DBRS Confirms Wal-Mart at AA, R-1 (middle), Trend Stable

DBRS has today confirmed Wal-Mart Stores, Inc.’s (Wal-Mart or the Company) Senior Unsecured Debt and Commercial Paper ratings at AA and R-1 (middle), respectively, both with Stable trends. Wal-Mart’s earnings profile remains stable and exceptionally strong, based on its leading position as the world’s largest retailer, its resistance to economic cycles, and record of consistent growth. Total revenue for the first nine months of F2012 increased by 6% year-over-year (yoy) to $323.8 billion, largely as a result of new square footage additions and acquisitions in its International segment. Same-store sales in the United States were essentially flat for the same period as the economic recovery remained tepid. The Company continues to respond to the pressures of a generally challenging consumer environment through its Everyday Low Pricing (ELP) price investment strategy, the impact of which, when combined with higher cost of goods sold, more than offset benefits of operating leverage and resulted in a slight decline in the EBITDA margin (7.5% vs. 7.6% yoy). As such, EBITDA grew at a slower pace (4.5%) than sales to $24.2 billion in the first nine months of F2012 on a yoy basis.

In terms of financial profile, Wal-Mart continues to benefit from strong and stable free cash flow generating capacity that has historically been coupled with generally prudent financial management. Cash flow from operations of $18.5 billion in the first nine months of F2012 continued to track operating income and capital expenditures remained roughly in line with the previous period. Dividends increased modestly by $500 million in the first nine months of F2012, while share repurchases moderated to $5 billion. As such, free cash flow before working capital changes remained strong at $5.1 billion in the first nine months of the year. During this period, Wal-Mart also completed its acquisition of Netto Foodstores Limited and took a 51% ownership interest in Massmart Holdings Ltd. for approximately $1.2 billion and $2.3 billion, respectively. The above factors led Wal-Mart’s total debt to increase by approximately $9.3 billion from the end of F2011, and its lease-adjusted debt-to-EBITDAR increased modestly to 1.90 times (x) in the LTM ended October 31, 2011, from 1.69x at the end of F2011.

Going forward, DBRS expects Wal-Mart’s earnings profile to remain stable and exceptionally strong based on the Company’s inherent strengths and improving geographic diversification. DBRS expects Wal-Mart’s sales growth to continue in the positive mid-single-digit range in the near term, mainly as a result of higher international growth and continued store format conversions in the United States, which also further diversifies the Company’s earning base. DBRS also expects that Wal-Mart will moderate its recent heavy discounting and promotional measures as the inflationary and economic environment should continue to improve through the course of F2012 and F2013. As such, DBRS expects EBITDA margins to improve slightly, and operating income to grow at a pace more consistent with revenue growth.

DBRS expects Wal-Mart’s financial profile to remain strong. Cash flow from operations should continue to track operating income and increase to approximately $27 billion at the end of F2012. Overall capex is expected to be in the range of $13 billion to $14 billion in both F2012 and F2013, largely to support conversions in the U.S. segment and growth in the International division. In addition, DBRS expects Wal-Mart to continue to make small strategic tuck-in acquisitions in the near term. Dividends are expected to increase and continue to grow in the range of 5% to 10% in the near term, and share repurchases should continue in a disciplined manner – financed through a combination of free cash flow and/or debt – while the Company takes into account its international investments and internal leverage targets.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.