Woolworths shares fell more than 4% at one stage yesterday after Moody’s joined Standard and Poor’s in downgrading the supermarket giant’s credit rating after Friday’s board changes and weak 2014-15 profit result and sales performance.
The shares closed at $26.40, down 3.6% and well short of its 52 week high of $37.04, and closer to its 52 week low of $25.12, as a series of broking reports also put the retailer on a lower rating.
WOW 1Y – Woolies under more pressure
Moody’s issued a corrected rating statement yesterday that was originally issued on Friday, when the S&P ratings advice was also released.
Moody’s downgraded Woolies to Baa1 stable from A3 negative, with the outlook now stable. S&P cut its long-term credit rating on Woolworths to BBB+ from A- previously, and said the outlook on the rating is stable.
Moody’s said in its statement that “The downgrade principally reflects Woolworths’ weaker-than-expected results for the fiscal year ended 28 June 2015 and our expectation that its financial leverage which has now reached our downdriver for the rating, will worsen further over the next 12-18 months".
Ian Chitterer, a Moody’s Vice President and Senior Analyst, said in the statement, "The deterioration in Woolworths’ credit profile over the fiscal 2015 year has exceeded our expectations, and adjusted debt to EBITDA at 3.5x has reached the upper threshold for the A3 rating”.
“But, the difficulties that Woolworths is experiencing in arresting the negative momentum in comparable-store sales – combined with our expectation of continued shelf-price deflation due to the need to address pricing competitiveness relative to Coles and Aldi – will result in its key credit metrics for fiscal 2016 falling materially outside the tolerance levels for the A3 rating,” Chitterer said in the statement. He is Moody’s lead analyst for Woolworths.
“Furthermore, the trend in comparable-store sales growth at its Australian Food and Liquor business has been negative, falling to -0.9% from 3.5% in 3Q 2014, with July and August 2015 continuing to track at the same level," says Chitterer.
“The stable outlook reflects our expectation that Woolworths should nevertheless be able to maintain credit metrics in line with a Baa1 rating, while its transformation plans are actioned in an environment where its shelf prices are likely to come under increasing downward pressure," Chitterer added.
Moody’s said it also expects that “Woolworths’ debt/EBITDA for 2016 will weaken from the 3.5x reported in 2015 to a level that is in line with a Baa1 rating of around 3.8x”.
"The ratings outlook could change to negative if comparable-store sales in the core Australian Food and Liquor business remain negative for a prolonged period and the Home Improvement and General Merchandise divisions continue to underperform.
"The rating could be upgraded if comparable-store sales in the Australian Food and Liquor business revert to a positive number, losses in the Home Improvement business are reversed, and the General Merchandise division returns to growth. We would expect leverage to be maintained below 3.2x on a sustainable basis,” Moody’s said.
But the ratings group warned that Woolies’ rating could be downgraded if comparable-store sales in the Australian Food and Liquor business worsen, losses in the Home Improvement business continue to increase, and the General Merchandise division keeps underperforming. "An indicator of downward rating pressure includes debt/EBITDA exceeding 4x”.
In its ratings advice late last week, S&P said, “The downgrade reflects the impact of intense competitive pressure on the earnings and margins of Woolworths’ Australian supermarket business, together with continuing significant losses from the group’s hardware division and weak operating performance at its department store Big W”.
S&P credit analyst Paul Draffin said, "These factors, together with the company’s large and growing fixed cost base and capital investment, are likely to sustain the group’s financial risk profile outside tolerances for the previous ‘A-‘ rating in the next two years”.
Woolworths’ core food and liquor business lifted total sales 2.3% for the year, while comparable sales were up just 0.7% as the company’s performance worsened in the final two quarters of the financial year
By contrast, rival Coles saw a 5.3% rise in total sales and a 3.9% in comparable store sales for the same period.
