',

STANOARD &POOR'S
RATINGS SERVICES

RatingsDirect"
Criteria I Corporates I Industrials:

Key Credit Factors For The Retail And

Restaurants Industry
Irt[sy

CEdit

ardt.b:

Li, CFA. Nq York ( l) 212-433-69s i ma.lr@sLndard.ndpoo6.coh

Rlm Ran'm, Lnndon (41) 2G7l 76-7a62: 6d dt@@nMddttindpoo6 con
Ana

S.6!ri.ry

CEdit An

Ulli.r Chioq

Hong

Mdk Puccia,

N4

lrtrl

(!ng (052)25313530: lillio chiou@sedddmdpooBcon

Yo.k

hr (man.

1l ) 212-,133-7233:

h&kpucda@stad2dandp@Bcom

Londo. (4.r) 2G7176-3613, paskeme@stodrrd.rdp@6 com

CESoiE Bud, New York (l ) 2 l2-,133-,4 I 22i gregoiEbut@slandard.ndpoom.com

rall: of c9. nlgllls,

SCOPE OF THE CRITER]A

SUMMARY OF THE CRITERIA

IMPACT ON OUTSTANDINC RATINCS
EFFECTIVE DATE AND TRANSITION
METHODOLOGY
Pan l-Business Pisk Analysis

fhrt ll-Financial tusk Analysis

Part lll--Rating Modifi ers

RELAIED CRITERIA AND RESEARCH

Criteria I Corporates I Industrials:

Key Credit Factors For The Retail And Restaurants

Industry
(Ad qN

tld.:

This

lndutir,"

ptbli

ed

Sroddd &

nt

dd

ed NDptioN fo. rating rctail

bab we aE publishins
to revidils key crcdit factors in th rctailinS

food dktnbutoB, on a Slobal

adicle ro help mek.r panicipants bener udeBllDd our appoach

industry This cdreria is elatd to

Th. Radil

Poor's RarinSs SeMces is rcfining and adapting its methodology

companies, includirg Estaurdts, automorive reraileB,

eeu

tio drticle supetw.ld th. oni.le 'K.y cmlit Fd.7o6: Baines And Fi1arcial Rbk5

Sept 18,2008.)

ou

this

corpoEt critena (se 'CorpoEte Methodolos/ publbhed Nov 19. 2013) a!

to "Pnrciples Or Cndit Ratings," published Feb 16,2011

SCOPE OF THE CRITERIA

Thae diteria appv ro aI rtail compani$

We

defim retan companies as conpanis thar

direcrt to the individual co.suner thDuah stoEs, @talogues, or onli!. opsatios-or

ch@els

We include

Blaurets, automotive rctailB,

3eU

Soods or sruics

cohbiEtio!

of

the

and 9rc.ery $,holesals in this Key Crcdn Facto6 SiEn that

the tundamntats of operanng these bulin$3es are ldgely rhe $me aE gneral rctailing with similai

uit

economics

SUMMARY OF THE CRITERIA

Srmdaid & Poor's is updating its qitBia for analyzi.g retail cmpanies, applying ou, gen.al corponte qitena This
supersed$ "Cntetu: Key Credit FactoF: EBin$s And Financial Rjsks In The Retail IndBtry." Sept 18, 2008. We
view retail

an "intermdiate fsk" indusrry under our

n*.rited6,

Biven irs 'inrermediate" cyclicality

a*sment

and

"inrermedjare' r ompernive ns* and grcwrh as$smenr

In asse$ing the competitive position of rctail compeies,

re

put pandlar emphBh on the compdies tuerchddising

strareg)e, producr difirenriadon, ha.kel positior rclative to pee.s, and opsating efficiency
Il the prclinimry csh flow lqeESe Nessment is intemediate or strcn8e( we ge.erally use disc.etionary cash
(DCF) to debt or

l4erase

fre

a*ssfte.r

thir ability to

operating cash flow (FOCF) to debt as the supplementsl

i3

Bti6.

signincmt o. waker. EBITDA to inter$t will be siv.n greter

importse

as we

ro@ more on

*trice thct interet butdo.

IMPACT ON OUTSTANDING RATINGS

lj

The impacr of the new corpo.ate citeria on ratinas is

published on Nov 19,2013.

www_srlrDAiD^Dpooil.co /R^TtxosDtircT

dsdibed in

flw

If the preliDinary c8h flow

th aiteda anjcle 'Corporate Merhodology,'

Clit

ria I Corporates I lrd6,'idls:

X.r Ctrln racb$ fol

The Retail Ard Rstaoahk lndrcnr

EFFECTIVE DATE AND TRANSITION

Th!. oteria sre effEtive immediatly on the dare of pubtcation.

METHODOLOGY
Part l--Business Risk Analysis
ladultry Rid.

vi{

Withjn rhe hmeaork of Sr.ndard & Pooir crneria fo. alsccrinS indwtry risk we
i,3k indurtry (@tegory 3). Our

indury .ist Nessent

inlemedi.r dcSrc of cyElicdity (caregory

int rm! of compditive nsk ed gro$tlr
In our opinion,

irdutries

onerdy

and sectors.

l@din8 market share o!

oul a$.&nnent thst the indutrys risk

3), and

rared compadis in the rerailn8

INetment

reI

daninS

m 'inremedjare'

for Erail ompani3 i, derived liom

indBry

usually have

Dedim

oa view of rhe reSrn.nrs

is intemdiate (cateSory 3)

risk compded ro orh.

hde good marker posnDn with

les disretjonary prcducr

grade issueE tnd to operate in developed markeB,

denned niche posnion in its subsctor, or de

catesons such as food tud dru8s. CoNersV, it is

dirlelt

undeveloped maiketi with ndrow market pre*nce

dd

fosed

on

for a compmy opeating in highly volatile and

,ocused on g.owing

ir,s

sto.e bas.. to achieve

investment-Brade rating, even with a coBenatively leveraSed capital structure.

I0

Tlere

is a

rctaileE

wid di.spetsion on rhe risk p.ofles of rhe subsectors withjn the retailing indusr.y Much of what rated

$ll

haw simila'

to con$heB rcpresnts

rajt!

highly

disqetioury purchse-cspeialy

and compte drrcctly wnh each othtr

over the shon term Sub8ctol8 thal

be Sbuped for purpo*s ofindustry dsk anallsis. We

gbup the fouoeing slbsctors for dalyric purpo*s, hnked by the sob*ctois dsk prcfle:

.
.

Dis@unteB, $p.rmrkets, phatmcie,

Dpanmnt stor6 ed specialty storcs;

Auromotive retaileG

ud

conveoieDG

stoB (includils gB

rctailing op6tions):

11 Wech acte.ize the.isk prcfile ofthe deout srbsedor as trrcn8'beca8e ofts good market sharc Browth
pr6pe.rs, while we vi4 the nsk profite ofthe spemarket subBector s "stietactory' to'fan'based on rhe elatively
sr.ble narure ot food tailing. On the other end of the spe.truh, w. view rhe rbk prcfile of Bpectalty appdel rerailing
subsector

"weak"

ding

to the high discretionary nalure of the product category in a very tagmented

dd

comPedrive indusrry.

Cyclicality a3s6sment:

l2

Wb

sgs

the cycticality of rated retan companies

intermediare (category 3) based on

ou

tualysis of cldical

pst('ro'trcu8h (PT'D decline in Benue and prcfilability acMB sectoB Dd ovr tifre. Key dliveB ofcyclicality

coNmer confdene; ummplolmenr Erer horhold indebtedne$. coGuher s?endin& Saoline pnc6r and
dailabilty of coi$rner c.djt. Th effect of cyclcdiry is th main nsk difeEntiator bet@ subtedoB. In Seneral,
include

Cntdo I Corpontzs

ln l6ni4k:

Ke-r

Gedt

Fa.tors

for'Ihe R.tail And Rqtnututts Indunry

we erpect spe.markets, Pharmacig, md Seneral me.chandls. drscounters to lemain Ie$ cyclicaly aJiected by

declinins con$mer speodinS because tlrei! bro6d product offennss arc le$ disc.etionary. DiseuDte6

dd conmables,

good value prcpostion- rhey emphsize b6ics

and benent iiom con$me.s fadin8

$ch

dmes ofconomic slowdom. Thjs is in cmtrast to dbcrctionary cateSodes

and espeialy apparel @iegones,
r

ehjch,ere

als

o,Ie! a

dom during

as home imp@vement. appliances,

weak thloughout the rccssion in 2009

d PrcPerty
In aI sbsectoB, sles 8rc$ri and volume arc ctuical to prcfirabiury, becaBe of the hish fiied cost be
inteBity oI these buinesses (i.e., hia operarjng leverase). The neSative impact of merchandke mi$teF i5

conpounded by this high opeEtins lqeraS ReraileB atso ned to continually iryest in new trores, mdenale costly
renovatioB of exisdns prcpenies to maintain existing sales,
makes the

buines

capital-

ed borwing-inte.rive.

ed

expand Seogmplicaly to dnve sles

8rwth. This
scPtjble

Atso, ourdated and/or poorly maintained slores de

to naterial sal$ ercnon

1

The rerail indurry

ha

demonstrated a

Ddju

de8.ee or cyclcrliry in @nue

dd

prcntability. which are Mo ky

industrys ry.li.aliry assmeDt. Based on ou! a.a\8is of glob.l ComPustat data,

letsle.s experienced a. ave.age FrT decline in revenues of 0.4% during .ecsionary penods sin@ 1968, and tb

me6ues we use to derive

srcepest decli.e

eerage

PtI

{3

an

I 8% duins the domturn liom 2007 to 2009 Abo tince 1968. retail comPanies etPdienced an

decline in EBITDA margin of 7. l% dunng

reeionary

priods

ed st

fered thc la4ett drop. a

FrT

EBImA ma.gin declineoI13%, dui.g the l9?2-I975 domt n With an aveE8e drcp in Evenue of 0.4% and e
we.ase proftability deline of 7. l%. retsil companies' cycli@lity as5*frent clribates ro d inrermedjate (cateSory
risk We generally onsider the highr the lelel of crljcality in an indutry the mo.e this facior will @ntribute to
credit nsk oI entities ope8ting in that industry

HNoer,

3)

the @ersll e,Iect ol cycUcality on an indu,grry's rirk profile

may be mirigated (or exacerbated) by m indBoy's competitive

dd

Srowrh

e iFmmt.

Competitive rkk and groulth assessmnt

I

We

view the rctail indristry as having

asN

competitive risk and srcwth, we

'intcrmediate' (category 3) comptitive ruk and

ase*

four subfactoB as low, medium, or

fuh

8r*1h asssment.

To

nsk. Thee sbfaclore are

EffectivenesB ofindustry beners to entry:

Level

ed tnd

of industry p.ofit

gins,

tusk of secular .han8e and substitution by prcducts, sewices, and technologies: and

Effectiveress of rtail bdusrys balri.Is to enEy-Mdium RisI

I

The retail indwtry b hiSltly competitive md fta8Dnted with

f4

blrneB b entry, although cenain ebsectoB-such

lood md drug retailing-'e dominared by larSe playeB with sig.ifcanr market share .nd sc.le, wble othrs hNe

esrablished $rcn8 brand rc.o8nirion creating cusrohd loyalry

1

Industry coNolidation ard orSdic srorc gro$1h crcated ,rElct lcadeE in food and dru8 .et jlng. Mdket
conen$atjon rai*s the barneB ro ent y as larSe chains with &ale and emcienor csn idcst in pn e to attmct

ruiohers
a

In addition, much of the U.S. supermdker indu!try is unio.ized ehich nsdt3 in hjOer opsating cost! and

thinler prcnt margin.

18 Reiailing

is somewhat capital intensive given the

,Try.sadDrD^mPoois.

ned to continuously iNest in

store development In the U S , store

Clitelid I Colporates

rcnovatjoo proBarns

lrket slE

mintaininS

lrtllstiak:

Key Cred't fd.tors

Mket,

highly impo.rant 8iren the rclative maturiry of rhe

.

FatTh.

Reta'l And R6tout4"ts

and a key factor in at

ladustt

le$t

Succe$irl ltore rcrFEtion prcgram! can drive store tmffc and $lcs. A lack of store

ime$ment, coNerltly, can drive asay

@tmeB ed lo* @stoftr loFlty

Te.hnology to $ppoft ornine opeatjodg

md 3n effcient s.ppv cbajn ako rcquire liable @pital iNcarnenr

19 Big-box rctaile.s dohinal specialry cateSode such

home imprcvement, elecnonie, ard oflice suppliB This

hd

created intense p.ice competition for smalei or regional players Those that &e unable to coDpete on price ned to

dilferentiate themselver in order to $cceed.

20 Alto

retailers face hjgher bar.iers ro entry

gi!e.

that automakers contrcl the

nMber

Automakers Ee senerally prchibned ftom diEct auto sdes by deller ftandise laws

conMer

to reach lh

manufactlreB. Bur

2l

Civen Oeir rcle. auto rctailers have Saircd effective

snd location of

ed

tsftonal

f@chies.

Senerslly rely on auto dealers

monopolies liom

ther

arEy of other vehicle olterinSs ftom comptltors lmirs the benelns of this ftard8e sEucture

Levl ard trend ofindunry profit naryiE-High Risk

Ongoing omperirion prerslres retaleE prcfitabilitl. The rapid grcwth ofthe discomt segfrent, palticularly in food
retailing,

ha

pres&led gloss ma.gin fo! many tladjtional glocely operatoB as they need to l@er prices to remain

competitive. Bie-box category kjlleN with high volme sales pe. srorc also put inten* press re on smalle. pla),e.s

22 lvhjle comodity cost

ben nimble in pding

in@s

could

p.Nre

prcfit Dargins in tl'e shon term, reEil and rlst8uEnt opeEtoB have

b consMels and adjlning then osi strucnre to ablorb dlese

inlre. Throir8h pncin& BtauEnts @ diEt c1latom.E to parts of the mmu wlErc meAB lre les exposd to
cotMo&y pn e ris In Europ, howver, weak c.ding coupld wirh inftaed cdprjt on have Eemly rc$tred in
maDy retaileB aborbint or uMble to pN i.put @st incraes.

23

pan ofthe cost inoe.se

Successtul inventory mana8ement can help ljmit markdoM nsk lor speci6lry rcraileB tutaileB

cd

genralty Ebound

ftom a single weal seuing seaon by fixing merchandising i$ues and achieving better marSins in lhe next sellins
seaen. For

dmple,

durinS rhe most rccnt reession. rctaileE reduced inventory

reducins markdoM .sk and lowenng theii

deral

cosrs in liShr of weak

purches dd enhmced sh

flow,

sal6

21 Alto rctails have a diveM r*enE sireM that includ$ a hi8h-m.sin pan! dd *rie bBin*. whjch affods the
potstial for co.!,slenr cash generatio. despne conomic sinSs that @n reduce O! volme of vehicle sa16 d/or
lower maigiB on
sopl.

25

or*Iins.

nd

and Bed vehiclB. PErts and seMces can gerefrte 40Pl to 50% of prcft. which cm covs abour

se.e.al, and administniive (SG&A) erPenseg

Auto retailes a. dependent on automskds' captive linance companies or thid-party lendeB to provide credit dirccdy
ro cotlsmeB fo. th vehicl purchNe The cost and availabitity of @dit can .onstran/dlive sales, ,3 can

mmufacturer

inchtive

to the consumer

Risk of seorlar chang.

Rid.
26 tlb viry

lnd suhtitutior of etailinS by product3,

the risl oI sec,ultu chlnge

risk hom or&ide the indosry ir

dd

Id,

pae thm bnck{nd-monar leiail

sub6ritutjon by producls,

there is

inftsing

sales.

*wu.sT^xDArDll.DPooxs.co /Mrrf, osDNcT

seric6,

sr"vic3,

ard techologis-Medium

and tecrnoloaies

rBk within the indusEy as

a "mdim."

o.Ine sal6

Vlhne

tle

are risina at a faste.

C/itetia Corpont
27 Wlile

there is a well-etablished

sI

conMer

l".lurtuh:

O..1t Fa.tor Fu

The Retail

Aill R8ta$drts lld|stry

trend lavonng Bhopping online, bnck-and-monar rctaileB continue to be

prihary disrriburion channels Futher, many retaileB

rhe

Ke.!

bnck-ud-monar stores with therr odine

are blendinS their

operarioru Bnd, in lhe process, growing tht mulrichannel sales.

28

Some

Mnufact@B h&e dweloped

oh

then

ha

had

smal portion ol lhe U S popu]ation

ha

djenibution cnannek to sel ro

corrmn

direcdy, but this

lmned impaet on letailng.

2s

d we[

Substitution rirli ro. auto rctailrs b relatively low

Only a

ehrive,

acc$sible, reliable puuic trosportation. Thereforc, the vast majority is

ln rh

U.S ,

the

v8t

majority of rcads

ed

reldt

on a P.ivat vehicle. This is by dBiSn

inteBtate highwa,ts werc desiened and comtructed lor the modem

autonobile. In Asia. alrhough public transponadon ir more widely awnabb given a hjehs density of populaton,

pdEte vehjcle penetmtjon

srjl very

is

ld.nd

ha morc @m

to grew

Rbk in rtail hdurtsy grosth trerds--Low RbL

30

Retan

indlstry sales trends de closely corel.ted with macrceonomic trends. In marue devloped m{kets, GDP

Srowth in

*tritive

itsll

is

smetimes not

proxy for .etail sale. SMe-3tore o! like-torlike

a good

to consmer con idence and xpdations about unemployment

by a modest retsil sals decline in the recent

rend to
I

se

rcrail sales

g]w fatr

e@ohic dofttun in

than ohn line with GDP

the

ed

Us

$l$

@tr be much

more

discrcriooary income. This is aidenced

and eEozone dlrin8 2009. In Asia. we

ge1i'

A retailels sralegy to achieve top-line grcwtt fron its store expansion strate$/ can also have a significdt impad on

i$

operating profile Large rnitinationals, including many Eurcpean retajlers, have expanded thei. footprint to

emerging mdkers wheE thre is higher growth potential comparcd to rhe core developed markets

32

The U.S retail lm&cape is

mtuE dd

ovrstored (mother sEy of 3lying 'exceis capacity') and exhi,hirs low grosth

.atB. Sale grcwt} IarSely @mB fiom the exiding storc bae or 3eesroE sl6 Mam trcndr arlecr se+storc or
Iikeforlike $1e., prcdomindtt lf rcrail !.ies grow, rhey erow throud expaffion-+specia,Uy taileB that e
inrrnarionauy pMcnt, hn abo retaileB *to expand their distribution chmnels (for exmpl. to online).

33

We

viry Ewpean

maturE

retril

kets a! very diveBe with varying operatin8 and competitive dyDuics.

as$

utich vstly

panioldt in Westeh Euope, as largely

but sufferins lss frm exes epaciry rhe iD rhe U.S Comprirjon ton both Gtablbhed rctaneB and ns

influene the

8.ost

pauer.!. That eid.

enrants rcmains fiere. and

14

consma sFndinA trctrd! o.

re

would

retail marklrs,

to modetute increa.re in rare-store sales srcwth @n be luSev amibured ro imp@ed

better operatDml exeotjon. Cootinued onrine

dd Bultichunel

grcwth should also aid

the top line, toSether with modeEre conniburion hom srore erlpansion BtrateSies.

34

A6iu .etajl market b hjghly n'aSmented dd competithe but thioly peoetrated and expenencing rapid grcwrh
mainly driven by incr.Bing disposble in.om. price irflation, urbdiztion, md highe. populsrion RetaileE are
The

expmdjng thei. stor neMorks aggresivety ro incEee cdsae

35

RetaileB seuing l$-dilcretionary prcduct

those in home impr@emelt

ud

such

apparcl, where

food and dru8s, de less

@BMe6

restauhnt sector is also hishly dbcretiona.y The commer

sceptible

ro economjc

domrurB than

@n poltpo.e puchses when rimes beome tou8h. The

cd

eat at

ho(e.

rorrrrrEr rr, r0rr

Cfltela I Corpoldres tndusrriak:

36

Key Credn Fd.tors

fa/

The Retail Antl Rest4'/ants lndustry

*llh8

The effect of cycle.liry i3 the main risk ditreMtiator betwen subsctoB in rctail. We expect spcialry reraileB

moredb.raionaly product! to exhibit moe prcnouced $in83

Country rtuk
37 we defne 'country.isr

as the

in rales based on dleSes

brcad Eng ofeconomic, institutional, financial

doinS businss with or in a specific country and can aflect a non*olereisn

wery rated entity and traNction

38 h

a3sBsing

(se

coutry

ed

ket,

i. conomic actility

in

legal tuks rhat dise

tom

iry's crcdit quality The crcdit nsk ior

inluenced to va.yinS degre3 by th6e R?es of country*pecific dsl6.

is

dsk for a rctail @mpmy our analysi!

l)g

rhe

sfie

mthodolog],

wirh other orpoEte

iseB

the @rpoEte criteda)

Comptitivc pGition (including proftability)

39

Under

ou @rpo..t crit.na.

companys comptitive position is

(a) fair, (5) weak or (6) wlnerabl In

asesd 6

asssin8 the compedtive position

(1)

qceU6t.

for rctaileB, we

(2) strons. (3)

raid

an

stishctory

individual

Competitive advetaSe:
*ope, ed diverciry;
Operating eficiency: and

Scale,

40

fi6t rtuee c$mgonents ar. indepo&ntly assessd a! eith.r ( l) stM& (2) $rclg/ad.$atc (3) Edequte, (4)
adequate/re& or (5) rca*. ftofrabtliry is ass6d rhrcugh rhe combinarion of rhe l4l of profirabiliry dd rhe
The

volatjlity of prcfitability.
4

After asssinS competitive advantage, scale, scope, diversity, md opratine elficiency separately. wE determine the
prcliminary compelitive position asessment by ascribing a spei,ic weight to each component. The applicable
weightings

wil

depend on Oe company's cofrpetitive posirion goup profile (CPGP). The CPCP $signed to retaileB is

ed

"BEnded PrcducB

*dic6.

Seryice"

retailing is @trsuer facinS and opeEtes bsed on .eputatioN lor its prcducts and

While the indusry i3 abo.omewtEt capiral intensive,

ned to comit substetial amout

comptitive adBtage (4570); scal,
rhrough the combinarion

md rtan616e

thn $orcs

of @pital. We appty a CPGP with a weighlins of the

scope.

dd

&d therefoe

do not

thE conponmts a ioll(*s:

diveBiry (3e/.)i and opEting emcjency (2s%). Prcfitabnity is

otLv.l ofproirabinty mdvolatility ofprcitability,

d we

NN

Nesed

prc,itability basd on a

matrix (refd to ou orporat methodology, 'Prcfitability As4sment Marrix").

12 \

Ihen

datzing

retaileis competitive p6ition, we pur

partidls

emphdis on the compey's competitive adva.lage

In ou. vie-, the comp.nys m.rket poetion agai.st irs pee6, its oerchandising stratery, and ns ftack re@rd in
SDwinA ils !.les b6e arc key lactoB that Day mitrgare sales pressrc duing a cydjcat

envircme tirae

scale

ce

dNntum

or hiShly comPtitive

@mhand pnong power ard abilry ro leveage c6t. Mane6 of opEtin8

effrciency-ilcludjlg c@t srructue, rcrking @pital heaSfrent, and teclbolrgy..e gmeraty *condary

cou/Mrtf,GsDIEcr

Cnbb I CotpordEt I lnduttuk:

Key Credit

[d.to6

For Tb. R.tail And R5taudnts

ln.luttty

Competitive advantage

43

Our dsessmenr of a rcrailer's competirive advanrage is bued on the iollowing subfacto.s:

MerchmdisinS sratery. Whether th. stralery is Iool3ed on a niche or on a @te8ory $ccestul merdtaDdisint is
cled, focEed, &d @Bistmt flough to mintain custofr.lc,yalry
Dme@tjation ol conccpt/poatucr/shopping e)pnde, and positionjn8 vers coDpctitors can ffectiveb larSd a
s?eofi c crlltomer seSment.
Brand reputation and marketing Srory pnEte or exclusive bre& ce @Dmed pnc premitlms and alloe lot
abde-average margns while burding Gtomer loyalt).
Pro&ctlserviceJev.l quslty tutajle8 that ofier the right balance of quality od pnce p.ovide a compeling vatue

4.1 whethe. the staregy is brcad or

spets

of the

bEin6s

Brw,

nsk oalysis

rcrsile/s fre.chandilin8 stmlesr

dd

brand

mageme e ditical

thes can set the foundation for overal @mpetitive position

'15 A rtailer with a strcng o. strcng/adequate competitiv advantage assessmnthas acombination

ot

Con*tendysuccessin hercbed:sinSstlate$.
CompelinS value proposirion of its prcdu.rs or
Highly ditrerentiated concept or prcduds;
Succsn prcduct/bBnd posidonins:

*Niceq

A etrcns con$mer frechie;

Succ$stul online 3trateg a.d e pladorm lo spporl tutrtre channels:
Strong stor development with att'aclile storc locationst and
For auto retajlers, operation ol a vanery of desirable ftanchises with diveBe bred exposu!
.16 A lel&iler with a

reaI

or adequate/weak

ases$ent

of its compettive advantase typically

ha

cor'iination of

Uttle concept/prcdrat ditrerentiation;

WeaI b.dd positioning relative to pers:

Lo{

value propositio ofits prcducts/seNic$:

Weak track

rcord ol

slore development, or ents hom cenain markers due to failed expmsions;

Lack of signin@t odine presdce to rupplement its rerail oper.rions;

Fo. auto retaileB. conentration of

17 MeEhddising

fEchi*s

and

dd

bred expo$re

success can be achjwed thrcu8h a vanetyofnethods Mosr

Etailm

l()s

on a distinct niche, prcduct

c3te8ory or conveniene. Whether the sirareg is niche or @leSory-dominet, the merchandising stEtegy needs to be
clear, focDsed, and consittent becaEe deviatioN can

48

loe

customr loyalty and market share lo competitors.

@!t!mer frmchi& is &e resulr of lonS-term merchandbing $ce$ and bEnd

@!l!mer acceptace ed loyalty Frcm a credit amtysis pers?.ctive. a .tren8 eolrlmd
healrhy salB &d prctu 8rcwth.
A strcng

19 succesin

management that c@te Nah

rranchise suppons

co6ktent

retajlers prcvide a compeuins ldue proposnion RetaileB thar offe! the nght balance of prcducr qualiry and

price prcvide a convincing redon to shop ar thet sto.es, and generally have a strong or st onSladequate a$e$menr
Selecting appealinS producb and efiectively displalnS

Intoducjlg new nem and moving jnto

www.$

n*

cate8ories

DADATPoon3.CO /MarxCSDrMCr

dd oekering them wil attract high tutomer Eafic

dd pnce poinb cd reinvigo.ate s.les &d i6age. Ho{ever,

Cnbid I Co,?otdt.s lndustidk:

Xe.! Cretln

fa.lots [o/ The Retal Ann

Rest !runts

ud Nonmedts rhat .liffer liom @sromeB' expectarior3 or image of rhe stor

genenly rsults in a weak or adequate/weai( codpetitive advantage ssessment.

srockin8 merch3ndis

sbpar

50

sales and

ce

Ind$,.l

lead to

RtaileB difiernriare them3elves by ofiering unique prcduct desi8n, qualiry prcducls. sood sewice. conpetting
a$onmenl, and appealing presentation DiffeEntiation is oten the key to success in a crcwded market Given rhe
inteNe .ompetition hom big-boi pla!'6 in a,lm@t qery prcduct category a smallregional or nich.etailer ttEr is
u.able to @mpete based on priee wjl Deed a high degree o, diffcrentiation to reeive an Nesmenr of stbng or

To

pB.

dbomters nom

bee. epandinS their

8@wth

gaining nDrka shar6 o. to

pictelab|

a cromB @

itrlI'Be pne,perception dodg Gromersj

afford to

puidre

more. In addition,

prodlcls a! th.y aE tailormade for the rctailer, prcducd

dd

mark ring @3t3. Crcce6

slronS or stronS/.deqrr.te

52

Spcialry reraileB

hae

prilatc+b.l

lokr

soods cery hisher

mrgiB

rhan

bred.d

rtock-keping units (S(Us). and c'rry loecr

drug chajG rhat inoear. Oe pnctration of rhet privatelabel prcsEN seneElly gr a

also developd private bra.d! tdgain8 a niche market that compete agajBr national bran.ls.

We

ale &hiwed

hislny difierentiated prcduct mix

view thse developmenrs favorably,

above-avera8e src$ marsins

53

,D

hde

volue

agsqe

Some specialty rctailss have

rutom.r *8Dents.

rerailers

md erclusive offenn83 Th. producls, when &cce6siirl. rypicaly boost

aB

dd

stoE expe.ience tar8eting specific

thcy represent a competitive advantage that allows ior

$tile buildjns rutomer loyalty

Retail compani$ must regula.ly rciwest in their propsties, or build new prcpenis to increBe sales and maintain rhe

.eldance of the storc concept. lnvescnent beFnd normal mainren.nce spndin8 ir often requird ro pedodically
eimiSorat a proprr, espe.ialy in more competitive malkets Store remodelinS prcglam arc citical to attract

oatom.B

8nd maintain competitivenes. A

comperitive adEntage OurdaGd

erdioB, on

s4

rell

ddor p6rt

mainlained store

coftpritive disadvantaee. and

Onlire sales tmain a small perentaSe of

be witi o

atftactiE storc layout @n

maintained stoles. on the other

der.I

pil

Se.erally b

as$ed 6

hod- @

b a

susceptibl to msterial ssles

wea] or adequte/weak

tail s618, but aE gwing at a much fasrer pac. ln les?onse,

etailF have inoeased $n iN61,nnrs in th o.Ine channel ln our bBiness rtk NBment, we vi@ iN6tmenr

faorabv We do not necsd y vi* a lack of oiline iflesllnedt uifavo.ably as long ar overall
8rcsth procpcts rcmain heaIlry and the .elaile! is e,eandin8 its "brick and morte" storc b@. We beliqe rerail
sbs.ctoB. $ch a discount stores, maintain 8ood storc grcwth pot.ntial snd, thereforc, signmcmt online inveshent
in the online chamel

is

not critical. For other more marurc scto6, such as dep.nmnt stores, in contrast, broadening the onli.e channel is

importanl to sales erowth given &e lack of storc ero{th potential.

55

Scrle, scope, and diversity

Retailing is BeoeElly fragmentd, but ir cenain sbsectoB, $ch

comad a wry

highly fhSmented md

s6

as

$permdkets and drugstores, ldge retaileB can

sisnificant share of the overal markd olher ectors. such

Si2. .ion. docs not

ad

ellse

specialty apparel or hard Soods a.e

the ldgest playeB ody rccount for d very smsll po.tion ofthe ove.al

frdker

prcfitabibty and grcwth I h@der, hrSe $al sXos comp&i6 to sprcad @r @sr! and

eljoy moE e@nomis of s.ale the

dE smFiroB.

Sia @n povide cconornie of scrle in .lisniburion, advenilin&

Clniid
overhead,

57

Our sele, scope,

.
.
.
.
sE

ud inlomatio!
ed

Cor,otdres I Indust/idk:

divrstry arsessmenr

Divelsity of product or

K.,

Cle.lit Fdcto\

Retoil

Ald

R.stdutunts lndtstry

ir.orpoEte:

serie rdge.

Gesraphic too9int oI srorc be and pGp.cts oI core mai.ets For EuroPea. rctaileB, a Pee.ce in emeryrnS
markeB offe$ hidr 8roMh prcspects than th matDre home Mkets
volmes, size, market shee, or niche position in chosen seSnenr.
Relative atrractivens of rhe mrkets (i.e., si4. dDogrdphics, expcted gwth, ed intensily of competition)

6s$ment

Sizable maker sharc leadeEhip

i!

olscale, scop,

dd diE6ity t]"ically

the ret ileis co.e markets or

coDbines

indatry s!bse6o.

Larse scalc that comman& st.ong barSlining power with $FplieB.

Ab rty ro levetuSe
A

$ccestul

lrkedng dd

other op.nting @sts.

niche position within a

For Eurcpean

ed

$hecto,i

a @teSory leade.

Asian rctaileB, geogEphic dive.siry wirh presence in hi8her-growth emerginS mdkets given the

limited size of the domestic markt, or exposurc to dilfercnt rgio.r

tot 'rhe

systems Impoont mark r sharc l@de.ship al5o crcares cl@t with suPPleB to obBin

A stronS or strcn8/adequate

.
.
.
.
.

{irh .liffeEnt coMption

rrcnds, helpinS lo

For larSe auto retailers, gro{th through succe$tu| acquisitioN, with the scop and scale for technolosy orat enablet
more eficienr oprarions

'

In the

reslrumt indatry ompariy.peEted sd ft.nchi*d rcnauEnts g.netilly coDEibue

percemaSe of rcvenE ro advenising tunds. As s rBult. luc

market then prcducts

59

ed prcmodoB

A weak or weak/adequate

Nssment

b.e&

signifi@t

rend to hale ldge advenising budgets md

morc aSSesively thaD smaler braDds

of s$te, s@pe,

ud

bl.

diveEiiy typically is characte.ted

. l reak marker position in a crowded sector

. Lack of lcale and lN bdCaining power with rupplieb.
. PBm.e of siSnincantly $ronger playe$ in core markets.
. Ma*t 3h!rc los ro srrcngr play6 in it! core mrkts.
. For Euopce ald Adu rctaileB. lack ot s.o8.apr'ic divrsry hde or no pre..ne
.
.
60

iD highrewtn emrCng
marke$, or Dnle or.o divellity in differcnt rc8ions wirh differtnt consunFjon tcnds to midgate volatrIry.
For at to rctailers,lack oferomh throud acqui,3itioB md lack ofscale ed sp for tehnol rtomabl.h@
For Braurants, smaller or regioml bran& Iack sele and s@pe that could result
hindeB the ability to prcmote products.

In terms of geoS.aphi. diveBity,

re

sy

adve.tisin8 budgeB that

a@s ole

sjzable

m.kct

(rot ermple, the Us. or China) with

gd p.ofitability is not
b.qr of p@r store or m.r.rlandiirg e@tion Lil(ewire,
@n be vi d 6 urdryorable: h@!ve., nmerous regionel ntailels

parti@lar star or rpon. Hdever, geogEphic diEBity that lack!

meein8tul. ad weu diveBifed rctailrs

s(ruSgle

sigDjfcant conenration in ore sta(e or rcpon

have achieved srrcng rcgional

6l

Bmall

beliwe retail compaDes should operate in frultiPle regio6 allMd the world

holdins leadins markel positions: or be well spead

lirde conclnttation in

i!

mrket shaE

Generally, brand diversiiy does not play

despne fimited geographic

antmporlut

role in

ou

dteBity

ratings process A retail compdy may operate or

Crn ia

Cotpototcs

tndqtti4b: Ke, Ctetlit Facto^ For The

manage nnltiple conceflr, and rh8e may be in ditferc.r sub3etoB or

Retail A4d Restaunrrs

hde quite diErSlnt

prcduc't ofle.inss

ladrstly

ed

p.ie points But i, fa.t. dcveloptnclr ud tlEaaemelrt ol smrler bnn.ts can occlf,y mrmSemnts time dd
@urce. so dEt the prihary b@d opeBtioB msy suffe. StiU. re wodd view a singula! concefl rhat i5 $F*ry
pnitioned

62

@fsvorablc.

In terms of concept diversiticaton, we bela the .etailer should have breds that have domina positiom in the
niche segments they serve and account fo. a significanr po.rion of operathg income. ldeally the multiple concepts
tarSet djsrjnct

stomer

or prcduct se8ments and the grcwth of one does nol cannibalize on the sales of anodet

OpratiDg efhciency

63 Blt.il

cofrp.i,les diveBe re.to6, md opeEting mtn6 for each seclor can vary widely. Thcnforc, comparison shodd

be hade with

Ns
.
.
.
.
.
.
64

Fss

in rhe sam slb!ctor

opEring efficiency we rypi.dly

Same store

sles

Sales per square

,ith simil& prodkr

mix,

cct strEtre,

and

Se

raphical opeEtioB. To

rack

or like{orlike Bales:

footi

EBITDA fuAIgM.
Accomts payahle dqsi
C.sh co e6ion cyclesi ed
For au(o rclaners, rc l@k at the Edo ot SG&A to grors proirs

Strcng or strcng/adequat opcmting emoncy ir chtracterized by:

.
.

A @Distent p@itive trend of sme.store sales grcwth that loeragB a growing 6xed co3t bas
Hicherthan-alera8e unit-l4el prcductiviry comparcd to peert, such as salB per squde f@t for retailers

ed

avense unit volurne (AW) ror restauants.

.
.

a @si$ent tmd of glw megin indi@tes st oDg work nS capital meagement. This is Prfticulely moE
importar for *enal rctaiLrs
A Nmptitive con $rucrur. (SG&A as a percent ofsalB) dd ability to adiust co$ lrrudurc in penods ofhlins

aDo!-nvraee prcfit mdSin (EBITDA marsin) from cln istmt ssl6 Srowth to

.
.

mrking capital maiag@crt leadrng to higher inventory turu and limrtd mdkdom risk
For auto rtailers, a high dgre of Ntomation intSdting oprations and ssles. pDvidirs curent mrket data lo
th sales fl@r for beaer pricinS, and gathenng cEtoher informtion to d.ive sales for the parG ud setuice segment

a highry fixed

exPe@

Emcient

Also fo. auro .elailers,

exelent relarionships with prcfrtable automalcrs, lo inS that the aulofr6kers t}?icaly
pMide fl@. pla. frnanong for th Ehid invotory ed have veto P(,w ovq the amrdin8 ot ftanchits to

Fd rsta1lfut3,
packaeDg

65

lssase

hioer mi,

ud bbor

of hanchisd

co3ts, and

thu offe6

uits
a

rcsults in

ls exposue to @lmodity c!8l fluctuatioG

dd

moE predict.bl

\r/eak or adequate/weak operating ernciency combines:

cof/unf,GsDtEcr

iovrrlrRrr,2013 rr

Critqia

Corpolat6

lndusniak: Ker Crtdit Fa.toB

Sme-stor sales trends thst lag pee6 or or

lol

The Retail Akd Restaarants

dustry

declining .oBistently, indicating market slarc Io$.

sales kends or les ompetjtiv cost structurc.
Less competitive ratio ofSG&A to sa,les becaute ofhieher rent or labor expenses
High volatiliry ofgrcss malsin, indicaung poo. inventory mdagement.
6JE

Prcftability coosistently bel@ pers due to subpar

Lryerthan-sveragesates/sq ft. indicatingmderutiladasts.

Lack of a compreheBive online smreg/ or ljtde presehc in this

grcst

channI.

Wak worhnS capital managemen! resDtring in g.eater invntory investment, l@er inventory tu ns, and a

higheFthan'expected level of markdo$ns.

For auto retajlers, voladle same-sto.e sate grosth t.end, less variable cost structure, and inconsistent inventory

contrcl &e to less $phisticated systems automtion.

For r*taurants, iDconsistent sales and grcater exposue to @st fluctuations due to the larger portion of company
operated units veBus fianchbed uits.

66

Sto.e productiviry is an important me4ure of a letaileis @erall operating eticiency ln our analysis of store

productivity, we seneBUy look at the foudinE key metrics:

SMe-store sles (also rcIered to as compdabl+store sales or like fo.like sales). We view a consiste.t t end of
sme-store eles grcwth favo.ably in ou asssmmt and beli4e it indicates the compuy is uing iB assets
eificiemly ro leve.age irs ldgely fxed cost be, wliich pnmuily colsist! or.ent expeose dd labo! cosi
Furthermore, sme-store sles trends thal ra.k ahead of pers may indjcate that the retailer t gai.ing share
Conve6ely, same-store sates trends thar lag peeB or are declinins coNirtently Day indicate mdket share lo$

vers ir!

peers or ro orher retail formats.

sqMre foot or sales density. Retailers cao demonst ate above-ale.age slo.e prodxctlviry by seling more
per squde foot rhan pers, ahich we view favorably in ou Ne$ment Lryer sales pe. squde foot rhan PeeB may
indicate uderutilized assets md subpu operating performaoce. However, retailing is a very.lre.se secror dd this
measue can vary widely depending on the prcducr mix or store tormat. Therefore, the comparison sbould be made
with peeB ir the same subsctor with a similar prcduct mix, co3t Btructu e. and geoS.aphical operation.
Crcss maryjn trends can provide insidts into how well a retailer is @nasilg its inventory pirchases, cosr
Sales per

increas*, and pncinS stategie. Inventory planning is clitical in letailing s too nuch excess inveotory u$Elt
Ieads to steep mtrkdMs, hurting overall prcntability. In pe.io& ofhigh inflation, .etaile.s able to pass on cost
incre@s can ftaintain gross margins. We vie, favorably a retailer that outperform its peeB in majntaininS o!
g@ing its gross mrgin. We view ufavorably a retailer that unde.perfoms its peeB with a steady decline in gros
margin or highly volatile gross margin trends These trends heavily depend on slobal comodity pries (botI tood
and no.food)

dd

mabufacturinS in

labor cost inflation levels, due rc rhe heaE, dependence on Asim manufacnning (Chinese

pdtiolar.

EBITDA margin. Whne

sals

metrics arc

etul,

w also @nsider the opsating marsin

another meaure

ol

ol sal$ and compare it to ils peers.

SG&A expeBes are t picaly nxed .osts thar a .etailq needs in order to grcw prcfitability Depnding on the deg.ee
ol operating Iserage, a rctailer may ned to iocrease sme-stole eles at a drfierent pace than ns peers. Therclore,
we view fryoEbly the ability of a retailer to turn fixed @sts into Bales 8ro$tb to .lrive mrgin expansion. Gene..Iy.
mal-b6ed opeEtors hde hiSher rent expenses thah off'mallopeEtoB in lifest,,le enters
operating effrciency. We look at a retailels SG&A expenses

67

Wo.king capiral

agement is important in

tund invento.y investrnents abead oi sales.

ou evaluation

p ticln

a percentage

of opeiatlng einciency because oi the use of liquidity to

ly in the iftpo.tant holiday season. ln generai, a retarer with

st ong worhng apital maragement shlls erhibit! lows levels ofworkjng capnal investment compared to its peers,
and often has fewer

ma.kdom

Grcwirg companies ned to inv$t in inve.to.y to suPport store 8rcs,1h, re$rlting in a

xovrllllr

r0,

?rrr rr

Cnbir I Cotpotut

s I l"d6t ial3:

K.'t Cl.dn Fados fot Tb.

Retnil

An'l

Re'tdvTants

Indrci,

eof

esh, while matu e compsnies on Educe iNenrory invernents, Bulting in a suce of.ash Giwn that
inventory $?ically reprcsents the bulk oI a retaile/s curenr ssts, achising hither ineentory trmovea gnraly
rcsul$ in low{ levels ofinventory invetlrent aDd reduccs financing cosrs On the other hand, Poor rcrKn8 capital

MSemeat cs strcs

68

retaills liquidiry if rhe comPan)/s inventory position i! too hjSh stile verdoB

&med

ChaBcteristics of sccestul rcrhn8 capital management includel

HiSher lewl ofif,ventory tunovr

thd

peers. Thjs rcflects the retanerr's ability to stocl sufncient lypes and

quntitiB ol inventory in order to met rutomer demand on a timely balis withour tying uP exces capital;
Accoud palEble lsels thar minimize net invntory investfrent, sch 6 exrsding the nuber of account payable
days (3rrcr.hing ofAlP &ys)i and
L@er c8h @NeBion cycles Thete dmo6trate a @mpaEys strcnss position in the $PPly chdn (for x4ple
rcqunn8 supplieB or dealeB ro hold more ofits inventory) Relarive to PeB, thjs allos a compey to direct more
Gpitsl to otirer areas of iNertment.

69 May

&d partialarly spedrative-grade )rsuerr,

rctailers,

ptrrlhase. dunrS the montu ladjng ro the

imponet s.llrng quarters

impact of
a

s@nsl

An unlavohbl

cndd

rely on revoMDS @dit tacilrties to tund se$onal inventory

selli!8 penod. HiSh se4onality leaves Uftle @m lot erlor in the

dBment

of

poor summe4. UndeQerfoming pe6 in achising ssles

seenal

risk codd manifes frcm the imbiliry to l@er th

seenality

uable

risk facloB on bwinss performance (sry a DIY retailer that is

6gett dd mnaging

to

uest

tales decline due to

inventory investrnsls during

pea}s could lead to heavy markdowns, huring Prcftability.

Profrtabitity
70

The profitability

Nsment

assment can confm or modiry the preliminary competitte Position Nesment Thc profitabilty
ort,o componenrs: I) the l4el of prefrtability. d 2) the volatility ofPrcttability. The two

conlisl3

componnu de combind into the frnal pBfitability N!tsment Bing a matrix. To

,aE of historical data. In

baed on peer analy3is
7

csss in

ag$

Protu potnrial is a cntical determinant oI dedit pmtection. A company that generales

stroiS

mr8iG hB a Srater abilty

72 A rctajler

that

consBtently

urets

gwinS

to seneEte c.sh to redPloy for

etDeni

hider returB

dd

dnve

rctE

on @pital by emcienlv

on capital

od

and wi$stand busines 3dve6ity.

favorabte assessment of prcfitabilily 8nraly can succeistut]

sales,

volatiliry. we rcq'rire s4eral

khjch we do not have such histo.ical .tata we Perform the volatility assestme.t

aing ts asets

incea*

HiSher

Prcfitability by

pbftability

ds

serues

ofa.etaileis competitive strelgth. market Positioning, and its bland identiry. In our ana'3is, we
c@sider a relaile/s ssles grc$lh irack record md try to lorecast a s.les trcnd bsed on the companys competitive
position, growth plaG, ed indBtry PrcsPds. An unfavo.able assesment cd rcsult iiom peBBtent sales decline
a retiable gauge

I@din8 to prctu eDsion depit

73

Wb

cdt

Educrion effons.

analta profitsbility memB in absobte sd

mesures Proitability

is

relaove

trm, focing

on the volatility.

E6&, dd PrcsPcts of the

imi& and outside

alro ulrimately a key perfo.mance indicator, allowing compeisons lo peers

indBtry A compey that geErates hiSher oPeratins margins and rcturs on capital airo has a 8rater
ability to tu.d 8rcfih intmsly, attr&t capital extemally, and withstand buines adve6iry Emings Power ultirotely
of the rerarl

www,ar^xDm xDrootrs.

ior,rrrrrtt,201r rr

Cntetia I Cotporavs

l"dqn/iak:

atlestslo the vdue ofthe omparys 3!s.l! 8nd th.

perfomee

$ces ofmeageme

lor

Thc

R.tail

ltEtegiB.ln

And Restaub ts

I'.)

st|g

facr, a omprny's prcfit

oIler8 a lidnri! tst of its tundaRntal hedrh .nd cmpritive podition

pmftability

Levcl of

74

Ke\ Credit Fa.tals

EBITDA marSin is the prihary metric rhat

s!

u3. to evahat proftability for rctait companie. We also onsider

retum on capiral in some cars. bur rhir mca&rc can be distorted if rhere is a siSnificarr arnour ol goodwill or

intangibl$ ftom

l4raged bulbut ofacqulsitive history Th EBITDA ma.8in

u*d

ie

adju$ed for lases baled on

our lease adjustment metlodologl.

75

RetaiInS

cmpries

diverre secton eacb *ith

d&8
food

peB

djffft.t

margin prcfil. As such, w compe esch rrsreis

sm. rcgion. For emple, food and

,tt!il.B gen.raly hde a l er mriBin prcfle than appaEl od depanmenr srores given rh low tnaryh nahr of
ed dru8s Prcfihbiity ir determined oD a thre poinr $ale: abde effag. alcEse. atd bel@ mEge

protrabiliry against its

in the

sme subrlcror

ond is most c.!es -irhiD the

Retajler Profi tability Scale

D.pt

76

We

assa .

tocus

.toa/rp4i.l.y r..!lLn

R.nlurah

ilto

the ab@e caregoris,

Volatility of profi tability

77 Volatility of pronlability is detemined
cntena We

arro

Etril.r

companys pmfitabitity raric rebtive lo th6e of its pee6 wirh .imilar busines! nixe6 or mrdtudisinS

d in the context of its str?re8. WnXe w gcne.aly asse$ prontabiliry BinS rhe

company do! not fit cleaily

We geneEJy

re would

using lhe stddsrd errcr

N6s

ab@ table

iD

caes where a

proirability uling other, mor{lvsnt

of.ese$ion

(SER), in

accodance wirh ou corporate

EBITDA ma,gin to detemile the SER for etail and r6-tauEm companies We only derermjne SER

*t!en companjB have at lar

78

Dlrcoutd/Foo.t r.r.ihE/dru!.lor../c-.ror.r

sen

ya6 of hi$oncal annual data to

EBITDA to dete.min th. SER for rctsneB

eNrc

rhe relulrs

ed restalrBts o.ly

e mtuingt l

if rtrn

at least

wen

yce3 of

hi$oncal dnual dlta to elrsE mminSirl .r!ult&

79

As with the level of pbfitability, we evaluate a company's SER in the conlext of ns indlsr.y group W establish a

six-point 3cale with th l' catgory capnninS the least volatile @mpuies (i.e., those wirh the lowesr SE&) and the '6'
category capNnn8 the most volatile companies (i.e. thGe wiih the hiehsr SEFr)

Part II--Financial Risk Analysis

80

AccouthS ard amlytical adjurEnentr

Ou. ealy3is of a comp.nys flucial state@nt3 b.8jB

wirh a raia of the accounting ro dermine whrh.r the

a@Etly m$lure a @npany3 pedorhane and pGition relative to iB peers ud ihe luger univee of
corpoEte entities.'Io allo{ fo. globally coEkt.nt &d comparable fimncialamlys.s, ou. rating analysis roy include
statemenls

wryw.sTAxDliD^EpooRs.cof

/urdcsotrlcT

rovrrlar ll.

'orr

ra

Gn.
q@tjtative adjusfitenu ro

a I Colpotutzs Indrstridk: Key Credn Facto6 Fot The R.tail And Ratau/anrs Industry

ompeys

rcponed

Bults ThBe

adjBtments also emble betrer aligDmnt of a

ompanys rpond fi8ures wirh our view ofuderlyirg eonomic conditioG. Moreover. they
portrayal of a @mpanys onSoins

bBin*.

*ctor, d discus!.d in 'Corpoale Merhodologr

cluEcteristics

ed

6I

a more

affate

AdjNtmenB that p(ai! bmadly to all orpoBte *cloB. indudins this

Ratjos ADd

Adjuune s,'publishedN@.19,2013 AecosDr8

analyti@l adjustne.ts that arc unique to thir sector arE

dt@ed beloe

Floor plan financinS

8

Despire rhe difiering accounring chdacrriation of auto retaileB' fl@r plan financing arangemenB (th@e with both
lhe

autorEtlB' @ptive

,inance arms and dlose with thitd-P3ny financieG), we comider 3uro rctaileB floor

ple

borcwings, egardles of source, more akin to trade psyables tha. to debt becaure ol the borNings' high

l@-tcElue

ratio3 (rypicdly lod/"), widespread aEilabiliiy. and inde6nite maturity. with rcpayme.t 8erc61v

occuning once vehicles are sold.

82

dd beaae

of a lonS

httory

of man'.dadEr $bsidies larsety offset

borcwins

plo borcwings rcporred s debt On nr'e balece sheer, floo. pld boffiings
ee moved to accounB payable froft debt since re vi4 (his a ahn to trade payables Likewise. we comids floor
plan intercst expens as an operatin8 cost rsther than a llnancing cost md add it to $e @st of sales. Thereforc, the
For auto retailers, we adjBt for floor

adjusted EBITDA, FFO and adjsted total interet expen* may be

staremen$ dependinS on
interest

N:ltucq

*hich

hd
i5

lryE thu

those Eponed in retaileb' fimncial

rhe interest is reported we do not mate any change in the ueatment of fl@r

genehlly alidy included in

c6t

of sales. On the

@h fl@

stalment,

re

Plo

include

clEnges in a[ floo. plan bor@inss (both with c.ptive and thifrt p.itieo in the worhng capnal *crion of @s]

fl@

Adjustment procedures

8:l

Datarequi.emenh
Amount oi floo! plan borrowiogs repo.ted as debt.
Arnount ol fl@r plan interelt expense Eported by the company in inte.e$ expmse lor the penod; dd
Fl@r plan borrcwin8s/rcpalmenffeponed by the @mpsny under fi@cing activity in itt cash flow srarement for

.
.
.

Debi we subt act any lloor ple borwings reponed a debt in th fimcial statements
EBITDA md FFO We subtract floor pla, interest expens t om tol interer expense and ireat it 4 a pet of
opemting expense, thus reducing EBITDA dd FFO by the floor plan interst amount.
C6h fl hom opeBtions: We reveBe the impact ot floor plm borNidgs/repayment in the financing activity

sctlon ed trcat it s

a part

ofwo*i.8 caphl

(i.e , change in accounts payable),

thB impacting cath flow fiom

ope6tior$. We blieve sch borrcwings are more ahn lo trade payables than debt
Cash

85

flosnev.ag analysis

of csh fl@ Benehtio., turcdt dd tutE in lation ro 6h otu8arjoB is onen lhc b6t indi@tor of a
@nparvs nnecial risk Cash n@/bveEge d.lysis b tne foundarion for asainS an isucis inanoal nsk p,o6le
The assmenr of a coDoratiotr's csh fl@/leveBse is sssesed on a sale of 1) minimal. 2) hod$t. 3) intemediate.

The

pattm

C.ndia I Corpoldtes l lnd6t'dk: K.y Cre.lt tacto6 rot

4)

86

3i8ni,i6t,

We

the

s) s8Sresive.

so.

ed

m.thodoLo&r

Tbe RetailAn.l Restzu/aats tn.lu5try

6) highly leveraSed

E with oths @rpoEte

compa.ier when als..sing .8rh

i33uei3

(se

@rpohre methodoloet) for Eung r(3i]

fldwll*Ege

Core ratios

87

We

detemine core ratios in accodmce with Stsndad & Pools hrios md

flow/levenSe oI rctajl compaies, we oril'ze FFO ro debt

ed

adjusnt{t

cnteria. ln asesing the cah

debt to EBITDA.

88

we conside! most rerail and rcstaurant companies

89

Supplmental rados
In addirion to 6 comFny's ore ratios, we comider supplemen&l Etios in order to dvelop
company's crcdit rbk prcfle and fine tune our cah

having "sta.lard' volatiliiy

fl@

tuller understandjng of a

analysis. vlib genmly include EBITDA to interest coaerage,

FOCF to debt. and DCF lo debt in our malysis.

90

Retaile6 often carry a higi adjured dbt burden and rhet ability to meet esh interest and
Fo! retaiters with core
to Benerate fEe Bsh
such

csh flow

flN

H@de(

flow and laeh8e ratio. de i.djcarive of a

,e

generaily use DCF lo debt o. FOCF to dbt as the

for rctaileB $+rose FOCF 8eneration is constrained by siSnifient capiral expendituH,

e wiu use ca5h flow from opeEtions (CFO) to debt

intercst covera86

payments is c.itical

after invesnnS in their busines enable them to louq lverase or tund shreholder rctums,

share rcpurchaB or dMdend paymmts. ThercIorc.

supplemental ratos.

lae

and loerage ratios indicaove of a nnanoal profile of interfrediate or bette( th ability

the supplemental ratio

the prErned supplenenBl latio For !raile6

fimcial prcfle

we

f()s

etos

corc

cah

that is "signincat' or weaker, we generally Be EBITDA

more on &eir abilty to srvicr their irterest and leae buden.

In $me cases when wt believe leare{drBted EBTTDA idterer (xrehge or other cash floe coveiaSe rarios (beca$e
or ou.

lee

adjustment) oveBtate the companys abiuty to c@er tued

EBITDA.R to inter6r plB rcnt Btio ir'.sead. We beli4e $is ratio more
by optunn8 actual nt velsu3

propery own.Bhip

vets

c6t!. includils rc!t. rc may e an umdjutd

&uardy reflects the leerel6red obligation

minjmm conractlal rcnt. This Etio also h.lps

lee m6t of the! prcpnies.

distinSuish companier with

hider

@mpanjs that

EBITDAR CoveraS. Rado Scale

Part III--Rating Modifiers

DivBif cation/pordolio dfcl
9

ln Bsd$ng diversilication/portfolio

efiect analysis fo. a .etaile.,

corpoEte isseB Gee our corporate methodolosr)

ou

snalysb wes the sme methdology ,s ior other

Cnbb

Corporabs

l"dBniaL: X..!

Cre.ln Facro*

for Th.

Ret4il And

R.stautu

L.lutty

Cepital stsuctw

92

In assssi.B capital structule on a retail compay, our analys,s Uses rhe safie methodolog
issueB

(se

with orher corporare

our corpo.ate merhodolos').

Liquidity
93

We use the

94

Auto rtailers'

sme general methodology

as

with other coryorate issrer'

entory borrcwinS requterenrs may be mr by floor plm finocinS ftom automakers and somerjmes

third-pany lendeu. Thi!

augemot

stabili4s liquidity for fte rctailers and is nor co.sidered to be a ue of liquidjry

Finrncial policy
95 In 8lgsinS findctul tr olicy on a rtail cofrpaiy.
ilsEB (se our corpoEte methodolosr).

96

Mrnagamant and govem.[ce

ln aBsing maEsemenr ed govemce
corPonte issuB

(re ou

our aDalysis

a.s fie see

on a rctajl company.

ou

analysis

medodology

aB

the

ffie

with orher corporarc

methodolory

with orher

corpoEle metodolosr)

Comparable rating analysis

s7

In asessinS the comparable Etings anarsis on a retajl company. our analysis Bes the

soe

methodology as with

other corporate issueG Gee our corporate methodologr.

RELATED CRITERIA AND RESEARCH

Corporat Methodology, N@. 19, 2013
Methodolo&. lndurny Risk Nd. 19, 2013
CorpoEre Methodologt Ratios And AdjEt netrs. Nov 19,2013
Methodolog And AssmprjoG: Uquidiry Des.npbrs Fo' Glob.l Co.porare Issuers, Nd. 19, 201 3
Counry Fjsk AseMent Methodolory And Asmptiom, Noe 19, 2013
ManaScment And G@mee Crcdit FactoB For CorpoEre EndtiB Ard INrcB, N@ 13.2012
PrinciplB OI Cledit Bltitrgs, Feb. 16. 201I
These oitena reprsnt the specinc application oI tundrmertal principles that define crt(lr! rirk and mti.Br

Then Be is determined by
of rhe credn
chanSe

ed.

issr

or

iseipcifc

.tnibutes as wellas

Stad

opinios

d & Poois Ratings SwicB' asessment

dd 6smptjons may
issEr or isespcinc facloB, or new

if appDcable, sEuctual dsks for a given issuer o. issue .aring Merhodology

lrcm time to time

6 a Bult

of meket and economi. .onditions,

empid.al evidence that rculd aflect our oedit judgmenr.

{ag.sr^xDmANDPoois.cox/urrxosDrEcr

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