MOODY'S CONFIRMS RATINGS OF FLEMING COMPANIES, INC.; CHANGES RATING OUTLOOK TO NEGATIVE.
Moody's Investors Service confirmed the ratings of Fleming Companies, Inc. and changed its rating outlook from stable to negative following the company's announcement of new strategic initiatives to reposition its operations. Moody's ratings incorporate the structural changes in the grocery industry, Fleming's continued erosion in sales volume, its low profitability and pre-tax charges of $667 million, as well as the company's diversified customer base, nationwide presence and cost control efforts.
Senior secured bank agreements at Ba3.
Senior unsecured sinking fund debentures, medium-term notes, senior notes, and issuer rating at B1.
Senior subordinated unsecured notes sold under Rule 144A at B3.
"Negative. Fleming is weakly positioned at its current rating levels given the challenges the company faces in building sales and implementing plans to improve the efficiency of its wholesale operations. Failure to achieve cost reductions or operational disruptions from the execution of new strategic initiatives could negatively impact financial returns and exert downward pressure on the ratings."
Fleming plans to refocus its operations to enhance efficiency and profitability and to grow volume. Seven product supply centers will be closed or disposed of, and their business transferred to other existing facilities. Under-performing retail businesses will also be divested, including 11 Hyde Park Market stores, allowing Fleming to devote resources to those retail chains and groups that provide satisfactory returns. The company also intends to grow both wholesale and retail sales, and to reduce costs. As a consequence of these plans, Fleming will recognize pre-tax charges of $667 million in 1998; only a small portion ($45 million) of which is cash. Additional pre-tax charges of about $114 million will be incurred over the next four years. While the company's re-positioning initiatives could yield financial and operational benefits, their implementation carries the risks inherent in the execution of such broad-based initiatives.
Fleming expects sales to decline in 1998 to between $15 to $15.2 billion, and to decrease by about $1 billion over the following two years. EBITDA in 1999 is likewise expected to fall to $380 to 400 million, down from the expected 1998 EBITDA of $420 to $440 million. Increasing wholesale revenues and returns could prove challenging given the decline in small and independent grocery retailers and the growth in large self-distributing chains. Growing retail revenues could also be a challenge as the large supermarket chains consolidate and fortify their competitive positions.
Headquartered in Oklahoma City, Fleming Companies, Inc. is one of the largest food marketing and distribution companies, supplying supermarkets throughout the United States and operating about 277 owned retail stores.
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