April 8, 2013 / 4:16 PM / 4 years ago

Fitch Affirms Carrefour at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) PARIS/LONDON, April 08 (Fitch) Fitch Ratings has affirmed Carrefour S.A.'s (Carrefour) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'. The Outlook on the Long-term IDR is Stable. The affirmation reflects Carrefour's improved financial flexibility in 2012 thanks to significant asset disposals and cash preservation measures. Fitch expects the company to use these resources to improve its operating performance through increased operational and capital investments. The agency acknowledges the first signs of improvement in the group's core operations, notably in its French hypermarket format, and the strong performance of the Latin American (LatAm) activities. However Fitch continues to factor into the rating the group's low operating margin, the enhancement of which continues to rely mainly on the success of management's turnaround strategy in a French market that is expected to remain difficult. KEY RATING DRIVERS Business Profile Constrained by Operating Margin: Carrefour's business profile is comfortable in the 'BBB' category due to its brand awareness, size and geographical diversification in Europe, Asia and Latin America. Carrefour has leading positions in several European markets and is well diversified, with 54% of 2012 revenues generated outside France. However at 2.7% (as calculated by Fitch), the group's operating margin remains weak for the rating level. Weak Environment, Intense Competition: In Europe the protracted weak consumer sentiment, together with a price war, rivalry from specialist retail chains in the non-food segment and development of internet shopping has put pressure on the group's performance therefore mitigating any cost savings efforts. In China Carrefour suffers from high competition and rising operating costs, combined with economic and political uncertainty. Fitch forecasts group's sales and operating profit to enjoy only moderate growth over the next three years. Geographical Refocusing and Deleveraging: Fitch views positively Carrefour's 2012 cautious financial strategy, with focus on cash flow including reduced dividend pay-out ratio, improved inventories management and lower capex. The company also exited from countries where it did not have the prospect of market leadership such as Greece, Colombia, Singapore, Indonesia and Malaysia obtaining proceeds of EUR2.8bn which helped reduce the group's net debt position. Regained Financial Flexibility: Fitch expects 2012 accumulated liquidity to enable the group to regain financial flexibility for capex and other operational investments, while maintaining funds from operations (FFO) lease-adjusted net leverage (excluding its financial services operations; FY12 level: 3.6x) at 3.5x at FYE14, a level that is adequate for a 'BBB' credit relative to peers. However, Fitch does not expect Carrefour to generate strong positive free cash flow (FCF) because of increased capex in relation to the group's transformation programme. Remaining Execution Risks: Although hypermarkets have shown a positive trend in like-for-like sales and profit in H212, Carrefour's success at turning around its French operations is still to be confirmed. The group mainly relies on France (43.4% of FY12 group's EBIT before central costs) to improve its global operating performance. Spain, Italy and China are not expected to show positive results in the near term while fast-growing LatAm still represents less than 20% of total revenues. RATINGS SENSITIVITIES Positive: future developments that could lead to a positive rating action include: - Group EBIT margin above 3.3% (level achieved in 2010), mainly reflecting the success of the turnaround of Carrefour's operations in France; together with positive FCF generation on a sustainable basis - FFO fixed charge cover sustainable at or above 3.0x - FFO lease-adjusted net leverage (excluding its financial services operations) sustainable at or below 3.0x (corresponding to 2.5x on EBITDAR basis) Negative: future developments that could lead to a positive rating action include: - Group EBIT margin falling at or below 2.5% - Recurring negative FCF, reflecting a further deterioration of the consumer environment and/or no impact from Carrefour's initiatives to improve its operating performance - FFO fixed charge cover below 2.2x - FFO lease-adjusted net leverage (excluding its financial services operations) above 4.0x (corresponding to 3.5x on EBITDAR basis) Contact: Principal Analyst Anne Porte Associate Director +33 144 29 91 36 Supervisory Analyst Johnny Da Silva Director +44 20 3530 1546 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research Corporate Rating Methodology here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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