S&P Revises Whole Foods (WFM) Outlook to Positive; Affirms 'BBB-' Rating
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Standard & Poor's Ratings Services said today it revised its rating outlook on the Austin-based Whole Foods Market Inc. (Nasdaq: WFM) to positive from stable and affirmed the 'BBB-' corporate credit rating.
The outlook revision comes as the company continues to perform well, driven by strong sales growth from new stores and solid same-store sales increases. Furthermore, the company enhanced operating margins mainly as a result of operating efficiencies from the higher sales volumes. We expect the strong trends to continue at least over the near term. The company has no funded debt, and Whole Foods Markets' adjusted debt consists of our operating lease adjustment. We expect that adjustment to grow at the rate comparable to square footage growth, but also believe that the company will likely grow profits at a faster rate, thereby enhancing credit metrics.
"Standard & Poor's Ratings Services' rating on Whole Foods Market Inc. reflects our "fair" assessment of its business risk profile, which incorporates the company's strong position as the leader in the organic and natural food retailing sector, and our expectation that the company will continue to outperform traditional grocery stores in the next two years," said credit analyst Charles Pinson-Rose. "We also view Whole Foods' financial risk as "intermediate". We based this on the company's strong cash flow generation and our forecast credit ratios."
Our rating outlook is positive. This incorporates our expectations that the overall profit growth should outpace the growth in operating lease adjusted debt. 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-to-debt was in the 30% area, we may consider a higher rating. We estimate this could occur in 2013 if EBITDA grew around 27% to 29% and would track toward $1.4 billion, while operating lease commitments only grew by 7% to 8%. We believe this level of EBITDA growth is unlikely in 2013, but if the company continues its current performance trajectory, we expect the company could reach those profitability levels and credit metrics in 2014.
We would likely revise our outlook to stable if the company's profitability growth trends moderated to the high-single-digit area. At that point, profits would only increase in line with our expected growth in operating lease adjustment to debt. We would expect that this would mostly likely be a result of comparable-store sales slowing to the low-single-digit area and the company maintaining operating margins.
The outlook revision comes as the company continues to perform well, driven by strong sales growth from new stores and solid same-store sales increases. Furthermore, the company enhanced operating margins mainly as a result of operating efficiencies from the higher sales volumes. We expect the strong trends to continue at least over the near term. The company has no funded debt, and Whole Foods Markets' adjusted debt consists of our operating lease adjustment. We expect that adjustment to grow at the rate comparable to square footage growth, but also believe that the company will likely grow profits at a faster rate, thereby enhancing credit metrics.
"Standard & Poor's Ratings Services' rating on Whole Foods Market Inc. reflects our "fair" assessment of its business risk profile, which incorporates the company's strong position as the leader in the organic and natural food retailing sector, and our expectation that the company will continue to outperform traditional grocery stores in the next two years," said credit analyst Charles Pinson-Rose. "We also view Whole Foods' financial risk as "intermediate". We based this on the company's strong cash flow generation and our forecast credit ratios."
Our rating outlook is positive. This incorporates our expectations that the overall profit growth should outpace the growth in operating lease adjusted debt. 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-to-debt was in the 30% area, we may consider a higher rating. We estimate this could occur in 2013 if EBITDA grew around 27% to 29% and would track toward $1.4 billion, while operating lease commitments only grew by 7% to 8%. We believe this level of EBITDA growth is unlikely in 2013, but if the company continues its current performance trajectory, we expect the company could reach those profitability levels and credit metrics in 2014.
We would likely revise our outlook to stable if the company's profitability growth trends moderated to the high-single-digit area. At that point, profits would only increase in line with our expected growth in operating lease adjustment to debt. We would expect that this would mostly likely be a result of comparable-store sales slowing to the low-single-digit area and the company maintaining operating margins.
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