S&P Moves Outlook on Target (TGT) from Stable to Negative; Affirms 'A+' Rating
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Standard & Poor's Ratings Services said today it revised the rating outlook on Target Corp. (NYSE: TGT) to negative from stable and affirmed the 'A+' corporate credit rating.
"The outlook revision follows larger than expected losses at its Canadian division and tepid sale growth in the core U.S. market," said credit analyst Ana Lai. "We've lowered our expectations for fiscal 2013 and fiscal 2014. Given the weaker than expected performance in the third quarter and our expectations for continued profit pressure in Canada, Target needs to execute better on ramping up the new stores and improve its supply chain in Canada."
The negative outlook reflects our expectations for continued profit pressure due to slower than expected ramp up and supply chain issues at its Canadian division while intense competition and weak consumer spending in the core U.S. market could continue to pressure profitability in the next year. At our forecasted debt leverage of 2.3x for fiscal 2013, there is little cushion for operational shortfalls or weaker than expected consumer spending.
We could lower our rating by one notch if TD/EBITDA deteriorates to 2.5x due to worse than expected results at its Canadian division or softer than expected performance in the U.S. because of competitive pressure or weak consumer spending. In the near term this could result from a 14% decline in EBITDA in fiscal 2013 compared with our base case decline of 9% while share repurchases stay at $1.5 billion. In fiscal 2014, a downgrade could result from the same trends--failure to improve in Canada and negative comps in the U.S.--such that EBITDA declines by about 4% and could result from sales growth of just 3% and gross margin narrowing 40 basis points (bps). We could also revise the favorable modifiers to neutral from favorable assessment in this scenario.
We could revise the outlook to stable if improvement in operating results at the Canadian division or strengthening of the core U.S. sales contribute to higher profitability such that total debt to EBITDA reaches about 2.0x or lower. Although not likely, this could result from an EBITDA growth of 3% in fiscal 2013 while share repurchases stay at $1.5 billion. In fiscal 2014, a stable outlook could result from sales growth of 7% and a gross margin expansion of 50 bps, driving a 20% increase in EBITDA while share repurchases increase to about $2.5 billion.
"The outlook revision follows larger than expected losses at its Canadian division and tepid sale growth in the core U.S. market," said credit analyst Ana Lai. "We've lowered our expectations for fiscal 2013 and fiscal 2014. Given the weaker than expected performance in the third quarter and our expectations for continued profit pressure in Canada, Target needs to execute better on ramping up the new stores and improve its supply chain in Canada."
The negative outlook reflects our expectations for continued profit pressure due to slower than expected ramp up and supply chain issues at its Canadian division while intense competition and weak consumer spending in the core U.S. market could continue to pressure profitability in the next year. At our forecasted debt leverage of 2.3x for fiscal 2013, there is little cushion for operational shortfalls or weaker than expected consumer spending.
We could lower our rating by one notch if TD/EBITDA deteriorates to 2.5x due to worse than expected results at its Canadian division or softer than expected performance in the U.S. because of competitive pressure or weak consumer spending. In the near term this could result from a 14% decline in EBITDA in fiscal 2013 compared with our base case decline of 9% while share repurchases stay at $1.5 billion. In fiscal 2014, a downgrade could result from the same trends--failure to improve in Canada and negative comps in the U.S.--such that EBITDA declines by about 4% and could result from sales growth of just 3% and gross margin narrowing 40 basis points (bps). We could also revise the favorable modifiers to neutral from favorable assessment in this scenario.
We could revise the outlook to stable if improvement in operating results at the Canadian division or strengthening of the core U.S. sales contribute to higher profitability such that total debt to EBITDA reaches about 2.0x or lower. Although not likely, this could result from an EBITDA growth of 3% in fiscal 2013 while share repurchases stay at $1.5 billion. In fiscal 2014, a stable outlook could result from sales growth of 7% and a gross margin expansion of 50 bps, driving a 20% increase in EBITDA while share repurchases increase to about $2.5 billion.
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