Jan 21 (The following statement was released by the rating agency)
Fitch Ratings has upgraded Dixons Retail plc (Dixons)
Long-term Issuer Default Rating (IDR) to â€˜B+â€™ from â€˜Bâ€™ and its guaranteed bonds
due in 2015 and 2017 to senior unsecured â€˜BB-â€™ from â€˜B+â€™. The Recovery Ratings
on the bonds are â€˜RR3â€™. The Short-term IDR is affirmed at â€˜Bâ€™.
The ratings have been removed from Rating Watch Positive (RWP), where they had
been placed since 5 September 2013. The Outlook on the Long-term IDR is Stable.
Todayâ€™s rating action follows the completion of Dixonsâ€™ disposal of its
Electroworld operations in Turkey, its Unieuro business in Italy and its
loss-making online unit PIXmania in France, which Fitch expects will improve the
companyâ€™s operating and financial profile. The agency expects Dixons' group EBIT
margin to improve towards 2% by the financial year to April 2015 (FY13: 1.6%
pre-disposal) with the disposal of PIXmania. Management will now have fewer
distractions and will be able to focus on its UK and Nordics businesses which
are currently performing well. Fitch expects the group to continue to maintain a
prudent financial policy.
KEY RATING DRIVERS
Continued Improvement in Operations
Dixons continues to benefit from its "Renewal and Transformation" programme. Its
new service and product range are on track and its stores have been refurbished
and streamlined. Like-for-like (LFL) sales have been positive since April 2012,
despite a difficult trading environment in the UK and Ireland and a competitive
environment in the Nordics. UKâ€™s and Ireland's LFL sales were up 5% during the
vital Christmas/New Year period between 1 November 2013 and 4 January 2014 and
2% in northern Europe. Group EBIT margin was 1.6% in FY13 and Fitch expects this
to trend above 2% by FY15 following the disposals.
Strengthened Market Position
The consolidation of the UK retail industry over the past three years, including
the closure of 11 Best Buy Co., Inc. (BB-/Negative) stores and the departure of
Comet from the UK market has helped to create a more favourable operating
environment for Dixons. In the Nordics, there have been a number of significant
exits from the independent retail sector and heavy price competition. Overall,
Dixons is in a much stronger position than it was two years ago.
Low Profitability, Positive Free Cash Flow
Dixonsâ€™ profit margins are still low relative to pre-crisis levels, reflecting
the highly competitive nature and structural evolution of the markets in which
it operates as well as a high fixed cost base mainly comprising rents. The high
costs are a drag on earnings. However, Fitch recognises the opportunities for
Dixons to renegotiate rents on more favourable terms, due to its strong
bargaining position as an anchor tenant in many locations. Moreover, its low
profitability is somewhat mitigated by expected moderate capex and positive free
cash flow generation from FY15 onwards.
Stronger Credit Metrics
Group lease-adjusted net debt/EBITDAR improved to 4.7x in FY13 (FY12: 5.1x) and
funds from operations (FFO) net leverage was down at 5x in FY13 (FY12: 5.9x).
Fitch expects a mild improvement on both ratios over the next two years. Total
adjusted debt was GBP3.3bn, most of which was linked to the capitalisation of
the group's operating leases. Therefore, in the context of total adjusted debt,
the EUR69m of investment required to dispose of PIXmania is fairly small. FFO
fixed charge coverage was fairly weak at 1.3x in FY13 and is expected by Fitch
to slightly improve to 1.5x by FY15.
Improving Liquidity Profile
Dixons has strengthened its liquidity position and fully normalised its
relationship with credit insurers and suppliers following its liquidity problems
in 2008-2009. The group has a manageable debt maturity profile with two bonds
due in 2015 (GBP100m) and 2017 (GBP150m), and strong liquidity by way of
unrestricted cash of GBP280.9m as of 31 October 2013 and access to its revolving
credit facility (GBP200m due June 2015).
Positive: Future developments that may, individually or collectively, lead to a
positive rating action include:
- Sustained positive LFL sales growth in core areas (the UK and Ireland and the
- Group EBIT margin improving to above 3%
- Lease-adjusted net debt to EBITDAR below 4x or lease-adjusted net debt/FFO
decreasing to below 4.5x
- Free cash flow/sales above 2% (FY13:1.7%)
Negative: Future developments that may, individually or collectively, lead to a
stabilisation of the rating at the current level include:
- Deterioration in its operating performance such that EBIT margin falls below
- Lease-adjusted net debt/EBITDAR above 5x or lease-adjusted net debt/FFO higher
- Renewed liquidity problems arising from suppliersâ€™ demands for upfront
payments or credit withdrawals