Rating action

Scope Ratings assigns an initial issuer rating of BBB- to Fnac Darty, S.A. (Fnac Darty). Senior unsecured debt is rated BBB-. The rating for short-term debt is S-2. The Outlook is Stable.

Rating rationale

The rating is supported by Fnac Darty’s market leadership and high brand recognition in its home market of France; thick shop network; good reputation for after-sales service; and excellent online traffic, with France’s second most visited ecommerce website. The financial risk profile is a key credit support, including a low overall debt level which enables investments to be made without the burden of high debt repayments. The rating is constrained by the strong exposure to the French market, which accounts for 79% of group sales.

The company’s business risk profile (rated BB+) benefits from the retail industry’s medium cyclicality and entry barriers (Scope rates the overall industry at BBB). In Scope’s opinion, the medium entry barriers are justified by the time required to build brand strength and omni sales channels. In addition, the low cyclicality of Fnac Darty’s consumer staple products offsets the sales volatility that discretionary goods may face in times of economic turmoil. The company’s competitive position is also strong thanks to high brand awareness and a dominant market share in France in terms of sales by product category. Brand strength in particular has helped the company to increase the number of omni-channel transactions and achieve a strong online presence with France’s second most visited e-commerce website.

However, weak geographical diversification limits the business risk profile, with France representing 79% of group sales. The company’s presence in other countries – Belgium, the Netherlands, Spain and Portugal – is too limited to counter this risk and their growth potential is hampered by strong local and international competition (e.g. CEconomy). Moreover, brand synergies that arose in France and Belgium from the Fnac-Darty merger cannot be realised elsewhere as only one of the two brands is present in the other countries. On the other hand, product diversity is positive due to the presence in the books segment. The merger and the white goods segment also resulted in the group’s profitability slightly outperforming that of peers.

The financial risk profile (rated BBB) is the key rating support, driven by low overall low indebtedness. The group has only one sizeable long-term bond at EUR 650m (maturity in 2023, rated BBB-), no significant short-term debt, and a high overall cash balance. Cash flow generation is also positive, with Scope-adjusted fund from operations of about EUR 380m at YE 2017, supported by low cash interest expenses. Free operating cash flow followed a similar trend, growing to about EUR 140m over the same period. Overall, YE 2017 metrics are strong: Scope-adjusted debt/EBITDA of 1.6x, fund from operations/Scope-adjusted debt of 45%, free operating cash flow/Scope-adjusted debt of 16%, and EBITDA interest cover of 10.7x. Scope expects similar levels going forward, despite the IFRS 16 transition and a hypothetical acquisition modelled by Scope, both detrimental to leverage but mitigated by the assumption of good free cash flow generation. Fnac Darty’s liquidity is also strong, with yearly ratios of above 10x. New issuance of short-term debt is not expected in the long term, and high liquidity levels allow early debt repayment without a significant negative rating impact.

Rating-change driver

• A positive rating action may be taken if Scope-adjusted debt/EBITDA falls and remains below 1.5x.
   
• A negative rating action may be taken if Scope-adjusted debt /EBITDA exceeds and remains above 3.0x.

Stress testing & cash flow analysis 
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these ratings and rating outlooks Corporate Ratings Methodology 2018 is available on www.scoperatings.com.
Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerepweb/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Olaf Tölke, Managing Director
Person responsible for approval of the rating: Sebastian Zank, Executive Director
The ratings/outlooks were first released by Scope on 18.02.2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Directors: Torsten Hinrichs and Guillaume Jolivet.