TEXT-S&P cuts Roundy's Supermarkets rating to 'B'

Fri Sep 7, 2012 1:06pm EDT

Overview
     -- U.S. grocery store operator Roundy's Supermarkets' operating 
performance was weaker than expected in the second quarter as a result of weak 
economic conditions and intensifying industry competition. We believe that 
trend will continue, at least for the near term.
     -- We are lowering our ratings on Roundy's one notch, including the 
corporate credit rating to 'B' from 'B+'.
     -- The stable outlook reflects that, while we expect profit declines and 
weaker credit ratios over the next year, those ratios are likely to remain 
appropriate for the current rating category.

Rating Action
On Sept. 7, 2012, Standard & Poor's Ratings Services lowered its ratings on 
Milwaukee-based Roundy's Supermarkets Inc., including the corporate credit 
rating to 'B' from 'B+'. The outlook is stable.

The downgrade comes after weaker-than-expected operating trends in the second 
quarter as a result of increased price competition and effective marketing 
programs from competitors. We expect these factors will lead to weaker 
performance and further credit metric deterioration.

Rationale
The rating on Roundy's reflects our view of the company's business risk 
profile as "weak," which we revised from "fair." This change incorporates that 
weak economic conditions and new entrants into the industry, particularly 
discounters, will increase competition and weaken the company's operating 
performance and market presence. This is somewhat offset by the company's 
relatively good presence in its local markets. We view Roundy's financial risk 
profile as "highly leveraged," based on forecasted credit ratios. 

Roundy's second-quarter operating trends, highlighted by a same-store sales 
decline of 3.3% and an EBITDA deterioration of about 7.6%, were below our 
expectations and weaker than most industry peers. For the remainder of 2012, 
we anticipate further profit declines as the company takes price investments 
as a result of competitors more aggressive pricing strategies and marketing 
campaigns-leading to lower sales and operating margins. Below are our more 
specific operating assumptions for 2012:  
     -- Sales growth of about 1%--new stores will offset a comparable-store 
decline of about 2.5%-3.5% for the year;
     -- We anticipate slight gross margin contraction of 10-20 basis points 
(bps);
     -- Growth of general and administrative costs of about 3.0%-3.5%; with 
expected sales growth, this would lead to EBITDA margin contraction of about 
50 bps; and
     -- EBITDA between $205 million and $210 million. 

With our performance expectations, we project credit ratios, adjusted for 
operating leases and company-sponsored pension plans at the end of 2012, to be 
as follows:
     -- Debt to EBITDA in the 5.8x-6.0x range;
     -- Adjusted EBITDA coverage of interest of 2.2x-2.3x; and
     -- Funds from operations (FFO) to debt near 10%. 

These ratios are in line with indicative ratios of highly leveraged financial 
risk profiles.

Historically, Roundy's operating trends have been consistent as compared to 
many industry peers, and the company has been less vulnerable to weak economic 
conditions and industry competition. The recent performance indicates that 
Roundy's will be vulnerable to these factors over the near term. However, the 
company still has a relatively good presence in many of its markets, and we 
expect that performance could stabilize in 2013 if the company's pricing 
strategies are more effective and industry competition moderates.

Liquidity
We view Roundy's liquidity as "adequate," which indicates our expectation that 
liquidity sources should be greater than uses by a ratio of 1.2 to 1.0 over 
the next two years. As of June 30, 2012, Roundy's sources of liquidity include 
available borrowings of $94.9 million on its revolving credit facility, excess 
cash which we estimate to be about $50 million-$60 million, and forecasted FFO 
of about $130 million. We foresee liquidity uses to include some working 
capital needs, capital spending between $60 million and $70 million, cash 
dividends between $35 million and $40 million, term loan amortization annually 
of $6.75 million, and cash flow sweep payments. Given the dividend payments 
and capital spending assumptions, we expect Roundy's to generate about $25 
million to $30 million of discretionary cash flow.

Relevant aspects of Roundy's liquidity are as follows:
     -- We see coverage of uses by sources to be in excess of 1.2x for the 
next two years;
     -- We expect that sources would exceed uses even with a 15% drop in 
EBITDA;
     -- We anticipate that the company will maintain adequate headroom over 
maintenance financial covenants;
     -- The company has sound relationships with its banks and a satisfactory 
standing in the credit markets, in our view; and
     -- Manageable near-term amortizations.

Recovery analysis
For the complete recovery analysis, please see the recovery report on 
Roundy's, published Feb. 2, 2012, on RatingsDirect. 

Outlook
The outlook is stable. This incorporates expected profit declines and credit 
metric deterioration, but we believe credit ratios will remain appropriate for 
the financial risk assessment and rating category. We also expect Roundy's to 
maintain adequate liquidity and generate positive discretionary cash flow. If 
the operating declines are meaningfully worse than expected and EBITDA was 
near $180 million, leading to leverage in the high-6x area and EBITDA coverage 
of interest below 2x, we would likely consider a lower rating. This could 
occur in 2012 if total revenue increased 1%, gross margins contracted 50 bps, 
and operating and administrative expenses increased about 3.2%.  

Conversely, given the company's operating trajectory and industry conditions, 
we do not expect to consider a higher rating in the near term. However, if it 
could improve leverage to the low-5x area and coverage to the mid-2x area, we 
may consider a positive rating action. For that to occur, EBITDA would need to 
improve to about $235 million, which we do not view as likely in the near term.

Related Criteria And Research
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Downgraded
                                        To                 From
Roundy's Supermarkets Inc.
 Corporate Credit Rating                B/Stable/--        B+/Stable/--
 Senior Secured                         B+                 BB-
   Recovery Rating                      2                  2
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