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Dollar Tree Inc. Upgraded To ‘BB+’ On Continued Debt Reduction, Outlook Stable; Issue-Level Ratings Also Raised
- Discount retailer Dollar Tree Inc. continues to integrate its Family Dollar Stores Inc. acquisition and improve credit metrics in line with our expectations, including its latest term loan reduction .
- We are raising our corporate credit rating on Dollar Tree to ‘BB+’ from ‘BB’.
- We are raising our issue-level ratings on the company’s senior secured credit facilities and legacy Family Dollar notes to ‘BBB’ in conjunction with the revised recovery rating to ‘1’. We are also raising our ratings on the company’s senior unsecured notes to ‘BB-‘ and the recovery rating remains ‘6’.
- The stable outlook reflects our view that Dollar Tree will continue to report strong revenue growth and realize additional synergies from its Family Dollar acquisition in addition to our expectation for debt reduction given meaningful cash flow generation in the coming year.
NEW YORK (Standard & Poor's) Jan. 29, 2016--Standard & Poor's Ratings Services today raised its corporate credit rating on Chesapeake, Va.-based Dollar Tree Inc. to 'BB+' from 'BB'. The outlook is stable. Concurrently, we raised the issue-level rating on the company's senior secured debt to 'BBB' from 'BB+' and revised the recovery rating to '1' from '2', indicating our expectation for very high (90%-100%) recovery in the event of a payment default. This includes the company's revolver, term loan A, term loan B and legacy Family Dollar notes. We are also raising our issue-level rating on Dollar Tree's senior unsecured notes to 'BB-' from 'B+'. The recovery rating is'6', indicating negligible (0% to 10%) recovery in the event of a payment default.
"The upgrade reflects our view that Dollar Tree will reduce debt through available cash flow generation in the coming year with about $1 billion in pay down this month. It will also continue to successfully integrate and improve Family Dollar stores through strategic new store growth, closures, and re-bannering initiatives," said credit analyst Diya Iyer. "We believe Dollar Tree's focus on store efficiency initiatives and leveraging complementary merchandise expertise offers the potential for continued operational improvements at historically less-profitable Family Dollar. We also expect Dollar Tree to further optimize the profitability mix of branded and private label goods and leverage its foreign sourcing strength across the integrated company. As a result, we expect the company to achieve its targeted $300 million in synergies, including $75 million in the first full year post transaction close." The stable outlook incorporates our expectation that Dollar Tree will continue to expand its market share given consistent positive same-store sales at both banners in the coming year and a complementary business model across both fixed price and multi-price-point strategies and sales, creating a formidable competitor to Dollar General. That said, we believe competition from other discounters will remain fierce, potentially complicating ongoing execution of the integration. We could raise the corporate credit rating to investment-grade in the coming year if leverage falls below 3.0x, interest coverage approaches 6.0x, and FFO/total debt exceeds 30% on a sustained basis, resulting in further improvement in the financial risk profile. This will involve continuing to optimize locations, formats, and product mix across banners faster than we anticipate and driving store productivity gains ahead of our expectations. Should Dollar Tree continue at this pace of profitability growth and reduce debt in line with our expectations, given the pre-payment flexibility included in its term loan debt, we believe it remains on a path to an investment-grade rating within one to three years. We could lower the rating if performance falls significantly below our projections because of worse-than-expected performance at Family Dollar, leading to slower-than-expected sales growth and gross margin contraction of more than 100 basis points, resulting in leverage in the high 4x range, coverage below the 3x range, and low-teens percent FFO to debt, in line with an "aggressive" financial risk score. This would occur if Dollar Tree cannot turn around Family Dollar's operating performance, with persistent weak same-store sales results and pressured market share compared to Dollar Tree as it continues to expand its own store base. RELATED CRITERIA AND RESEARCH Related Criteria
- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
- Key Credit Factors For The Retail And Restaurants Industry, Nov. 19, 2013
- Corporate Methodology, Nov. 19, 2013
- Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012
- Recovery: Criteria Guidelines For Recovery Ratings On Global Industrials Issuers’ Speculative-Grade Debt, Aug. 10, 2009
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