MOODY'S AFFIRMS SAFEWAY'S A3 SENIOR DEBT RATING; OUTLOOK REMAINS NEGATIVE
Moody's Investors Service has affirmed the A3 senior debt rating of Safeway plc ("Safeway"). The rating outlook remains negative.
The A3 rating reflects Safeway's stable market position and relatively conservative financial management, Moody's said. It also takes into account the highly competitive nature of the UK food retail industry and the rating agency's concern that Safeway will find it challenging to maintain current operating margins. Incorporated in the rating is Moody's expectation that sustained organic growth in the UK food retail market will be increasingly difficult to achieve.
Safeway has successfully implemented a marketing strategy which combines deeply discounted promotions, store reformatting and an improved fresh produce offering. The strategy has generated growth in like-for-like sales in line with the market average since the third quarter of the 1999/2000 financial year. The marketing strategy has also led to a recovery of the operating margin, Moody's added.
Continued heavy investment in the store reformatting programme will be required over the next few years, though the ability to execute this will be dependent upon the cash-generative capacity of the business.
Moody's views Safeway's financial management as conservative and believes that, despite the investments required in improving and expanding its store base, the company should be able to maintain a solid financial structure. Nevertheless, the rating agency does not anticipate significant improvements in debt ratios over the next several years, as operating cash flows are absorbed by the high level of capital spending.
The rating outlook remains negative due to Moody's concerns over the ability of Safeway's marketing strategy to continue to deliver sustained organic growth and the company's capacitiy for generating cash flow to fund the increased capex commitment going forward. A tougher pricing environment in the UK food market could make it difficult for Safeway to maintain both its profitability and cash flows.
Headquartered in Hayes, England, Safeway is the fourth largest food retailer in the UK. It recorded revenues of GBP8.15 billion for the year ended 31 March 2001.
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