Rating action

Scope Ratings affirms Fnac Darty S.A.’s issuer rating at BBB- with Stable Outlook. Senior unsecured debt is rated BBB-. Short term rating is S-2.

Rating rationale

The rating is supported by Fnac Darty’s market leadership and high brand recognition in its home market of France, with France’s second most visited e-commerce website. The continuous growth of sales, linked to relatively high profitability, supports the business risk profile. The acquisition of Nature & Découvertes SA, a French leader in outdoor activities and recreational hobbies, is credit-positive but its size is too small to have a strong impact on competitive positioning and diversification. The financial risk profile is a key credit support, including a historically low overall debt level that enables investments to be made without the burden of high debt repayments. The implementation of IFRS 16 has put pressure on Scope-adjusted debt but also increased profitability. The rating is constrained by the strong exposure to the French market, which accounts for 78% 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), an opinion 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, which has led to continuous growth of the top line since the merger. The acquisition of Nature & Découvertes continues the strategy of the group’s horizontal expansion into complementary products, enhancing the shops’ attractivity by providing the chance to open new shop-in-shops for the other group’s brands. Brand strength in particular has helped the company to increase the number of omni-channel transactions and achieve a strong online presence with the second most visited e-commerce website in France. This limits to some degree the competition from other e-tailers and any associated loss in market share.

However, weak geographical diversification limits the business risk profile, with France representing 78% of group sales. The company’s presence in other countries – Belgium, the Netherlands, Spain and Portugal, among others – is too limited to counteract this risk. The growth potential in these countries is also 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 acquisition of Nature & Découvertes has not changed the rating case due to its relatively small size and sole regional exposure to France. The IFRS 16 implementation is forecasted to increase the Scope-adjusted EBITDA margin, from 7.6% in YE 2018 to 8.3% as per Scope’s forecast for 2019 – despite the EBIT margins stagnating at similar levels. Going forward, Scope expects the retailer to continue to expand via franchises (under franchise-owned and franchise-operated), which will have a limited impact on the operating expenditure of the group.

The transition to IFRS 16 has increased interest-paying debt above Scope’s initial forecast (EUR 935m versus EUR 487m initially planned). Consequently, Scope-adjusted debt (SaD) is estimated to deteriorate slightly to EUR 1,193m in 2019 from EUR 841m from the year before. Nonetheless, the rise in EBITDA – reflecting, among other factors, the implementation of the IFRS 16 – and ultimately in cash flow prevent a significant downward trend in financial metrics. SaD/EBITDA is expected to stagnate going forward at around 2x and funds from operations/SaD at nearly 40%. The 2023 bond was refinanced via two new bonds (with respective maturities in 2024 and 2026), which will support the cash interest cover due to the lower refinancing rate (1.875% and 2.625% versus 3.25% for the 2023 bond) and streamline the repayment schedule. Interest cover is forecasted to be above 10x but at a negative trend due to Scope’s forecasts of a debt increase in 2020 and 2021, representing an assumed EUR 200m of acquisitions each year. Free operating cash flow is expected to remain relatively high for a retailer with a free operating cash flow/SaD of close to the previous level of around 15%.

Rating-change drivers

A positive rating action may be taken if SaD/EBITDA reaches below 1.5x on a sustained basis.

A negative rating action may be taken if SaD/EBITDA breaches the 3.0x threshold on a sustained basis.

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 this rating and/or rating outlook (Corporate Rating Methodology) is available on www.scoperatings.com.
Historical default rates of the entities rated by 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/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
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/or 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, the 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 Adrien Guerin, Analyst
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 18 February 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.

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