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Rating action

Scope Ratings GmbH (Scope) has today affirmed its BBB issuer rating on Fnac Darty S.A. and revised the Outlook to Negative from Stable. Scope has also affirmed its BBB rating of the company’s senior unsecured debt and its S-2 short term debt rating.

Rating rationale

The Negative Outlook is driven by Fnac Darty’s 2022 results, with leverage (Scope-adjusted debt/EBITDA) increasing to 2.2x from 1.6x. In 2022, the company’s credit metrics were negatively impacted by lower sales from the deterioration of the business environment in France, mainly in the second half of the year, leading to inventory overstocking and negative working capital variation of EUR 155m. Fnac Darty’s EBITDA and profitability both decreased because of inflation, including higher salary costs. The company’s leverage also increased on the back of an outflow of EUR 131m in connection with litigation relating to the sale of Comet Group Limited in 2012¹. The change in the Outlook is also driven by additional pressures on EBITDA expected in 2023. A decrease in EBITDA will follow expected lower sales in H1 2023 due to weaker consumption, driven by strong inflation reducing customers’ purchasing power for non-food items. H2 2023 is expected to exhibit lower inflation, leading to a positive impact on discretionary retailers’ sales versus the first half of the year. Energy cost increases between EUR 30m and EUR 50m from the cancellation of the hedging contract between Fnac and Solvay as well as salary inflation in line with 2022 will also contribute to a weaker EBITDA generation.

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 company’s activities. During 2022, sales decreased by 1.2% YoY to EUR 7.9bn, impacted by a slowdown in e-commerce sales, which was partially offset by the positive sales contribution from physical stores. Scope expects the company to remain dominant in France’s brick-and-mortar consumer electronics market and among the top three in online sales. The rating continues to be constrained by the high weight of France in sales (2022: 83%; stable YoY), mitigated in part by a wide product range and strong performance in its online and omnichannel presence. The Scope-adjusted EBITDA margin deteriorated to 6.9% in 2022 (down 70 bp YoY), while the Scope-adjusted EBITDA return on assets decreased to 19.7% (down 120 bp YoY). Scope expects profitability to bottom in 2023, followed by a recovery in EBITDA margins to around 7% in 2024 and 2025 thanks to lower inflation, improved sales volumes, and a more stable cost base.

The credit metrics of the financial risk profile (assessed at BBB+, revised from A-) continue to carry the company’s rating. During 2022, net financial debt was mainly impacted by negative free operating cash flow because of lower EBITDA, negative working capital variations and the EUR 131m payment for Comet. Consequently, Scope-adjusted debt increased to EUR 1.2bn at YE 2022 from EUR 1.0bn a year earlier. Scope does not expect any large debt issuances in upcoming months. This is because the company’s free operating cash flow is forecasted to return to positive territory thanks to capex remaining at EUR 120m and working capital variation reverting to breakeven. The company’s lower Scope-adjusted EBITDA impacted all its credit metrics. Lower cash generation put pressure on leverage metrics, including the Scope-adjusted debt/EBITDA ratio (2.2x at YE 2022; up by 0.6x YoY) and the Scope-adjusted funds from operations/debt ratio (36%; down 13 pp YoY). Scope forecasts leverage will continue to increase in 2023 based on its expectation of stable Scope-adjusted debt and lower EBITDA. Furthermore, Scopes anticipates the Scope-adjusted free operating cash flow/debt ratio will remain low (5%-10% in the next two years), due to relatively high capex forecast in upcoming years and despite low expected net working capital variation.

As of 31 December 2022, Scope assesses liquidity as adequate, with EUR 20m in short-term debt maturing over the next 12 months fully covered by EUR 839m in unrestricted cash and EUR 800m in undrawn committed credit facilities.

Scope deems the company well positioned in terms of environmental, social and governance aspects. The company puts the sustainability of goods at the core of its strategy, which is a positive ESG factor because 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 methods with a lower environmental impact.

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

Outlook and rating-change drivers

The Negative Outlook reflects the risk that Scope-adjusted debt/EBITDA ratio, stays above 2.0x. Scope’s assumptions include lower EBITDA due to pressure from lower sales volumes and rising energy prices, although the EBITDA margin is assumed to remain between 6.5%-7.0%. Scope’s rating case reflects stable net debt in 2023 stemming from a neutral impact from working capital, EUR 120m in capex, lower dividend pay-outs and no material M&A transactions.

A revision of the Outlook back to Stable could be triggered if Fnac Darty succeed in bringing its Scope-adjusted debt/EBITDA ratio below 2.0x. This could be achieved through stronger EBITDA generation combined with a successful appeal in the Comet lawsuit, leading to a positive cash inflow of around EUR 130m, or reversal of 2022’s negative net working capital outflow in 2023.

A negative rating action is possible if the Scope-adjusted debt/EBITDA ratio stayed above 2.0x on a sustained basis. This could be the result of no concrete deleveraging efforts in 2023, an unsuccessful appeal in the Comet lawsuit or no recovery in profitability (Scope-adjusted EBITDA margin) to above 7%.

Long-term and short-term debt ratings

Scope has affirmed Fnac Darty S.A.’s senior unsecured debt rating at BBB, in line with the issuer rating.

Scope has also affirmed the short-term debt rating at S-2. This affirmation reflects the company’s underlying BBB/Negative issuer rating and its adequate liquidity profile, with upcoming debt maturities comfortably covered by internal cash sources, committed credit lines of EUR 800m and good access to external funding (bank and capital market debt).

 1. The liquidator alleges that in February 2012, prior to Fnac's acquisition of Darty in 2016, Comet repaid intra-group debt to KIL when it was already insolvent.

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 Outlooks, (General Corporate Rating Methodology, 15 July 2022; Retail and Wholesale Rating Methodology, 27 April 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Thomas Langlet, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 18 February 2019. The Credit Ratings/Outlooks were last updated on 1 April 2022.

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

Conditions of use/exclusion of liability
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