Key Rating Drivers:
The Rating Watch Negative follows Safeway's announcement that it is in discussions concerning a possible sale of the company and reflects the expectation that a sale of the company could cause financial leverage to increase further, into the mid-4x range or higher depending on the structure of the transaction.
Safeway also announced that it intends to distribute its 72.2% stake in Blackhawk (which generated
Safeway reported soft operating results for 2013, with identical store (ID) sales growth (excluding fuel) remaining sluggish at 1.7%, although this is an improvement from the 0.8% posted in 2012. The company's market share has been relatively stable for the past few quarters. The gross margin ex-fuel contracted by 15 basis points (bps) due to price investments and higher inventory shrink. Fitch expects ID sales growth will likely be at or under 2% in 2014, with the potential for additional gross margin pressure.
The sale of the profitable Canadian business in 2013, together with competitive pressures on the remaining domestic business, led to a reduction in the operating EBIT margin to 1.9% in 2013 from 2.6% in 2012. Fitch expects that operating margins could be modestly lower, as the company may need to make incremental investments to accelerate its top-line growth. Fitch believes it will be difficult for Safeway to restore its EBIT margin to its pre-
Safeway's lease-adjusted financial leverage was 3.6x as of end-2013. In the event the company is not sold, leverage would be expected to move to a level close to 3.0x, taking into account the spin-off of the Blackhawk business and the completion of an additional
Future developments that may, individually or collectively, lead to a negative rating action include:
The company is sold in a leveraging transaction, ID sales growth stalls causing operating margins to contract further, and adjusted leverage moves above the low 3x range.
Future developments that may, individually or collectively, lead to a Stable Outlook include:
Consistent ID sales growth of 2% or above, a stable to improving EBIT margin, and a consistent financial policy with adjusted leverage being maintained below 3x.
Fitch places Safeway's ratings on Rating Negative Watch as follows:
--Long-term IDR 'BBB-';
--Senior unsecured notes 'BBB-';
--Short-term IDR 'F3';
--Commercial paper 'F3'.
Additional information is available at 'www.fitchratings.com.'
--'Corporate Rating Methodology' (
--'Short-Term Ratings Criteria for Non-Financial Corporates' (
In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Short-Term Ratings Criteria for Non-Financial Corporates
Tel: +1 212-908-0549
Source: Fitch Ratings
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