(The following statement was released by the rating agency)
CHICAGO, August 23 (Fitch) Fitch Ratings has affirmed its
Default Rating (IDR) on Staples, Inc. at 'BBB'. The Rating
Outlook has been
revised to Negative from Stable. As of Aug. 3, 2013, Staples had
$2 billion of
debt outstanding. A full list of rating actions is shown below.
Key Rating Drivers
The affirmation reflects Staples' leadership position in the
mature retail and
commercial office product supply industry, and diversified model
by channel and
customer, as well as ongoing debt repayment and solid free cash
flow. The rating
also reflects the company's soft sales and earnings trends that
are due to the
challenging macroeconomic environment, the secular trend from
paper to digital,
and significant operating challenges in Europe.
The Negative Outlook reflects the potential that current
could persist over the medium term, leading to further erosion
in EBITDA, and
resulting in a credit profile that is no longer consistent with
Staples' operating profile is supported by its diverse customer
base, as it
sells to a balanced mix of large corporate customers, small
consumers, and its significant online presence. It enjoys
leading positions in
its two largest segments - North American Stores and Online and
Commercial, which accounted for 57% and 38%, respectively, of
EBITDA in the 12
months ended Aug. 3, 2013. The international business, which is
Europe, faces significant challenges, and represents only 6% of
The company's recent trends have been soft, with sales down 3%
in 2012 (on a
52-week) basis, and down 3.5% in 1Q'13 and 2% in 2Q'13. Within
American Stores and Online segment, weak North American retail
comps (down 2% in
2012 and in 1Q'13, and down 3% in 2Q'13), and the effect of
store closures (31
in 2012 and 22 in 1H'13), were offset by 3% growth at
Staples.com. The North
American commercial segment has been relatively stable over
time, and grew by
1.7% in 2012 and in Q1'13, and 1.3% in 2Q'13.
International sales, by contrast, were down a sharp 11.8% in
2012, 12.5% in
1Q'13, and 8.3% in 2Q'13, due to weakness in Europe and
Australia. Fitch expects
Staples' revenues will remain under pressure over the medium
term, as benefits
from its various growth initiatives may be offset by secular
declines in the
sales of office supplies and weak sales of technology products.
Staples' EBITDA margin declined to 8.5% in the 12 months ending
Aug. 3, 2013
from 9.0% in 2011 as a result of operating weakness in Europe
and investments to
drive growth in the North American business. Fitch believes that
trends could lead to another 75 basis points (bps) of EBITDA
in 2013, causing EBITDA to decline to around $1.9 billion
(adding back non-cash
share-based compensation) from $2.1 billion in 2012.
Staples announced in September 2012 a set of initiatives to
drive faster growth
in its online and delivery businesses and improve same store
gradually reducing its retail footprint. Investments in price
Staples.com and Quill.com, and other growth investments, will be
part by a $250 million, three-year cost reduction initiative.
plans to reduce retail square footage in North America by 15% by
the end of
2015, through a combination of store closures, downsizings and
Fitch views these initiatives as positive steps, pressuring
margins over the
near term but potentially leading to faster online growth in the
U.S., a more
productive North American retail footprint, and gradually
improved returns in
the international business. However, the restructuring also
challenges facing Staples' business over the next few years due
to growth in
online competition in the context of a weak economic environment
already pressured sales growth and margins.
The pending merger of Office Depot and OfficeMax could improve
profile longer-term by eliminating one large player in the
contract segment and
reducing the amount of retail square footage through store
Financial leverage (adjusted debt/EBITDAR) stood at 3.0x at Aug.
compared with 2.8x at year-end 2011, and is expected to remain
in the high-2x
range at fiscal year-end (January 2014)as declining EBITDA
offsets the benefit
of the expected repayment from cash of $876 million of notes
maturing in January
2014. Fitch expects that further erosion in EBITDA could drive
leverage back up
to 3.0x at year-end 2014.
Staples has a strong liquidity position with cash and cash
equivalents of $1.2
billion as of Aug. 3, 2013 and an unused $1 billion revolving
expiring in May 2018. Free cash flow (FCF) after dividends was
$576 million in
2012, and is expected to be around $600 million in 2013. Fitch
expects that FCF
will be directed toward share repurchases and the debt repayment
above, as well as smaller acquisitions. The rating does not
debt-financed share repurchase activity.
If weak sales and earnings trends persist, causing leverage to
move to a level
above 3.0x, Fitch would consider a one-notch downgrade.
If there is a stabilization of sales and operating margins,
enabling leverage to
remain below 3.0x, Fitch would consider revising the Rating
Outlook to Stable.
Fitch has affirmed the following ratings as indicated:
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Bank credit facility at 'BBB';
--Senior unsecured notes at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
The Rating Outlook is Negative.
Philip M. Zahn, CFA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Monica Aggarwal, CFA
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Corporate Rating Methodology, Aug. 5, 2013;
--Analysis of U.S. Corporate Pensions, Aug. 5, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and
Analysis of U.S. Corporate Pensions
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