Fitch Affirm's Staples' IDR at 'BBB'; Outlook Stable
CHICAGO -- September 27, 2012
Fitch Ratings has affirmed its long-term Issuer Default Rating (IDR) on
Staples, Inc. at 'BBB'. The Rating Outlook is Stable. As of July 28, 2012,
Staples had $2 billion of debt outstanding. A full list of rating actions is
The affirmation reflects Staples' leadership position in the office products
retail and wholesale industry, diversified model by channel and customer, debt
repayment in the years following the 2008 Corporate Express acquisition, and
solid free cash flow. The rating also reflects the company's soft sales and
earnings trends, as well as the potential benefits of a restructuring program
announced Sept. 25, 2012.
Staples' operating profile is supported by its diversity across a wide
customer base, as it sells to a balanced mix of large corporate customers,
small businesses and consumers, and its significant online presence. It enjoys
leading positions in its two largest segments - North American Delivery and
North American Retail, which accounted for 49% and 45%, respectively, of
operating profits in the 12 months ended July 28, 2012. The international
business remains challenged, but normally represents less than 10% of
The company's recent trends have been soft and worsened in the second quarter,
when sales were down 3% on a local currency basis. U.S. retail comps were down
2%, while European comp sales were down 9%. The EBIT margin declined to 6.8%
in the 12 months ending July 28, 2012 from 7.1% in 2011. In addition, EBITDA,
which has tracked in the $2.2 billion - $2.3 billion range (adding back
non-cash share-based compensation) over the past four years, declined to $2.1
billion in the latest 12 months. Fitch expects Staples' full-year EBITDA to be
close to $2.1 billion as second half performance should improve from the
latest quarter trend.
Financial leverage (adjusted debt/EBITDAR), which increased to 2.9x at July
28, 2012 from 2.8x at year end 2011, is expected to trend down slightly over
the near term with the expected repayment of $325 million of notes maturing in
October. The larger $1.5 billion maturity in January 2014 is likely to be
partly refinanced. Going forward, Fitch expects that leverage will remain in
the high 2x range.
Fitch views Tuesday's announced restructuring as a positive step forward, one
that should gradually improve returns in its international business, while
also beginning the process of downsizing its retail square footage in the U.S.
However, the restructuring also underscores the challenges facing Staples'
business over the next few years due to growth in online competition in the
context of a weak economic environment that has pressured sales growth and
There is no change to Staples' financial strategy as a result of the
restructuring announcement. The company announced that it would repurchase
$450 million of shares in 2012, and affirmed that it will repay the October
debt maturity with existing cash. The company is focused on maintaining its
current investment grade rating.
As part of the restructuring, Staples will reduce its retail square footage in
North America by 15% by the end of 2015 through a combination of store
closures, downsizings and relocations. In addition, the company will
restructure its international business by closing 45 stores (to 330) and
several smaller delivery businesses by the end of 2012.
The restructuring will result in pretax cash charges of up to $250 million in
2012 (which will be paid out over the next three years), as well as a noncash
goodwill writedown of $790 million - $850 million. In addition, to fund
additional investment in its online business, the company will initiate a $250
million cost reduction program to be completed over three years.
Staples has a strong liquidity position with cash and cash equivalents of $985
million as of July 28, 2012 and an unused $1 billion revolving credit facility
expiring in November 2014. Free cash flow (FCF) after dividends has tracked at
around $700 million - $900 million over the past two years, and should remain
in that range in 2012. Fitch expects that FCF will be directed toward
dividends, share repurchases, as well as some debt repayment. The rating does
not contemplate any debt-financed share repurchase activity.
What Would Lead To Consideration Of A Negative Rating Action?
If weak sales and earnings trends persist, causing leverage to move to a level
at or above 3.0x, Fitch could consider a one notch downgrade.
What Would Lead To Consideration Of A Positive Rating Action
Stronger than expected operating results indicating improved execution
combined with a reduction in leverage to the low 2x area, as well a commitment
from a financial policy standpoint to permanently maintain leverage at this
lower level could result in an upgrade.
Fitch has affirmed the following ratings as indicated:
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Bank credit facility at 'BBB';
--Senior unsecured notes at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
The Rating Outlook is Stable.
In accordance with Fitch's policies, the issuer appealed and provided
additional information to Fitch that resulted in a rating action which is
different than the original rating committee outcome.
Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
Applicable Criteria and Related Research:
--Corporate Rating Methodology, Aug. 8, 2012
--Short-Term Ratings Criteria for Non-Financial Corporates, Aug. 9, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Short-Term Ratings Criteria for Non-Financial Corporates
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Philip M. Zahn, CFA, +1 312-606-2336
70 W. Madison Street
Chicago, IL 60602
Augustinus Wong, +1 212-908-0762
Michael Simonton, +1 312-368-3138
Brian Bertsch, +1 212-908-0549
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