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
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:
--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.