November 20, 2017 / 4:30 PM / in a year

Fitch Affirms BUT at 'B'; Outlook Stable

(The following statement was released by the rating agency) PARIS/LONDON, November 20 (Fitch) Fitch has affirmed French furniture, electrical and decoration retailer Mobilux 2 SAS's (BUT) IDR at 'B'. The Outlook remains Stable. Fitch has also affirmed Mobilux Finance SAS's EUR380 million senior secured notes rating at 'B+'/ 'RR3' (54%). BUT's IDR is supported by a strong business profile compared to 'B' rated peers in non-food retailing. The company benefits from a sustainable business model supported by its leading position in the French market, moderate execution risk in strategy and strong cash-flow generation capacity. This compensates for its lack of geographic diversification and weak financial structure. The high leverage results from BUT's buyout in November 2016 and operating underperformance in the financial year ended 30 June 2017 (FY17). The Stable Outlook reflects Fitch's expectation that the group will deleverage towards levels consistent with an acceptable refinancing risk for a 'B' rating. Together with healthy free cash flow (FCF) generation capacity, we assume a conservative financial policy. A more aggressive stance towards M&A or dividends leading to reduced financial flexibility could put downward pressure on the rating. KEY RATING DRIVERS Recovering Demand, Strong Competition: The French furniture market is recovering, following a rather depressed performance in the year ended June 2017. This trend should be sustainable as underpinned by positive factors such as increasing consumer confidence and a recovery in the construction sector. However, Fitch forecasts conservative like-for-like sales growth for BUT over the next four years, at a maximum of 1.5% per annum. The group has to face both the fast development of pure online players and aggressive growth strategies from its most direct competitors Ikea and Conforama, enabled by a greater spending power. For example, Conforama recently took a 17% share in Showroom Priv? (online discounter) and announced the development of three new store formats. FY17 Underperformance: In FY17 BUT's EBITDA underperformed Fitch's forecasts, with margin estimated at 5.8% versus the 6.5% expected. Fitch considers this as a one-off, as margins were affected by higher advertising expenses and the cost of BUT's new distribution platform established in June 2016 not yet fully offset by higher gross margin. The high advertising expenses followed weak summer sales impacted by the Nice terrorist attacks and hot weather. They should decrease in FY18 as the market recovers. The cost of BUT's new distribution centre, set up to develop online sales and improve product availability should be progressively absorbed by growing sales. Profitability to Recover: Fitch forecasts BUT's EBITDA margin will return towards 6.5% by FY20, mainly driven by gross margin improvement deriving from sourcing synergies with owner XXXLutz (EUR6 million secured as of June 2017, to increase thereafter). Other supporting factors include moderate like-for-like sales growth and growing operating leverage on BUT's new distribution centre. Solid FCF Generation Capacity: Fitch expects BUT to generate average annual free cash flow (FCF) of 3% pa over FY18-FY20, which compares well with 'B' non-food retailers. Aside from slowly growing EBITDA and the absence of dividend payments, Fitch assumes the sustainability of BUT's working-capital past optimisation, which should lead to consistent inflows over FY18-FY21. It could be further enhanced by the purchasing agreement with XXXLutz. Fitch believes the FY17 outflow, which was the main driver behind BUT's negative FCF in FY17, is a one-off as it mainly resulted from delayed summer regulated sales, which started only two days before BUT's financial year-end. Stable Financial Flexibility: Fitch forecasts BUT's FFO fixed charge cover to remain stable at 1.6x (FY17: estimated at 1.5x) over FY18-FY21. This level remains weak compared to 'B' rated peers and reflects BUT's asset-light business model and increased share of directly owned stores following the acquisition of the previously franchised Yvrai stores on 1 September 2016. However, in our view this is counterbalanced by the group's adequate liquidity buffer, supported by a cash-generative profile along with an expected moderate appetite for acquisitions. Acceptable Refinancing Risk: The November 2016 buyout and the FY17 operating underperformance drove leverage metrics above Fitch's expectations, with both gross and net FFO adjusted leverage ratios estimated at 6.6x at FYE17. Fitch expects FFO adjusted leverage to fall only slowly (6.0x by FY21) but deleveraging should be quicker net of cash, due to consistently positive FCF. Net leverage at 5.0x by FY21 constitutes a manageable refinancing risk assuming a conservative financial policy. The natural exit of the current LBO is XXXLutz's full buyout of BUT, therefore the likelihood of an aggressive policy that could prevent deleveraging is low. DERIVATION SUMMARY BUT's strong business profile balances a weak financial profile relative to rated non-food retail peers in the 'B' category. The group has small scale and limited geographic diversification, but enjoys healthy sales and profitability growth prospects and a demonstrated track record of gaining market share. Its financial leverage and FFO fixed charge cover are more comparable with 'B-' peers, although comfortable liquidity underpins financial flexibility at the 'B' rating level. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - revenues of 3% to 3.5% annual growth, driven by moderate lfl growth and moderate network expansion; - EBITDA margin recovering to 6.5% in FY20 (FY17: estimated at 5.8%), driven by gross margin improvement and to a lesser extent positive operating leverage; - large working-capital inflow in FY18 following one-off outflow in FY17, moderate inflows thereafter; - average annual capex at 2% per annum over FY18-FY20 (FY17: estimated at 2%); - no dividend payments over FY18-FY20; - average annual FCF of 3% over FY18-FY20, driven by increase in profitability, working-capital inflows and moderate capex needs; - M&A activity limited to small bolt-on acquisitions. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Further improvement in scale and diversification leading to EBITDA margin above 8% and FCF margin above 4% on a sustainable basis - FFO fixed charge cover sustainable above 2.0x - FFO-adjusted gross leverage below 4.5x (net: 4.0x) on a sustained basis Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - A significant deterioration in revenues and profitability reflecting for example an increasingly competitive operating environment or a too ambitious, ill-executed expansion plan - FFO fixed charge cover below 1.5x on a sustained basis - Adjusted FFO gross leverage above 6.5x (net: above 6.0x) on a sustained basis - Average three-year FCF below 2% of sales LIQUIDITY Comfortable Liquidity: Fitch expects liquidity to remain adequate over the next four years. Fitch estimates readily available cash on balance sheet (total cash excluding estimated cash necessary to fund intra-year working-capital needs and restricted cash related to consumer financing) to be at its lowest at EUR12 million at end-FY17. This low level results from the buyout transaction, the acquisition of 18 Yvrai franchised stores, and a one-off high working capital outflow resulting from the time shift in summer regulated sales. From FY18 liquidity should be supported by consistent positive FCF and the EUR100 million revolving credit facility (undrawn at FYE17). Furthermore, BUT's liquidity is supported by the bullet maturity profile of its core debt. Contact: Principal Analyst Anne Porte Director +33 1 44 29 91 36 Supervisory Analyst Sophie Coutaux Senior Director +33 1 44 29 91 32 Fitch France SAS 60, rue de Monceau 75008 Paris Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Summary of Financial Statement Adjustments This summary refers to the FY16 audited financial statements. Operating Leases: In accordance with Fitch's corporate rating criteria, Fitch adjusts the debt by adding a multiple of 8x of yearly operating leases expense related to long-term assets (FY16: property leases of EUR73 million). Readily Available Cash: At 30 June 2016 Fitch estimated EUR40 million of the group's reported cash and cash equivalents deemed as not readily available for debt service, split between EUR30 million used to fund intra-year working-capital needs and EUR10 million in relation to the group's consumer financing activity. Fitch retains the same assumption in its forecasts. FFO: Fitch excludes from its FY16 FFO calculation estimated non-recurring cash acquisition and disposal costs of EUR5.6 million. Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email:; Adrian Simpson, London, Tel: +44 203 530 1010, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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 © 2017 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