S.A.C.I. Falabella Outlook Revised To Stable From Negative On Potentially Lower Leverage, ‘BBB+’ Ratings Affirmed

  • We expect Falabella's top-line and EBITDA growth to be modest, but consistent, in 2019 and 2020 due to e-commerce growth, new store openings, and relatively sound macroeconomic conditions in Peru, Colombia, and Chile.
  • The recent capital increase of about $580 million would finance a portion of capital spending for the next two years; therefore, we expect debt to stay largely constant.
  • On April 15, 2019, S&P Global Ratings revised its outlook on Chile-based retail and real estate company to stable from negative. We also affirmed our 'BBB+' global scale issuer credit and issue-level ratings on Falabella.
  • The stable outlook reflects our expectation that the company will maintain net debt to EBITDA between 2.5x and 3.0x and funds from operations (FFO) to debt between 23% and 27% in the next two years.
SAO PAULO (S&P Global Ratings) April 15, 2019—S&P Global Ratings took rating actions described above. We believe Falabella will be able to maintain leverage at or below 3x in the next two years. Despite challenging market conditions in Chile--the company's largest operation--that took a toll on top-line growth, Falabella was able to reduce the leverage of its corporate operations in 2018 and report better operating results than what we expected in our base-case scenario.
For 2019 and 2020, we expect economic growth in Peru and Colombia to remain solid, supporting same store sales (SSS) growth across various formats in these countries. We believe relatively healthy macroeconomic conditions, development of e-commerce in these countries, and strong growth rates in the company's financial unit--particularly in Colombia--will bolster Falabella's SSS growth. We expect stronger demand for home improvement and supermarkets in Chile, but growth in department stores to remain modest given promotional activity in an already saturated market. We expect Falabella to open at least 20 stores per year and to heavily invest in technology and logistics, supporting the expansion of its e-commerce channel. Given these factors, we expect soft top-line growth, allowing for EBITDA growth in middle single digits. Additionally, we believe the capital increase, which was completed in late 2018, provides cash to finance capex plan for the next two years without the need to increase debt. In our view, Falabella should achieve gradual, but persistent, leverage reduction, with net debt to EBITDA between 2.5x and 3.0x and FFO to debt between 23% and 27% in the next two years.
Falabella's solid market position and brand recognition--mainly in the home improvement and department stores businesses in Chile, Peru and Colombia and in the shopping mall business in Chile and Peru--continue supporting its credit quality. Additionally, we believe that the company's strong geographic and business diversification (department stores, home improvement, supermarkets, market place, financial services, and real estate) allows it to benefit from synergies and partly compensates for its smaller scale and exposure to higher country risk volatility than those of larger global peers. Particularly, we believe Falabella benefits from a strong financial division, which over the past couple of years has helped mitigate volatility in the retail segment and has been an important contributor to EBITDA growth.
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