KEY RATING DRIVERS
Kroger's ratings are supported by its industry-leading sales growth and market share gains and relatively stable operating margins balanced against ongoing share repurchase activity and intense price competition.
Kroger generates industry-leading non-fuel identical store (ID) sales growth as a result of strong pricing perception by customers, effective marketing through use of loyalty card data, and improvements to the shopping experience. ID sales growth of 4.6% in the first quarter of 2014 follows increases of 3.5% in 2013 and 3.5% in 2012, leading to market share gains in most of its major markets. The company has achieved these results despite the weak consumer environment and intense competition from discount and specialty formats. Fitch expects Kroger will maintain low to mid-single digit ID sales growth over the next 2-3 years.
Kroger has gradually managed down its gross margin ratio, and has offset this pressure with cost containment efforts and the leveraging of fixed costs. The EBIT margin was up slightly in 2012 and 2013, to 2.9% in the twelve months ended
Free cash flow (FCF) after dividends is expected to track around
The ratings take into account Kroger's merger with
Adjusted debt/EBITDAR increased from 2.6x prior to the acquisition (at
Debt levels are expected to be steady in 2014 as the company manages leverage down to its targeted range. Beyond 2014, management is expected to direct essentially all of its free cash flow and potentially some incremental borrowing to share repurchases in order to maintain adj. leverage at around 3.0x.
A positive rating action would be considered if adjusted leverage improved to the mid-2x range, together with steady mid-single-digit ID sales growth and gradual margin improvement. This is not anticipated at this time.
A negative action would be considered if adjusted leverage moved up to the low 3x range due to pressure on margins and/or a more aggressive approach to share repurchases or acquisitions.
Fitch has affirmed Kroger's ratings as follows:
--Long-term IDR at 'BBB';
--Senior unsecured notes at 'BBB';
--Bank credit facility at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology'(
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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