France-Based Frozen Food Retailer Picard Groupe 'B' Rating Affirmed; Outlook Stable

  • Picard Groupe S.A.S's fiscal 2019 operating results were weaker than expected, with S&P Global Ratings-adjusted debt to EBITA increasing to 7.4x, resulting in very limited headroom for any further unexpected underperformance.
  • However, the group's operating performance has started to improve, and we expect a modest revenue growth in fiscal 2020.
  • We are therefore affirming our 'B' rating on Picard, our 'B' rating on its senior secured debt, and our 'CCC+' rating on its unsecured debt.
  • The stable outlook reflects our expectation that Picard will achieve revenue growth of roughly 2%-3% over the coming year, and will demonstrate a more supportive financial policy toward shareholder remuneration, particularly in the context of recent weak trading and elevated leverage.
PARIS (S&P Global Ratings) Sept. 9, 2019--S&P Global Ratings today took the rating actions listed above .The affirmation reflects S&P Global Ratings' view that France-based French frozen food retailer Picard Groupe will return to modest revenue growth of close to 2% over the next 12 months, and maintain strong adjusted EBITDA margins of over 17%.
Picard's underperformance in fiscal 2019 (fiscal year ending March 31, 2019) was mostly attributed to weak consumption in France during the Yellow Vests protests at the end of 2018 and beginning of 2019, especially during the year-end holiday season that represents over 40% of the group's EBITDA. A significant negative calendar effect also hampered results. We expect a turnaround in fiscal 2020 as the trading environment improves and Picard continues to adapt its offer to changing consumer behaviors, such as an increased uptake of organic products, snacking bars, and preference for digital customer relationship management systems. Consequently, we expect positive like-for-like revenue growth for Picard in 2019, supported by GDP growth in France and in line with the 2.6% like-for-like growth in first-quarter fiscal 2020, or 1.4% excluding calendar effect.
In our view, Picard is a mature business with stable revenue growth and profitability, deriving over 98% of its revenue from France. Picard has demonstrated a resilient operating performance and niche positioning, which offsets its small size and lack of geographic diversity compared with some of its larger competitors in France. The group's high quality food offering at affordable prices has built strong brand recognition, translating into high margins and reported free cash flow relative to its peers. Picard continues to sustain its market share and is the leading frozen-food retailer in France, with 1016 stores across the country. While the group is subject to some seasonality in revenue and is potentially vulnerable to food safety and supply chain issues, we believe management has a strong operating performance record. The group's business model is also cash flow supportive, with moderate capital expenditure (capex; about 3% of sales) and structurally negative working capital requirements.
Nonetheless, the company's competitive position is constrained by significant structural weaknesses as the macroeconomic environment in France weakens and major grocers increasingly focus on competitive pricing and expanding their convenience store network. In addition, the company will have to adapt to changes in consumer behaviors, particular the rapid growth in the fresh and organic segments, in a French frozen-food market that has never fully recovered from the horsemeat scandal in 2013.
In this context, we believe that margins will continue to erode slightly, with sluggish revenue growth only partially compensating for inflation in rent, energy, and labor costs. Consequently, we forecast little-to-no growth in EBITDA over the next 12 months and expect only slow deleveraging in the long run.
The company's S&P Global Ratings adjusted debt to EBITDA increased to 7.4x in fiscal 2019 from 6.8x in fiscal 2018 on the back of two debt-funded dividend distributions for a total of €188 million, resulting in two consecutive years of negative discretionary cash flow. We view Picard's leverage as high for the current rating level, leaving very limited headroom to accommodate any material weakening of the operating performance. However, we view its strong cash generation, absent of any further dividend distribution, and comfortable liquidity buffer as supportive factors.
Our view of the group's financial risk is constrained by our assessment of the shareholders' financial policy, which we consider aggressive in light of a weak operating performance. Private equity sponsor Lion Capital has been a shareholder since 2010, and in 2015 disposed of a 49% stake to listed Swiss food producer Aryzta AG, which has publicly mentioned its intention to dispose of its stake in the near future. As a result, we have limited visibility over any evolution of the shareholding structure and financial policy. That said, we believe an additional dividend distribution is unlikely in the near future, given the already elevated leverage arising from the recent years' dividends.
Further additional dividends will also be constrained by the terms of the existing debt documentation. An eventual change of control would not necessarily entail a refinancing, since the current bonds are portable. However for this to be the case the consolidated net leverage should be less than 6.9x, against 7.5x at the end of fiscal 2019.
The stable outlook reflects our view that, despite continued competition in the French grocery market, Picard will defend its niche market position and achieve revenue growth of roughly 2%-3% over the coming 12 months thanks to new store openings and return to like-for-like growth. We also expect Picard will maintain an S&P Global Ratings-adjusted EBITDA margin at the current level of about 17%. We anticipate reported free operating cash flow (FOCF) and discretionary cash flow of about €50 million and €30 million respectively in fiscal 2020. We forecast adjusted debt to EBITDA of about 7.4x for fiscal 2020 and a ratio of EBITDAR to cash interest plus rent of about 2.2x over the next 12 months.
We could lower the ratings if Picard's growth is lower than we anticipate, or if its operating performance deteriorates, leading to adjusted debt to EBITDA rising sustainably above 7.5x or EBITDAR cash interest coverage weakening toward 1.8x. This could result from an economic downturn in France, intensified price competition in the French grocery market, a food safety scare damaging Picard's brand reputation, a supply chain disruption, or an inability to pass on cost inflation to customers or adapt to changing consumer behaviors. We could also lower the ratings if Picard's credit metrics were to deteriorate as a result of further aggressive financial policy, either by way of increasing its debt level or continuing shareholder distributions.
Due to the high level of adjusted debt arising from the dividends payment and weak rating headroom under the credit metrics, we consider an upgrade unlikely over the next year.
We could raise the ratings if, on the back of strong trading and cash conversion, as well as positive discretionary cash flow from a prudent financial policy, Picard deleveraged such that its adjusted debt to EBITDA improved sustainably to below 6.0x. An upgrade would also be contingent on management and shareholders demonstrating a commitment to a more conservative financial policy.
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