under Methodologies.

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

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

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