Fitch: No Immediate Rating Impact from Walmart's Weak Guidance/Buybacks

CHICAGO--(BUSINESS WIRE)-- Wal-Mart Stores, Inc.'s (Walmart) lower than expected earnings guidance and $20 billion share buyback program does not have an immediate impact on the company's rating, according to Fitch Ratings. Walmart's 'AA/F1+' ratings reflect its substantial scale, dominant market position, and history of relatively stable financial leverage, even during periods of soft sales and margin pressure.

Fitch, however, expects operating earnings to decline 10% next year, after falling an expected 9% this year. Fitch also views the company's expectation that cash flow growth will accelerate to about $80 billion over the next three years, up from $75 billion three-year prior, as optimistic given that strategic investments will have to provide a sustainable sales and operating income lift.

Comp growth above 2% could be a challenge given Walmart's significant market penetration and heightened competition from dollar stores, supermarkets, and on-line retailers. Comps have been positive for four straight quarters; rising 1.5% in the quarter ended July 31, 2015, due mainly to traffic being up 1.3%.

Fitch expects fiscal 2017 (ends January 2017) operating cash flow to be flat to slightly higher due to the above mentioned earnings decline even with modestly improved working capital management. Walmart increased the minimum wage for U.S. employees to $9/hour in April and to at least $10/hour by February 2016 which will cost the firm $1.2 billion this year and an estimated $1.5 billion in fiscal 2017.

Fitch projects FCF to approximate $5 billion this year, $6 billion in fiscal 2017, and $7 billion in fiscal 2018 driven by lower capex. Walmart plans to reduce capex from about $12.4 billion this year to an approximate $11.0 billion run rate starting next year, due to moderation of new store growth. Debt financing is expected to help finance Walmart's share buybacks, with the amount dependent on the timing of buybacks. While not currently anticipated, weaker comps, higher than expected margin compression due to investments in price, and adjusted leverage sustained above 2x could result in a negative rating action.

Current Rating Sensitivities

Positive Rating Action: An upgrade is unlikely, given 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 the 2x range due to debt-financed share buybacks 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 '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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View source version on businesswire.com: http://www.businesswire.com/news/home/20151016005557/en/

Fitch Ratings
Primary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Monica Aggarwal, CFA
Managing Director
+1-212-908-0282
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]

Source: Fitch Ratings

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