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Rating action

Scope Ratings GmbH (Scope) has affirmed its BBB- issuer rating of Ceconomy AG and revised the Outlook to Stable from Negative. The senior unsecured debt rating and the short-term debt rating have been affirmed at BBB- and S-2 respectively.

Rating rationale

With inflationary pressures continuing to affect consumer behaviour, Scope anticipated pressure on EBITDA margins and leverage last year. However, the issuer maintained strong cost control which, together with a resilient top line and increasing gross margins, supported an improved operating performance year-on-year. The revision of the Outlook to Stable from Negative is based on the expectation that Ceconomy will continue to build on its current positive track record of cost savings and improved product mix, thereby keeping its credit metrics in line with Scope's rating case. The rating affirmation is supported by the expectation that the issuer will continue to deleverage and maintain positive free operating cash flow.

Ceconomy’s business risk profile (assessed at BB+) benefits from its strong positioning in 11 European markets (the group is number one or two in nine out of the 11 markets covered). While most consumer electronics retailers operate online only or have less geographical coverage (e.g. Fnac Darty), the issuer’s business model, with both online and brick-and-mortar presence across Europe, is difficult to replicate. Geographic diversification, although 40% of total revenue are still generated in Germany (FY 2022/23), has been a major support in the difficult market environment, as last year Ceconomy was able to benefit from strong revenues Turkey, offsetting the weak demand in Germany and Italy. Following the recent sale of the Swedish and Portuguese branches, Scope believes that the issuer will focus on preserving its market shares in the other European countries. The new focus on complementary services, such as ‘Marketplace’, and ‘Retail Media’ underlines Ceconomy’s proactive approach in adapting to market dynamics. Scope believes that these new services will foster the issuer’s market position and further diversify cash flow generation. Besides, these services are expected to lead to improved profitability as they are typically margins accretive.

Ceconomy is currently undergoing a restructuring of its supply chain structure, from a decentralized approach, with suppliers distributing directly to its local stores to a model where suppliers deliver to one large national warehouse from which products are distributed to the stores. While the reorganisation involves some execution risk and will put pressure on capex, Scope expects it to support a more efficient supply chain, as the issuer will have centralised stock control and will be better able to match local customer demand.

The business risk profile is constrained by the low profitability. With lower Scope-adjusted EBITDA margins than its peers, Ceconomy has suffered from the dual-brand business model in the domestic market, including two cost centres, and the integration of online sales, which is typically a low margin business. Profitability as measured by the Scope-adjusted EBITDA margin improved to 4.7% in FY 2022/23 (up 0.2pp YoY), driven by the successful implementation of cost-saving measures and resilient operating performance despite challenging market conditions. Scope expects margins to remain between 4.5% and 5.0% supported by: i) the positive track record on the cost saving measures already implemented in FY 2022/23 (digitalisation and simplification of the central structure and closer campaign management of the two brands in Germany), which are expected to continue in the coming years; ii) the launch of the marketplace, which is active in Germany, Spain, Austria and the Netherlands (with plans to launch in other countries); iii) the increasing focus on ‘Services and Solutions’, ‘Retail Media’ and ‘Own Labels’, which are expected to benefit the operating profit as they typically generate higher margins than traditional retail.

The financial risk profile, assessed at BBB-, benefits from an effective deleveraging strategy. The Scope-adjusted debt/EBITDA has improved in 2022/23 to 1.8x from 2.3x and is expected to remain below 2.0x, supported by the growing EBITDA. Gross debt has decreased over the last years to EUR 2.5bn in FY 2022/23 (down EUR 0.2bn YoY) from EUR 2.9bn at its peak FY 2020/21, driven by a reduction in leases (in line with the company’s strategy to negotiate better contracts and reduce the average store size). Most debt consists of lease obligations (69% as of FY 2022/23) and a EUR 500m bond (19% of gross debt as of FY 2022/23) repayable in June 2026.

The Scope-adjusted EBITDA interest cover is expected to deteriorate in the forecast period, also due to increasing lease interest expenses, but will remain at a very comfortable level between 8x and 10x.

In FY 2022/23 the issuer achieved its goal of improving free operating cash flow, through a leaner inventory management (faster turnaround of inventory to facilitate the transition from store-centric logistic toward omnichannel infrastructure). Scope expects the ratio to remain positive in the coming years, albeit to a lesser extent, due to increasing capital expenditure needed to execute the supply chain management transformation and store renovations.

Scope acknowledges the risk associated with the high level of lease payments but considers the risk to be well managed as Ceconomy is successfully on track to reduce its annual lease payments (by reducing the average size of stores) and has a relatively high flexibility to renegotiate contracts (average lease term is 2.9 years).

Liquidity is adequate as there are no material debt repayments before 2026 and free operating cash flow is expected to remain above zero.

Outlook and rating-change drivers

The Outlook has been revised to Stable from Negative, based on the successful implementation of cost-saving measures which supported steady profitability in 2022/23, and the expectation that these measures will continue to deliver benefits in the coming years, allowing leverage to remain below 2x, despite the possibility of continued weak demand.

A positive rating action could be warranted if Ceconomy were to reduce its Scope-adjusted debt/EBITDA below 1.5x on a continued basis and would keep its Scope-adjusted FOCF/debt above 5% on a sustained basis, demonstrating effective management of net working capital and leased spaces or an improved business risk profile while keeping credit metrics in line with Scope guidelines.

A negative rating action could occur if the Scope-adjusted debt/EBITDA were to rise well above 2.5x on a sustained basis, driven for example by a weaker than expected Scope-adjusted EBITDA, as demand for consumer electronics goods declines.

Long-term and short-term debt ratings

Scope has affirmed the senior unsecured debt rating at BBB-, the same level as the issuer rating. The short-term debt rating has been also affirmed at S-2, supported by the underlying BBB-/Stable issuer rating and the adequate liquidity, with short term debt fully covered by cash sources and EUR 1,066 committed credit line. 

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 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: Claudia Aquino, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 27 June 2017. The Credit Rating/Outlook was last updated on 19 April 2023.
The short-term Credit Rating was first released by Scope Ratings on 27 June 2017. The Credit Rating was last updated on 19 April 2023.
The senior unsecured debt Credit Rating was first released by Scope Ratings on 24 June 2021. The Credit Rating was last updated on 19 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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