Wal-Mart Stores Inc.’s earnings outlook wobble and $20 billion stock buypack program is not going to have “an immediate impact” on the retailer’s debt rating, said Fitch Ratings.
However, the ratings firm said while it does not anticipate Wal-Mart to experience ongoing, weaker same-store sales and higher-than-expected margin compression due to leverage pressure, these factors could change and impact ratings of the retailer down the road.
The ratings firm maintained its “AA” rating on the retailer, and pegged it with a “stable” outlook.
The Fitch analysts said in their report that Wal-Mart’s “AA/F1+” rating reflects its “substantial scale, dominant market position and history of relatively stable financial leverage, even during periods of soft sales and margin pressure.” Still, Fitch analysts said they expect operating income to drop 10 percent next fiscal year, which follows an expected 9 percent decline this year. “Fitch also views the company’s expectation that cash-flow growth will accelerate to about $80 billion over the next three years, up from $75 billion in the prior three-year period, as optimistic, given that strategic investments will have to provide a sustainable sales and operating income lift,” the analysts said.
Regarding the top line, Fitch said delivering same-store sales growth of more than 2 percent would be a challenge for the retailer, “given Wal-Mart’s significant market penetration and heightened competition from dollar stores, supermarkets, and online retailers,” the analysts noted. “Comps have been positive for four straight quarters; rising 1.5 percent in the quarter ended July 31, 2015, due mainly to traffic being up 1.3 percent.”
On the balance sheet, Fitch said operating cash flow is likely to be flat “to slightly higher” for fiscal 2017 due to Wal-Mart’s expected earnings decline. And that would occur “even with modestly improved working capital management,” the firm said.
Regarding the share buyback program, Fitch said the retailer’s “debt financing is expected to help finance Wal-Mart’s share buybacks, with the amount dependent on the timing of buybacks.”
