DBRS Confirms Wal-Mart Stores, Inc. at AA, R-1 (middle), Stable Trends

DBRS Limited (DBRS) has today confirmed Wal-Mart Stores, Inc.’s (Walmart or the Company) Issuer Rating and Senior Unsecured Debt rating at AA and its Commercial Paper rating at R-1 (middle). The trends remain Stable. The confirmation acknowledges recent pressure on the Company’s earnings growth in an evolving competitive environment while the ratings continue to reflect Walmart’s large scale and dominant market position and its general resilience to swings in economic cycles. The ratings also continue to consider the Company’s relatively aggressive share repurchase program during a period of market challenges. The rating confirmations continue to be supported by Walmart’s consistently strong free cash flow generation.

Walmart’s total reported revenues decreased by 0.7% to $482 billion in F2016 from $486 billion in the previous year primarily because of the negative effect of the U.S. dollar exchange rate. EBITDA also declined to $33.6 billion in F2016 from $36.3 billion in F2015 mainly because of the impact of higher wages and training expenses, store closing expenses and higher expenses related to technology and eCommerce. The decline in operating income contributed to modestly lower free cash flow, which was used primarily for returns to shareholders with a lesser amount for debt reduction. As such, Walmart’s financial leverage increased to 1.81 times (x) in F2016 from 1.71x the year before.

Going forward, DBRS believes that Walmart’s earnings profile may remain pressured over the medium term; however, the Company may realize benefits from expenses and investments undertaken to enhance competitiveness in its profitability over the longer term. DBRS expects that the Company’s consolidated revenues will grow marginally in F2017, as net additions to its retail area and modest growth in comparable sales are likely to be partially offset by the negative impact of U.S. dollar exchange rates. EBITDA margins are expected to further deteriorate marginally from the 7.0% level in F2016 because of increased expenses related to investments in associate wages, training and eCommerce. As such, DBRS expects EBITDA to be approximately $33 billion in F2017.

DBRS believes that the Company’s capex in F2017 will be approximately $11 billion primarily for new stores and continuing investments in its digital and eCommerce platform. Dividend outlay in F2017 is likely to remain steady at around $6 billion. As such, DBRS forecasts free cash flow (before changes in working capital) of approximately $7.0 billion to $7.5 billion in F2017. DBRS forecasts that share repurchases under the Company’s program introduced in the previous year will require Walmart to rely on some incremental debt in addition to free cash flow, causing financial leverage to increase marginally higher over the next two years. DBRS expects that Walmart’s financial risk profile will experience pressure over the medium term in view of its relatively aggressive share repurchase program and no meaningful debt reduction plan during a period expected to experience earnings growth challenges. Despite the pressure, DBRS believes that Walmart’s ability to generate steady free cash flows will continue to provide stability to its credit risk profile.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Merchandising Industry (August 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related
Research at the right of the screen or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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