Reuters logo
6 months ago
Fitch Affirms Target Corporation at 'A-'; Outlook Revised to Negative
March 1, 2017 / 3:05 PM / 6 months ago

Fitch Affirms Target Corporation at 'A-'; Outlook Revised to Negative

(The following statement was released by the rating agency) CHICAGO, March 01 (Fitch) Fitch Ratings has affirmed the Long-term Issuer Default Rating (IDR) on Target Corporation (Target) at 'A-' and the Short-term IDR at 'F2'. The Rating Outlook has been revised to Negative from Positive. The Outlook revision acknowledges the accelerated impact of changes in consumer shopping preferences on Target's near-term results and the significant investments required to stabilize market share over the longer term. Competition from online only and discount peers have pressured Target's comps yielding market share and EBITDA erosion. As a result, the company has been forced to accelerate investments in omnichannel initiatives and tighten its focus on pricing and merchandising assortments. Fitch has reduced confidence in Target's ability to maintain or grow market share over the long run, given online encroachment in many of its categories and Target's pricing perception at the upper end of the discount sector. A downgrade could occur if the company does not exhibit signs of comp stabilization by second half 2018. KEY RATING DRIVERS Negative Comp Trajectory: Comps have been negative for three consecutive quarters, declining 1.5% in 4Q16 and 0.5% for the fiscal year ended January 2017. While digital sales have increased significantly to $3.4 billion in 2016 from $1.4 billion in 2014, they still represent less than 5% of overall sales and have not been enough to offset in-store comp declines, which declined 1.5% in 2016. Fitch expects comps to decline 2.5% to 3% in 2017 and 1% to 1.5% in 2018 as Target's recently announced strategic initiatives to improve pricing perception and merchandise assortment are implemented. The company's outsized exposure to categories experiencing significant on-line intrusion and relatively low exposure to food, which drives repeat transactions, are risks in stabilizing store traffic and transactions. Increased Investments Pressure EBITDA: Target's gross margin declined 100 bps to 26.9% during 4Q16 due to promotional activity and negative mix shift caused by an increase in lower margin digital sales. While Target's EBITDA (adding back non-cash stock-based compensation expense) margin improved 50 bps to 10.6% in 2016 due to cost savings associated with the company's two-year $2 billion cost savings program and the sale of its pharmacy business, Fitch expects EBITDA margin to decline to the mid-9% range in 2017 and 9% in 2018 as the company continues to see pressure from channel shift towards digital, makes investments in price, picks up the pace of remodeling and opens new urban stores, and introduces a dozen new private brands. Fitch projects EBITDA declines in the mid-teens in 2017 to $6.5 billion and 8% to 10% in 2018 to $6 billion. Higher Capex, Lower FCF: In addition to investments in price, Target also intends to increase capex to support its network of physical and digital assets. Capex is projected to increase to over $2 billion in 2017 from approximately $1.5 billion in 2016 due to remodeling stores and technology and supply chain investments to modernize its operations and to support flexible fulfillment. Fitch expects FCF after dividends in the $1 billion to $1.5 billion range in 2017 and $750 million range in 2018, down from over $2.5 billion in 2016, due to lower earnings, higher capex, and the company's modestly increasing dividend. Leverage Expected to be in the Low 2x range: Target's adjusted leverage declined from the mid-2.0x range during the 2011 to 2013 period to 1.9x at the end of 2016 due to a combination of debt paydown following the sale of its credit card business and operating income growth through 2015. Fitch projects total adjusted debt/EBITDAR will be in the low 2.0x range in 2017 and 2018. Target has roughly $600 million of 5.375% notes due May 2017 and $1.1 billion of 6% notes maturing January 2018. Target could choose to pay down a portion or all of these debt maturities in 2017 to maintain adjusted debt/EBITDAR at the 1.9x level reported in 2016. In addition, Fitch expects Target to significantly pull back on net share buybacks from the $3.5 billion level in 2016. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer include: --Total revenue declines at 2% to 2.5% in 2017 and -1% in 2018; --EBITDA declines in the mid-teens in 2017 to $6.5 billion and 8%-10% in 2018 to $6 billion, with EBITDA margin declining to around 9%; --FCF after dividends approximates $1 billion to $1.5 billion range in 2017 and $750 million range in 2018; --Total adjusted debt/EBITDAR is in the low 2.0x range, assuming the company pulls back significantly on share buybacks. RATING SENSITIVITIES Target's Outlook could stabilize if it gains traction on its strategic initiatives, with signs of stabilizing comps by second half 2018 and EBITDA stabilizing around $6 billion (versus $7.4 billion in 2016), while maintaining leverage around 2x. Positive Rating Action: Factors that could individually or collectively lead to an upgrade to 'A' include consistently strong operating momentum, represented by sustained comparable sales (comps) of approximately 2% or more with positive transaction growth and an EBITDA margin above 10%, and total adjusted debt/EBITDAR sustained under 2.0x. Negative Rating Action: Factors that could individually or collectively lead to a negative rating action include the continuation of negative comps beyond 2018, EBITDA margins declining to mid-8% range, and continued share repurchases that drive total adjusted debt/EBITDAR towards the mid-2.0x range. LIQUIDITY Strong Liquidity: As of Jan. 28, 2017, Target had cash of $2.5 billion and a $2.5 billion unsecured credit facility, which expires in October 2021 (this recently replaced an existing $2.25 billion facility maturing October 2018). Fitch expects FCF after dividends to approximate $1 billion to $1.5 billion in 2017 and $750 million range in 2018, assuming neutral working capital. This compares to FCF of $2.5 billion in 2016. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Target Corporation --Long-term IDR at 'A-'; --Senior unsecured notes at 'A-'; --Short-term IDR at 'F2'; --Commercial paper at 'F2'. The Outlook has been revised to Negative from Positive. Fitch has also assigned the following rating: --Bank Credit Facility due 2021 'A-'. Contact: Primary Analyst Carla Norfleet Taylor, CFA Senior Director +1-312-368-3195 70 W. Madison St. Chicago, IL 60473 Secondary Analyst David Silverman, CFA Senior Director +1-212-908-0840 Committee Chairperson Monica Aggarwal, CFA Managing Director +1-212-908-0282 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com; Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: Historical and projected EBITDA is adjusted to add back non cash stock based compensation and non-recurring benefits or charges. In 2016, Fitch excluded a net of $4 million benefit related to the Pharmacy transaction and added back $113 million in non-cash stock based compensation to its EBITDA calculation. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1019882 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below