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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB issuer rating of Fnac Darty S.A. (Fnac Darty) and has revised the Outlook to Stable from Negative. Scope has also affirmed its BBB rating for the senior unsecured debt issued by Fnac Darty S.A. along with S-2 short term debt rating.

Rating rationale

The Outlook change to Stable from Negative is driven by Fnac Darty’s successful deleveraging in 2023, thanks to the better-than-expected results in H2 2023 and the strict cost control programme maintained throughout the year. The Outlook change is also motivated by the decision of the High Court of Justice (UK) in favour of Fnac Darty S.A. with an additional EUR 40m to be received in the first quarter of 2024 in relation to the 2022 Comet group litigation. Finally, the improvement in macroeconomic conditions with lower inflation expected from H2–2024, is also driving the Outlook, which will have a moderately positive impact on Fnac’s sales and EBITDA.

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 2023, sales decreased by 0.9% (YoY) to EUR 7.9bn, still impacted by the weak development of the consumer electronics and household appliances business units, which was partially offset by the positive sales contribution from editorial products (up 8% YoY). Scope expects the company to remain dominant in France’s brick-and-mortar consumer electronics market and among the top three leaders in online sales that represented 20% of Fnac’s 2023 consolidated revenues. While the issuer’s geographic sales mix has improved moderately thanks to the acquisition of MediaMarkt¹ in Portugal, the rating is still constrained by the high weight of France in sales which accounted for 83% (stable YoY) of consolidated revenues in 2023. From Scope’s perspective, the lack of geographic diversification is partially mitigated by the broad product range and the strong sales performance linked to the online and omnichannel presence.

The Scope-adjusted EBITDA margin has slightly deteriorated to 6.6% in 2023 (versus 6.9% in 2022), while the Scope-adjusted EBITDA return on assets decreased to 18.4% (vs 19.7% in 2022). Scope expects profitability to moderately improve towards 7% in short-to-medium term driven by the improvement in macroeconomic conditions and the growth in the after-sale service business thanks to DartyMax which reached 1 million subscribers at year-end 2023. The issuer expects to achieve the milestone of 2 million subscribers in 2025.

The credit metrics of the financial risk profile (assessed at BBB+) continue to support the company’s rating. During 2023, net financial debt benefited of a stronger-than-expected cash position due to an inflow of EUR 97m from the Comet Group litigation and the positive working capital changes of EUR 70m. Consequently, Scope-adjusted debt decreased to EUR 1.05bn at YE 2023 from EUR 1.23bn a year earlier, benefiting leverage, exemplified by Scope-adjusted debt/EBITDA, that decreased to 2.0x (down 0.2x YoY).

For 2024, Scope expects Scope-adjusted debt/EBITDA to decrease to below 2.0x thanks to the progressive improvement of EBITDA reflecting a stable cash flow generation. The issuer will obtain a EUR 40m cash inflow during the first quarter of 2024 thanks to a decision of the High Court of Justice (UK) in favour of Fnac Darty S.A. related to the Comet Group litigation (accrued interest and legal cost incurred during the litigation process). This amount would partially offset, in case of materiality, the last year French Competition Authority (ADLC)² grievance of EUR 86m related to Darty’s vertical integration with some of its distributor in 2014 and years before.

In Scope’s base case, EUR 86m were added to Scope-adjusted debt as debt-like provision, reflecting the likelihood of payment during 2024 with limited impact on leverage and credit metrics. Scope deems Scope-adjusted debt to be around EUR 1.0bn in the next three years. Thus, Scope forecasts Scope-adjusted debt/EBITDA to decrease towards 1.7x in 2025 and 2026 driven by stable level of debt and better market conditions benefiting Fnac’s revenues and EBITDA evolution. Fnac’s management has the willingness to deleverage towards 1.5x in medium-term.

Group’s EBITDA interest cover has averaged 10x since 2015. However, in 2023, interest cover decreased to 8.1x due to an important growth of interest payments on leases that grew by 46% (YoY) to EUR 33.7m. Scope anticipates interest cover to decrease towards 6.5x to 7.0x, mainly reflecting the impact of the higher borrowing costs going forward.

Free operating cash flow/debt was negative in 2022. Due to positive working capital changes, the metric returned to positive territory in 2023 at around 25%. Scope expects the ratio to remain positive, but low ¬¬- between 5% and 10% - due to relatively high operating lease payments, annual capex of EUR 100m to EUR 120m and subject to volatile net working capital movements.

Scope assesses liquidity as adequate, with unrestricted cash of EUR 1.1bn in addition to EUR 800m of undrawn committed credit facilities (EUR 300m undrawn term loan and EUR 500m of revolving credit facility) as at end-2023 covering the refinancing of its outstanding senior bonds issued in 2019 and maturing in 2024 by more than 200%.

Financial policy is seen as neutral due to a conservative dividend policy and limited management appetite for debt-driven growth. The 2023 dividend payout has decreased to EUR 0.45 per share (from EUR 1.4 in 2022) reflecting management’s strong commitment to maintaining sufficient liquidity and reducing leverage.

Scope deems the company is 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 Stable Outlook reflects Scope's expectation that Scope-adjusted debt/EBITDA will remain below 2.0x in 2024 and decline towards 1.7x thereafter. Scope's assumptions include moderate revenue and EBITDA growth due to lower inflation from H2-2024 and an inflow of EUR 40m related to the High Court of Justice (UK) decision in favour of Fnac Darty. Scope's rating case reflects an EBITDA margin of around 7% in 2024, stable net debt in 2024 due to a neutral impact of working capital movements, capex of EUR 115m, lower dividend payouts, and no M&A transactions. The Outlook also reflects a necessary refinancing of the bond maturing in May 2024, with higher borrowing costs putting pressure on interest coverage.

A positive rating action is unlikely but would be considered if the company's business risk profile were to improve through a significant increase in revenues from operations outside France, leading to improved cash flow diversification, while maintaining credit metrics in line with Scope's rating guidelines.

A negative rating action is possible if the Scope-adjusted debt/EBITDA ratio rises above 2.0x on a sustained basis, or if interest cover deteriorates materially beyond Scope's expectations. An increase in leverage could be the result of a significant deterioration in the business, with an EBITDA margin below 7%, negative working capital changes due to higher inventories and/or material M&A transactions. Higher than expected refinancing costs could lead to negative pressure on interest cover.

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/Stable 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. MediaMarkt: Portugal household retailer with 450 employees, ten physical stores, one marketplace, and EUR 126m of revenues during 2022 – 2023. With the acquisition, Fnac has become the number 2 in the country in terms of household and electronics appliances. 
2. At the end of February 2023, A number of players in the manufacture and distribution of household electrical appliances have received a statement of objections from the investigating departments of the French Competition Authority (Autorité de la concurrence), in which a number of suppliers are accused of taking part in a vertical agreement with some of their distributors. Of all the objections raised by the Competition Authority, only one concerns Darty and covers a limited period ending in December 2014, (prior to the acquisition of Darty by Fnac in 2016). In addition, this grievance only concerns a limited number of clearly identified product categories.
 In order to quickly put an end to a complex procedure, Fnac Darty has decided not to contest the only grievance notified to it and to request the benefit of the settlement procedure provided for in Article L. 464-2 of the French Commercial Code. According to the issuer, this choice constitutes neither an admission nor an acknowledgement of responsibility on the part of Darty.
The exact amount of the penalty likely to be imposed on Darty will only be known at the end of the procedure, which should in principle take place during 2024. In anticipation of the Authority's decision, which will be rendered on that date, the Group has set aside a provision of c. EUR 86 m.

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, (General Corporate Rating Methodology, 16 October 2023; Retail and Wholesale Rating Methodology, 27 April 2023), 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, the Rated Entities' Related Third Parties 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 these 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 and/or Outlook 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: Daniel Felipe Gomez Reyes, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 18 February 2019. The Credit Ratings/Outlook were last updated on 4 April 2023.
 
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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