TEXT - Fitch rates Staples new notes BBB
Jan 8 - Fitch Ratings has assigned a rating of 'BBB' to Staples, Inc.'s new $1 billion five- and 10-year senior notes. The Rating Outlook is Stable. Proceeds will be used to fund a tender for up to $750 million of the $1.5 billion 9.750% senior notes due 2014 as well as for general corporate purposes. A full rating list is shown below. The rating reflects Staples' leadership position in the office products retail and wholesale industry, diversified model by channel and customer, debt repayment in the years following the 2008 Corporate Express acquisition, and solid free cash flow (FCF). The rating also reflects the company's soft sales and earnings trends, as well as the potential benefits of a restructuring program announced Sept. 25, 2012. Staples' operating profile is supported by its diversity across a wide customer base, as it sells to a balanced mix of large corporate customers, small businesses and consumers, and its significant online presence. It enjoys leading positions in its two largest segments - North American Delivery and North American Retail, which accounted for 52% and 48%, respectively, of operating profits in the 12 months ended Oct. 27, 2012. The international business remains challenged, but normally represents less than 10% of operating income. The company's recent trends have been soft while improving slightly in the third quarter, when sales were down 1% on a local currency basis. U.S. retail comps were down 1%, while European comp sales were down 6%. The EBIT margin declined to 6.6% in the 12 months ending Oct. 27, 2012 from 7% in the comparable year ago period. In addition, EBITDA, which has tracked in the $2.2 billion - $2.3 billion range (adding back non-cash share-based compensation) over the past four years, declined to $2.1 billion in the latest 12 months. Financial leverage (adjusted debt/EBITDAR), remained flat at 2.8x at Oct. 27, 2012 from year-end 2011, due to the repayment of $325 million of notes that matured in October 2012. Going forward, Fitch expects that leverage will remain in the high 2x range. Fitch views the restructuring initiatives as a positive step forward, one that should gradually improve returns in its international business, while also beginning the process of downsizing its retail square footage in the U.S. However, the restructuring also underscores the challenges facing Staples' business over the next few years due to growth in online competition in the context of a weak economic environment that has pressured sales growth and margins. There is no change to Staples' financial strategy as a result of the restructuring announcement. The company announced that it would repurchase $450 million of shares in 2012, and affirmed that it would repay the October debt maturity with existing cash. The company is focused on maintaining its current investment grade rating. As part of the restructuring, Staples will reduce its retail square footage in North America by 15% by the end of 2015 through a combination of store closures, downsizings and relocations. In addition, the company will restructure its international business by closing 45 stores (to 330) and several smaller delivery businesses by the end of 2012. The restructuring will result in pretax cash charges of up to $250 million in 2012 (which will be paid out over the next three years), as well as a noncash goodwill writedown of $790 million - $850 million. In addition, to fund additional investment in its online business, the company will initiate a $250 million cost reduction program to be completed over three years. Staples has a strong liquidity position with cash and cash equivalents of approximately $1 billion as of Oct. 27, 2012 and an unused $1 billion revolving credit facility expiring in November 2014. FCF after dividends has tracked at around $700 million - $900 million over the past two years, and should remain in that range in 2012. Fitch expects that FCF will be directed toward dividends, share repurchases, as well as some debt repayment. Post the $750 million tender offer, Staples will have no maturities in 2013 and $750 million in 2014. The rating does not contemplate any debt-financed share repurchase activity. KEY RATING DRIVERS What Would Lead To Consideration Of A Negative Rating Action If weak sales and earnings trends persist, causing leverage to move to a level at or above 3.0x, Fitch could consider a one notch downgrade. What Would Lead To Consideration Of A Positive Rating Action Stronger than expected operating results indicating improved execution combined with a reduction in leverage to the low 2x area, as well a commitment from a financial policy standpoint to permanently maintain leverage at this lower level could result in an upgrade. Fitch currently rates Staples as follows: Staples, Inc. --Long-term Issuer Default Rating (IDR) at 'BBB'; --Bank credit facility at 'BBB'; --Senior notes at 'BBB'; --Short-term IDR at 'F2'; --Commercial paper at 'F2'. The Rating Outlook is Stable.