The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today confirmed the issuer rating Fnac Darty’s rating at BBB-/Stable. The short-term debt rating and senior unsecured debt rating have both been confirmed at S-2 and BBB- respectively.

Rating rationale

The group’s credit metrics have proved robust, given the higher resilience of its business than expected. This is due to a fast transition to online sales, which has counterbalanced the decrease in sales in physical shops. Scope has therefore confirmed the rating at BBB-.

In 2020, Fnac Darty’s business model proved resilient and adaptable. The group successfully finished the year with revenue growth of +1.9% YoY/+0.6% on a like-for-like basis. This was despite a complicated macro environment, on the Iberian Peninsula (-9.5% growth of revenue YoY / 11.1% on a on a like-for-like basis), which burdened the growth potential of the group. Profitability was impacted, with a drop in EBIT of close to 25% YoY, mainly affected by a gross margin decrease of 120 bps while operating expenditures remained broadly unchanged. The main negative drivers were a decline in in-store traffic and ticketing sales, which impacted the gross margin by 80 bps and 45 bps respectively. Credit metrics, which have been in line with Scope’s expectations in 2020, should improve from 2021. This is based on Scope’s expectation that profitability will recover due to a normalisation of activity in France. Scope therefore expects Scope-adjusted debt (SaD)/EBITDA of under 2x in the coming years, despite a conservative EBITDA forecast.

Fnac Darty’s business risk profile (confirmed at BB+) has been resilient, given the rapid transition to the online distribution channel over the last year. This represented 30% of sales at YE 2020 versus a stagnation of below 20% in the 2016-2018 period. In Scope’s view, the online penetration of the group is likely to remain above 25% in the coming years, with close to 5 million new active online users. This increase in members cements the group’s strong online position in its key market of France (83% of revenue and close to 90% of reported EBIT in 2020). Fnac Darty has leading market shares among French omnichannel retailers, with a stronger focus on premium positioning (based on GfK data). In contrast to many retailers which consumers viewed as discretionary, the group managed to maintain high sales growth (+2% like for like growth YoY), capitalising on the ‘cocooning/home improvement’ trend which developed over the last year. Profitability was slightly under pressure last year, underlined by the Scope-adjusted EBITDA margin dropping to 7.4% in YE 2020, from 8% one year before. However, Scope expects it to bounce back to levels close to 8%. The rating agency considers the main factors which impacted gross margins to be temporary and related to restrictions in opening and ability of customers to visit shops or in ancillary services such as ticketing. In 2021, Scope does not expect to see further extensive lockdowns, temporary store closures, deteriorations in consumer confidence or supply chain issues which could affect the rating. Scope anticipates that profitability will be supported by the group’s gradual positioning toward services, which provide not only a higher national positioning, anchoring the group toward a vertical integration but also provide higher profitability margins.

Fnac Darty’s financial risk profile (BBB+) is supported by Scope’s expectations of a recovery in profitability and tight control of the group’s debt level. Consequently, Scope expects leverage in terms of SaD/EBITDA and funds from operations/SaD to improve in the coming years to a range between 2.0x and 1.5x and above 45% respectively. EBITDA interest cover is expected to remain high following the refinancing of the medium-term loan with OCEANE debt. Scope expects free operating cash flow/SaD to remain close to 10%, based on assumed capex of EUR 150m a year and low but positive net working capital. Liquidity is bolstered by a credit line – recently extended to EUR 500m – and remains adequate despite an anticipated temporary drop due to the repayment of the secured state loan of EUR 500m in the first half of 2021. Fnac Darty announced paying EUR 1 dividend per share in 2021 (estimated to represent a cash outflow of EUR 27m), followed by EUR 1.5 per share in 2022 (estimated to represent a cash outflow of EUR 40m) and a targeted 30% pay-out in the medium term. This shareholder-friendly remuneration strategy is, however, mitigated by Fnac Darty’s statement that it will maintain leverage, calculated by net debt/EBITDA, of below 2.0x (both excluding IFRS 16 adjustments).

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s opinion on the resilience of the retailer’s business model. It assumes slight growth in revenues and profits in the coming years, correlated with our expectation of a gradual reopening of retail shops. The agency, however, anticipates slower recovery for the Iberian Peninsula and the ticketing business, which are not expected to return to pre-crisis levels before Q4 2021. Scope expects a gradual improvement in SaD/EBITDA to below 2x.

A positive rating action may be warranted should the group successfully improves its SaD/EBITDA stabilises itself close to 1.5x on a sustained basis. This could follow a faster rollout and acceptance of the services which would positively impact the cash flow generation of the group. The reopening of the stores and a recovery of the macro condition would also positively impact the EBITDA generation.

A negative rating action is possible should the retailer increases its leverage to levels closer to 3x. An increase in leverage could be a result of a continuation of the lockdown measures in France, a low technological ramp-up or an increase of competition putting pressure on the cash flow generation of the group.

Long-term and short-term debt ratings

Scope affirms both existing debt instrument ratings of BBB- for senior unsecured debt and S-2 for short-term debt.

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

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 26 February 2020; Rating Methodology: Retail and Wholesale Corporates, 17 March 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed
Lead analyst: Adrien Guerin, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 18 February 2019. The Credit Ratings/Outlooks was/were last updated on 3 November 2020. 

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.