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20 Dec 1996
MOODY'S DOWNGRADES FOOD LION, INC.'S DEBT RATINGS AND COMMERCIAL PAPER RATING
New York, 12-20-96 -- Moody's downgraded Food Lion, Inc.'s debt ratings and commercial paper rating. The rating actions reflect the weakening of the company's debt protection measurements due to the acquisition of Kash n' Karry Food Stores, Inc., which operates 100 food stores in west central Florida, and Moody's expectation that margins will not return to historical levels. The ratings also recognize Food Lion's strong franchise with price-conscious customers and conservative financial management. The downgrade completes the rating review begun on November 4, 1996. Kash n' Karry's debt rating remains under review for possible upgrade.
Ratings downgraded are:
MTN program to A3 from A2.
Convertible subordinated debentures to Baa1 from A3.
Shelf rating for senior unsecured debt to (P)A3 from (P)A2.
Commercial paper to Prime-2 from Prime-1.
Ratings remaining under review for possible upgrade are:
Senior notes of Kash n' Karry rated B2.
On December 17, 1996, Food Lion acquired Kash n' Karry in a transaction valued at $341 million. The acquisition will double Food Lion's store base in the Florida market. The economies arising from the consolidation of distribution and administrative functions should bolster profits in that region. The merger was financed through the payment of cash and the assumption of $221 million of debt, which Food Lion plans to refinance. During the next four years, Moody's expects Food Lion to invest up to $150 million to remodel and upgrade the Kash n' Karry stores.
Since 1991, Food Lion's sales base has increased 36% to $8.8 billion for the 12 months ended September 7, 1996, reflecting growth in square footage from new stores and expansion of existing stores. Despite the sales growth, the company's profitability deteriorated. The EBIT margin is currently running at a 4.8% rate, below its 5.3% rate during 1991, because of the weak performance of the company's stores in three Southwest states and competitive price pressures. Even though management has demonstrated the ability to enhance products and services cost-effectively, Moody's does not expect margins to return to historical levels due to the intensely competitive environment.
Food Lion has established a strong franchise with price-sensitive customers in the Southeast. Moody's noted that the company withstood challenges presented by an adverse report on ABC's Prime Time Live in 1992 that caused severe sales declines and the loss of market share, and has restored its reputation in core markets. The company remains committed to offering national brands at everyday low prices, but has responded to customer demands with the offering of products and services provided by competitors targeting more upscale customers. Recent initiatives include: broader assortments of produce and meat; the addition of delis and bakeries; expansion of the private label program; a customer reward program with discounts on selected products; the acceptance of debit and credit cards; and 24-hour operations. A major store remodeling and expansion program is underway -- (800 stores are complete) -- to accommodate the larger assortments and the delis and bakeries. Same store sales gains have exceeded 5% throughout the current year as a result of the initiatives.
Food Lion's financial policies target a moderately leveraged balance sheet. Although debt levels will rise during the near-term due to the KNK acquisition, Moody's expects the company to limit its share repurchases, using its free cash flow to repay debt.
Food Lion, headquartered in Salisbury, North Carolina, operates 1,193 stores in 14 Southern states. During the 12 months ended September 7, 1996, its revenues were $8.8 billion.
No Related Data.
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