Aug 7 - Overview
-- U.S. natural food retailer Whole Foods Market has enhanced credit
protection measures with considerable profit growth reflecting higher
comparable-store sales and new smaller and more productive stores, trends we
expect to continue.
-- We are raising our corporate credit rating on the company to 'BBB-'
-- The stable outlook incorporates our expectation that strong sales and
profit growth trends will continue, at least for the near term.
On Aug. 7, 2012, Standard & Poor's Ratings Services raised its corporate
credit rating on Austin, Texas-based Whole Foods Market Inc. to 'BBB-' from
'BB+'. The outlook is stable.
The rating action comes after Whole Foods' strong operating trends. Its EBITDA
growth over the past year of about 21% has been somewhat better than we
anticipated and has enhanced credit protection measures meaningfully. Given
our operating forecast, we anticipate further improvement. Moreover, the
company has generated significant discretionary cash flow, and it now has
sizable excess cash. With expected capital expenditures and likely dividend
payments, we foresee Whole Foods generating further excess cash in the future.
The rating on Whole Foods reflects our assessment of its business risk as
"satisfactory," which incorporates the company's strong position as the leader
in the organic and natural food retailing sector, and our expectation that it
will continue to outperform traditional grocery stores in the near and
intermediate term. We also revised our assessment of Whole Foods' financial
risk to "intermediate" from "significant." This is based on the company's
strong cash flow generation and forecasted credit ratios.
The company's third-quarter results were slightly better than our expectations
and meaningfully better than traditional grocery stores. Although we expect
tepid economic expansion and sustained high unemployment, we believe such
conditions will not inhibit performance at Whole Foods, since the natural and
organic segment industry is growing considerably faster than the food retail
industry as a whole. Furthermore, the company's pricing, promotional, and
merchandising strategies have driven transactions and customer loyalty.
Consequently, we believe the company is now less vulnerable to downturns in
With these industry and economic conditions, our base line forecast
assumptions are as follows:
-- We expect annual comparable-stores sales increases to approach 9% in
2012 and to increase about 7% in 2013;
-- Total revenue growth in 2012 of approximately 16% in 2012 and around
12% in 2013; the more moderate revenue growth in 2013 incorporates that it
will be a 52-week fiscal year relative to 2012, a 53-week fiscal year;
-- EBITDA margins expansion of about 60 basis points (bps) in 2012 and
about 20- to 40-bp expansion in 2013;
-- Overall EBITDA in 2012 of about $1.05 billion and EBITDA in 2013 about
$1.2 billion; and
-- 6%-8% annual growth of operating lease-adjustment to debt over the
next two years, a similar growth rate of total retail square footage.
These performance scenarios would lead to the following credit ratios:
-- Adjusted debt to EBITDA of 2.6x in 2012 and about 2.3x-2.4x in 2013;
-- Adjusted EBITDA interest coverage of 4.6x in 2012 and about 5x area in
-- Funds from operations (FFO) to debt of 24% in 2012 and near 26% in
The forecasted ratios are generally commensurate with an "intermediate"
financial risk profile.
We believe that Whole Foods' recent sales performance is a result of its more
aggressive marketing and pricing strategies. We also believe that the company
will generally pass along food inflation to consumers and maintain gross
margins. We also see operating margins benefiting from higher sales volumes.
Whole Foods may price aggressively on certain items or increase promotions to
gain market share, but we do not expect such activities to hurt gross margins
We view Whole Foods' liquidity as "adequate" and we expect its sources of
liquidity to be greater than its uses over the next two years by a ratio of at
least 1.2 to 1.0. Sources, as of July 1, 2012, include $135 million of
unrestricted cash, $933 million of short-term investments, proceeds associated
with the exercise of employee stock options, and FFO over the next year of
about $1 billion. Since the company's revolving credit facility matures this
month and we do not expect it to be renewed, we do not consider it a source of
liquidity. We primarily expect cash uses to include working capital investment
associated with new stores, capital spending near $500 million, and dividend
payments. We expect discretionary cash flow to approach $400 million over the
Relevant aspects of Whole Foods' liquidity, in our view, are as follows:
-- We see coverage of uses by sources in excess of 1.2x for the next two
-- We expect that sources will exceed uses, even with a 15% drop in
-- No near-term maturities.
Our stable rating outlook on Whole Foods incorporates our expectations that
the overall sales and profit growth trends should be strong in the near term.
Nonetheless, we expect credit ratios to remain appropriate for our current
financial risk assessment and rating category.
If the company performs better than we anticipate, we would consider a higher
rating. For example, if debt to EBITDA was in the low-2x area and FFO/debt was
in the 30% range, we may consider a higher rating. We estimate this could
occur in 2013 if EBITDA grew around 27%-29% and would track toward $1.4
billion, while operating lease commitments only grew 7%-8%. However, we would
want to be sure that the company's financial policies would be such that
future capital allocations would ensure that the company maintains credit
ratios near those levels and liquidity remained adequate.
Given the company's performance trends, we do not consider a downgrade as
likely in the near term. However, we may consider a lower rating if the
company adopts more aggressive financial policies and adds funded debt to
finance returns to shareholder or acquisitions. However, we do not view either
as likely. If leverage rises above 3x, we may consider a lower rating. With
our estimated profitability and debt levels at the end of 2012, Whole Foods
could increase debt by $500 million and be near that threshold.
Related Criteria And Research
-- Issuer Ranking: U.S. Restaurants & Retail, Strongest To Weakest, April
-- Industry Report Card: Our Credit Outlook Remains Slightly Negative For
The U.S. Retail Industry This Year, April 30, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Key Credit Factors: Business And Financial Risks In The Retail
Industry, Sept. 18, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Upgraded; Outlook Action
Whole Foods Market Inc.
Corporate Credit Rating BBB-/Stable/-- BB+/Positive/--
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left