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Rating action

Scope Ratings GmbH (Scope) has today upgraded the issuer rating of French retailer Fnac Darty S.A. to BBB/Stable from BBB-/Stable. Scope has also upgraded senior unsecured debt rating to BBB from BBB-. The short-term rating has been affirmed at S-2.

Rating rationale

The rating upgrade is based on Scope’s expectation of an improvement in profitability and thereby in credit metrics, which is correlated with the expectation of no debt issuances into the medium term. Scope also expects cost inflation to play only a limited role in purchase behaviour as regards the group’s products.

The business risk profile (assessed at BB+) continues to benefit from Fnac Darty’s strong position in the French market as well as the increased weight of services in the group’s activities. During 2021, sales increased by 7.4% to above EUR 8bn, supported by the gradual reopening of stores in Fnac Darty’s countries of operation and the related increase of footfall. Scope expects the group to remain dominant in France’s brick-and-mortar consumer electronics market and remain within the top three in online sales. The rating continues to be constrained by the high weight of France in both sales and EBIT (respectively 83% and 91% at YE 2021), mitigated in part by the retailer’s wide product range and strong development in its online and omnichannel presence. The successful rollout of services (notably Darty Max – ESG factor: credit positive, leading to higher profitability, basket size and recurrency of purchases) as well as a favourable product mix benefitted the EBITDA margin, offsetting slightly the weaker gross margins of the franchises and the 100% owned subsidiary Nature & Découvertes S.A. (French retailer specialised in outdoor activities). As a result, Scope-adjusted EBITDA margin grew to 7.6% in 2021 (up 20bp YoY) while the Scope-adjusted EBITDA return on assets improved to 22% (up 1pp YoY). Scope expects profitability to regain pre-Covid levels (around 8%) in the coming years through the recovering performance expected for both Natures & Decouvertes (once retail footfall rises again) and ticketing activities.

The credit metrics of the financial risk profile (assessed at A-) continues to carry the group’s rating. During 2021, gross financial debt decreased significantly after Fnac Darty repaid its entire EUR 500m loan with the French government, granted as part of efforts to dampen the pandemic’s impact on businesses (Prêt Garanti par l’Etat). The group also optimised its financing structure by rolling over its EUR 200m 2023 senior term loan to 2027 and extending the maturity of the EUR 500m revolving credit facility to 2028. Consequently, Scope-adjusted debt (SaD) decreased slightly over 2021 to EUR 1.0bn versus EUR 1.2bn from a year before. Scope does not expect any large debt issuances in the coming months given the group’s positive free operating cash flow, forecasted to remain at comparable levels in the coming years. The higher Scope-adjusted EBITDA benefitted all credit metrics except for free operating cash flow/SaD, which remained close to past values (10%-15%). The improvement in cash flow benefitted leverage metrics SaD/EBITDA (1.6x at YE 2021 down by 0.5x YoY) and funds from operations/SaD (49% up by 12pp YoY). Scope forecasts leverage to continue to improve in the coming years based on the expectation of stable SaD, improving cash flow, and no significant M&A. Free operating cash flow/SaD is expected to remain low (5%-15% in the coming two years) due to relatively high capex forecast in the coming years and despite the expectation of low net working capital variations.

Liquidity is sound and benefits from positive free operating cash flow and the absence of significant debt repayments until YE 2024.

Scope considers the group well-positioned in term of environmental, social and governance aspects. The group places the sustainability of its goods at the core of its strategy, which is a positive ESG factor as it will decrease the amount of electronic waste, via Darty Max and WeFix (ESG factor: credit positive). The launch of ‘enlightened delivery’ will also support Fnac Darty’s environmental footprint by allowing the customer to select delivery modes with a lower environmental impact.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Outlook is Stable and incorporates the expectation of the Scope-adjusted EBITDA margin improving to almost 8% and the absence of significant new debt issuances, which would result in SaD/EBITDA approaching 1x in the coming years. The Stable Outlook also assumes no significant M&A transactions.

A positive rating action is remote but would be considered if the business risk profile improved through a considerable increase in market shares outside of France while credit metrics remain in line with Scope’s rating guidelines.

A negative rating action is possible if SaD/EBITDA reached above 2x on a sustained basis. This could be the result of M&A, new Covid restrictions that affect shop performance, and/or higher-than-expected price inflation affecting both margins and customer demand.

Long-term and short-term debt ratings

The long-term debt rating has been upgraded to BBB from BBB-. The short-term debt rating has been affirmed at S-2. Scope considers both internally and externally provided liquidity cover to be better than adequate. The group’s banking relationships and standing in the capital markets are good.

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, 6 July 2021; Rating Methodology: Retail and Wholesale Corporates, 17 March 2021) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 Entitiy 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/Outlook were last updated on 6 May 2021.

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
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