Fitch: Jet Purchase Neutral to WMT's Ratings; Underscores Commitment to E-Commerce Strategy

CHICAGO--(BUSINESS WIRE)-- According to Fitch Ratings, Wal-Mart Stores, Inc.'s (Walmart) definitive agreement to acquire e-commerce company Jet.com, Inc. (Jet) for approximately $3 billion plus $300 million of stock is neutral to current ratings but underscores the company's commitment to its e-commerce strategy. Walmart's 'AA/F1+' ratings reflect its substantial scale, dominant market position, and relatively stable financial leverage, even in periods of soft sales and margin pressure.

Jet is a fast-growing e-commerce company that has reached a $1 billion run-rate of gross merchandise value (GMV), or the total sales dollar value of merchandise sold through an on-line market place, in its first year and offers 12 million stock keeping units (SKU). By contrast, Walmart's GMV for its global e-commerce business grew 7.5% during the latest quarter, down from the high-teens in fiscal 2016. In addition, Jet's real-time pricing algorithm, which incentivizes consumers to buy more products in order to increase savings, has enabled the company to grow its customer base by more than 400,000 monthly.

With the acquisition, Walmart is acquiring new on-line technology that should be additive to what Walmart.com already has, positioning the company to better defend its market position and compete with Amazon as consumer preference towards on-line shopping increases. To date, Walmart's e-commerce sales have made only a modest contribution to comparable-store sales growth. U.S. comps increased 1% in fiscal 2016 (ended January) and 1% in the first quarter ended April 30, 2016 (1Q17) due to traffic growth. However, e-commerce, for which Walmart increased investments, had only a modest impact on comps of 0.2% to 0.3%.

Fitch believes the transaction can be funded out of cash flow from operations, which increased $1.8 billion to $6.2 billion during 1Q17 due mainly to improvements in inventory-related working capital. However, Fitch views the transaction price as rich at 3x Jet's GMV given that it is a startup and that, for example, eBay Inc.'s, current enterprise value is less than 1x its 2015 GMV of approximately $82 billion. Moreover, the acquisition is also likely to be a modest drag to Walmart's earnings (with over $34 billion of EBITDA in 2015) assuming that Jet, which was founded in 2014, is unprofitable.

Fitch expects Walmart's operating earnings to decline 9% this year, after falling 7% during the latest quarter and 9% last year as a result of investments in labor and e-commerce. However, Fitch projects total debt to remain flat at about $50 billion. Should traffic trends weaken or debt increases materially to fund investments and share repurchases under the company's $20 billion share program expected to be completed by the end of fiscal 2018, a negative rating action could occur.

For the LTM period ended April 30, 2016, total adjusted debt/EBITDAR was 1.9x and FCF totaled $10.7 billion. Fitch projects comps will increase 1% in fiscal 2017 with total adjusted debt/EBITDAR and FCF of approximately 2.0x and at least $8 billion, respectively.

Rating Sensitivities

Positive Rating Action: An upgrade is unlikely at this time, given that the rating is currently at the high end of the rating spectrum and fully captures the company's financial and qualitative strengths.

Negative Rating Action: Future developments that may, individually or collectively, lead to negative rating action include persistently weak comp store sales, higher than expected margin pressure, or adjusted leverage sustained above 2x due to debt-financed share buybacks and acquisitions concurrent with weak operating performance.

Fitch currently rates Walmart as follows:

Wal-Mart Stores, Inc.

--Long-Term Issuer Default Rating (IDR) 'AA';

--Senior unsecured debt 'AA';

--Bank credit facility at 'AA';

--Short-Term IDR 'F1+';

--Commercial paper 'F1+'.

The Rating Outlook is Stable.

Additional information is available at www.fitchratings.com

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Fitch Ratings
Primary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
Fitch Ratings, Inc.
70 W Madison St
Chicago, IL 60602
or
Secondary Analyst
David Silverman, CFA
Senior Director
+1-212-908-0840
or
Media Relations
Alyssa Castelli
+1-212-908-0540
New York
[email protected]

Source: Fitch Ratings

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