January 21, 2014 / 11:01 AM / in 4 years

RPT-Fitch Upgrades Dixons to 'B+'; off RWP; Outlook Stable

Jan 21 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has upgraded Dixons Retail plc (Dixons) Long-term Issuer Default Rating (IDR) to ‘B+’ from ‘B’ and its guaranteed bonds due in 2015 and 2017 to senior unsecured ‘BB-’ from ‘B+’. The Recovery Ratings on the bonds are ‘RR3’. The Short-term IDR is affirmed at ‘B’.

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. Today’s rating action follows the completion of Dixons’ 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 company’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.


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. UK’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

Dixons’ 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 Nordic region)

- 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 1.5%

- Lease-adjusted net debt/EBITDAR above 5x or lease-adjusted net debt/FFO higher than 5.5x.

- Renewed liquidity problems arising from suppliers’ demands for upfront payments or credit withdrawals

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