MOODY'S CONFIRMS FLEMING COMPANIES' RATINGS (SR. UNSECURED RATING Ba3); CHANGES RATING OUTLOOK
New York, 3/25/1997 -- Moody's Investors Service confirmed the ratings of Fleming Companies, Inc., but changed the rating outlook to reflect the company's weak positioning at these ratings levels. Moody's actions follow Fleming's announcements of lower 1996 earnings, the settlement of David's Supermarkets lawsuit, and the filing of a lawsuit by its largest customer, Furr's Supermarkets. The ratings incorporate the challenges the company faces in responding to structural changes in the grocery industry, the erosion in sales volume which could be exacerbated by a strained relationship with Furr's, and reduced 1996 profits, as well as Fleming's diversified customer base, cost control and reengineering efforts, and the liquidity provided by its bank facility.
Ratings confirmed are:
Senior secured bank term loan agreement at Ba2
Senior secured bank revolving credit facility at Ba2.
Sinking fund debentures, medium-term notes, senior floating rate notes, and counterparty ratings at Ba3.
Fleming's customers are diversified by format and geography, with no dependence on large accounts. Its largest customer -- Furr's -- accounted for about $546 million or 3.3% of 1996 sales. The company currently serves more than 3,100 supermarkets throughout the United States and in several international markets. Despite its large customer base, structural changes in the grocery industry have affected the demand for the company's services and created challenges in obtaining profitable business. Some of these changes include new everyday low pricing policies of national manufacturers, which reduce inventory requirements associated with forward buys; the consolidation of the grocery industry, with an increasing concentration of business among chains which self-distribute; and the growth of alternative retail concepts, such as warehouse clubs and supercenters. The operators of smaller grocery stores, many of which are customers of Fleming, will find it difficult to compete successfully against larger combination stores and supercenters. As a consequence, the company's 1996 sales fell 6%, following 1995's sales decline of 6% on a proforma basis for the Scrivner acquisition.
In response to these challenges, Fleming developed its Flexible Marketing Plan ("FMP"), a new pricing schedule that enables customers to select and pay for services, rather than pay a distribution fee. As part of the program, the customer directly receives all appropriate promotional fees and allowances earned from vendors. To enlarge its sales base, the company expanded its retail division, with company owned grocery stores now representing 22% of sales versus the historical 6% to 7%. Fleming also launched a reengineering program to lower its cost structure through the consolidation of warehouses and regional headquarters and the reorganization of its business divisions to focus on customer type rather than geography. However, the company encountered roadblocks in successfully implementing this strategy, including resistance from customers requiring systems changes to benefit from FMP. As a result, Fleming has decided to rollout three versions of FMP in 1997, concentrating initially on the 40% of its sales base (17 of 35 divisions) which had previously been reengineered. Moody's believes that the company faces significant challenges in this effort to re-establish its sales base.
In 1996, Fleming's sales performance was again weak, falling to $16.5 billion, and debt protection measures remain modest. However, despite the $1 billion drop in sales, operating profit margins and EBITDA margins were nearly unchanged as a percentage of sales, reflecting improved cost control. Debt has been reduced over the past two years, by $331 million during 1995 and by an additional $193 million during 1996. While operating performance has stabilized, Moody's does not expect profitability to return to historical levels.
Settlements of lawsuits continue to hurt profitability. Fleming has announced the settlement of the David's Supermarkets lawsuit, which will result in a pre-tax charge of $19.9 million during the first quarter of 1997. In September 1996, Fleming reached an agreement to settle two class action lawsuits stemming from the failure of Premium Sales Corporation, a grocery diverter. Fleming paid $20 million (to cover $19.5 million payment and $500,000 costs and expenses) and recorded a third quarter 1996 charge of $20 million. This charge was a significant contributor to the approximately $15 million drop in 1996's announced after tax income of $26.7 million.
Fleming is currently defending itself in several other lawsuits. Furr's, which is 35% owned by Fleming and is the company's largest customer, recently filed a lawsuit claiming that it was overcharged by Fleming under its 10 year supply agreement expiring in 2001. The loss of Furr's business or an unfavorable outcome could have a significant negative impact on Fleming. Moody's will continue to carefully monitor developments in pending litigation, which could require material payments.
Moody's has changed its rating outlook to the following: Fleming is weakly positioned at the current rating level. Continued declines in sales and earnings could put downward pressure on the ratings. The threat of potential large settlements or damages from pending litigation presents significant event risk.
Fleming Companies, Inc., headquartered in Oklahoma City, is one of the largest food wholesalers in the United States. The company also owns 270 retail food stores.
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