Dollar General (DG) Removed from CreditWatch Negative by S&P (FDO)

Standard & Poor's Ratings Services removed all its ratings on Dollar General Corp. (NYSE: DG) from CreditWatch with negative implications, including the 'BBB-' corporate credit rating and 'BBB-' issue-level rating on the company's senior unsecured notes, revolver, and term loan. The outlook is stable.

"We resolved the CreditWatch placement after Dollar General's tender offer to acquire all outstanding shares of Family Dollar Stores Inc. (NYSE: FDO) for $80 per share in cash (including associated preferred share purchase rights) expired on Jan. 30, 2015. The company subsequently withdrew its offer, with Dollar Tree Inc. in the process of acquiring the target," said credit analyst Diya Iyer.

The stable outlook reflects our view that Dollar General will not pursue a large debt-financed transformative acquisition in the coming one to two years similar in size to the potential Family Dollar purchase. This is because of both the lack of other large targets available to Dollar General and our belief that the company could benefit from focusing on expanding its own productive store base, efficient pricing strategies and solid merchandising to drive traffic and support healthy sales and earnings growth over the next year.

Downside scenario

We would consider lowering the rating if performance falls significantly below our expectations as a result of competitive pressure from Dollar Tree and other discount players, poor execution, or an over-expansion of its stores. Under this scenario, new store productivity would decline and same-store sales would turn negative, resulting in revenue declining in the low-single-digits and gross margins falling by more than 50 basis points (bps). At that time, leverage would approach the mid-3x area. Moreover, debt-financed share repurchases that cause debt leverage to weaken to the mid-3x range could lead to a downgrade.

Upside scenario

Although unlikely given the company's review of strategic growth plans, we would consider an upgrade if performance exceeds our expectations, with Dollar General sustaining leverage in the low-2x area and FFO-to-total debt above 40% over the intermediate term. Under this scenario, revenue growth would be in the low-teen percentage area and gross margin would expand by 150 bps.

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