CORPORATES
CREDIT OPINION
4 July 2016
Distribuidora Internacional de Alimentacion
Update Following Q1 2016 Results
Update
Summary Rating Rationale
RATINGS
Distribuidora Internacional de Alimentacion
Domicile
Spain
Long Term Rating
Baa3
Type
LT Issuer Rating - Dom
Curr
Outlook
Positive
Please see the ratings section at the end of this report
for more information.The ratings and outlook shown
reflect information as of the publication date.
Contacts
Sven Reinke
44-20-7772-1057
VP-Sr Credit Officer
[email protected]
Marina Albo
44-20-7772-5365
Managing Director
[email protected]
DIA's Baa3 rating is supported by the resilience of its food retail operations, its expertise with
proximity stores and discount price positioning. In addition, DIA's strong market position in
Iberia, its growing franchise in Brazil, Argentina and China, and the cost-efficient business
model has resulted in solid profitability. DIA benefits from extensive experience and know
how in operating a franchise business model, which provides the company with more
flexibility, less capital intensity and higher profitability compared with a traditional store
ownership model.
The rating is constrained by DIA's smaller market positions in certain markets where it
operates, the improving but still negative like-for-like sales growth in Iberia, and lower
operating profit margins driven by the acquisition of El Arbol and of 144 Eroski stores. In
addition, the company is committed to growing shareholder value and its shareholder policy
includes dividend payments and share buybacks. We recognise DIA’s intention to continue
participating in the consolidation of the fragmented Spanish supermarket sector, which
exposes the company and therefore its rating, to some event risk.
We expect - in the absence of any material debt financed acquisition - that DIA's key credit
ratios will improve in 2016, driven by considerable debt reduction and higher free cash flow
generation on the back of lower capital expenditures, positive working capital cash flow, a
lower effective tax rate and lower restructuring costs.
Credit Strengths
»
One of Europe's leaders in food discount retailing
»
High geographic concentration in Iberia where DIA suffers from like for like sales decline
– but sales trend is improving
»
Strong and highly profitable franchise model
»
Sales growth supported by franchises, international expansion in emerging markets and
acquisitions
»
Good profitability compared to rated food retailers albeit weaker in emerging markets
Credit Challenges
»
Acquisition of El Arbol and Eroski stores is margin dilutive despite successful integration
»
Weaker financial profile as a consequence of acquisitions and share buy-backs
CORPORATES
MOODY'S INVESTORS SERVICE
Rating Outlook
The positive outlook reflects our expectations that DIA will improve its operational performance in the next 12-18 months, mostly
on the back of a return to like-for-like sales growth in Iberia and driven by the benefits of the successful integration and optimisation
of El Arbol and of the 144 Eroski stores. Based on our expectation of an improving operating performance and in the absence any
material debt financed acquisitions, DIA’s financial profile could improve over the next 12-18 months to a level that we consider
adequate for a Baa2 rating. The rating would also benefit from a continued balanced approach between shareholder remuneration and
an improvement of the financial profile.
Factors that Could Lead to an Upgrade
We could upgrade DIA's rating if the company continues to successfully execute its strategy, such that it further improves its market
position in Iberia and the emerging markets it operates in, and at least sustains its solid profitability. In addition, a return to profitability
margins which DIA enjoyed before the recent acquisitions would put positive pressure on the rating. Quantitatively, an upgrade would
require the company's
1) adjusted debt/EBITDA metric to be sustainably below 3.0x; and
2) adjusted retained cash flow/net debt to remain at least in the low-to-mid 20s in percentage terms.
Factors that Could Lead to a Downgrade
DIA's rating could be lowered if there was an erosion in the company's market shares in its key markets, and/or if its operating margins
deteriorate, as a result, for example, of sustained negative like-for-like sales performance in Iberia, more intense competition, or
operational difficulties in emerging markets. A more aggressive shareholder return policy or a large debt-funded acquisition could also
create downward pressure on the rating. Quantitatively, we could downgrade the rating if DIA's
1) adjusted debt to EBITDA ratio increases above 4.0x; and
2) adjusted retained cash flow to net debt falls below 15%, for a prolonged period of time.
Key Indicators
Exhibit 1
DIA
[1] All ratios are based on 'Adjusted financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations
Source: Moody's Financial Metrics
Detailed Rating Considerations
ONE OF EUROPE'S LEADERS IN FOOD DISCOUNT RETAILING
With 7,718 stores, total gross sales under banner of EUR10,547 million and net sales of EUR8,926 million in 2015, DIA is one of the
leading discount operators in Europe. Although, it is much smaller in size than other food discount retailers such as Lidl (unrated)
with total sales of more than EUR60 billion and Aldi (unrated) with total sales above EUR50 billion. Spain and Portugal are DIA’s core
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
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CORPORATES
markets. In the former, the company is with a market share of 8.7% the second-largest retailer player behind Mercadona (unrated).
In Portugal, DIA ranks as the third-largest supermarket chain, behind Pingo Doce (unrated) and Lidl (unrated). The group has smaller,
albeit improving, overall market positions, in Argentina, Brazil and China where it is growing mostly through franchises.
The company's focus on price and proximity, coupled with its high emphasis on the successful and profitable franchise model have
been key success factors in recent years for DIA. In this regard, we understand that DIA's loyalty card, ClubDIA, has been an effective
tool to support customer loyalty as around 75% of sales generated with ClubDIA card holder. In addition, the loyalty card program is
funded to more than 80% by the company's suppliers.
HIGH GEOGRAPHIC CONCENTRATION ON IBERIA WHERE DIA SUFFERS FROM LIKE FOR LIKE SALES DECLINE – BUT SALES TREND
IS IMPROVING
In the first quarter of 2016, DIA generated 67% of its gross sales under banner and 86% of its ‘`adjusted’' EBITDA (as calculated by
the company) in Spain and Portugal, with the remainder coming from emerging markets. In particular, a large part of the company's
earnings are generated in Spain where DIA's market share increased considerably in the last five years to 8.7% in 2015 from 6.8% in
2009.
DIA's like-for-like sales in Iberia are in decline since Q4 2012, as shown in exhibit 2 below, as a result of the difficult macroeconomic
environment and high unemployment rates across the two countries. However, we note that some of DIA's competitors have recorded
a better sales performance. For instance, Carrefour (Baa1, stable) reported positive like-for-like sales in Spain for the last six consecutive
quarters although we recognize that a part of this growth is driven by an improvement in non-food sales. We believe that DIA's relative
underperformance can partly be explained by the large growth in DIA's Iberian store network and the associated cannibalisation effects.
The economic recovery that started in the second half of 2014, as well as the subsequent increase in consumer confidence during 2015,
led to an improving like-for-like sales trend. DIA’s like-for-like sales decline in Iberia flattened gradually to -0.3% in Q1 2016 from
-4.4% in Q1 2015. We anticipate that DIA will record positive like-for-like sales growth in its Iberian store network in 2016. We expect
that this growth will be principally driven by a slight uptick in food inflation and increases in volumes.
Exhibit 2
Like-For-Like Sales Evolution in Iberia by DIA and Carrefour
Source: Company Reports
STRONG AND HIGHLY PROFITABLE FRANCHISE BUSINESS MODEL
DIA runs three different types of stores: (1) COCO Stores – Company Owned Company Operated, comprising 52% of DIA group stores;
(2) FOFO Stores – Franchised Owned Franchised Operated; representing 20% of total stores; and (3) and COFO – Company Owned
Franchised Operated, 28% of total stores. The franchised operated model is more profitable, flexible and less capital intensive than
the company operated one, and it has been DIA’s growth engine in recent years, in both the Iberian and emerging markets. At the end
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MOODY'S INVESTORS SERVICE
of 2015, total franchised stores under DIA’s banner represented more than 60% of the company’s national and international store
network, compared with only 27% in 2009.
The key driver of success of the franchise model is based on the vested interest of the franchisees in running the store in the most
optimal and efficient manner possible, which translates in reduced shrinkage, lower labour costs and smaller operating costs overall,
leading to higher profitability. We believe that growing the number of franchise stores will remain an integral part of DIA’s strategy. In
our opinion, there is still potential to increase the number of franchised stores, especially in Clarel and La Plaza de DIA formats, which
are currently predominately company operated.
SALES GROWTH SUPPORTED BY FRANCHISES, INTERNATIONAL EXPANSION IN EMERGING MARKETS AND ACQUISITIONS
DIA has been expanding fast in recent years largely on the back of the opening of franchise stores, expanding into emerging markets,
and acquisitions. The company’s recent acquisitions and the contribution of emerging markets were the largest sales growth drivers in
2015, when sales increased by 12.2% to EUR10.5 billion. Sales growth was even 1.7% higher on a constant currency as DIA’s sales were
negatively impacted by the weakening currencies in emerging markets, particularly the sharp depreciation of the Brazilian real which
fell by more than 26% during the year.
In 2015, the gross sales growth in Iberia, excluding the contributions of El Arbol and the Eroski stores, was -2.5%. However, this was
more than offset by the 15.2% sales expansion in emerging markets (sales growth in emerging markets was even 20% on a constant
currency basis). DIA has in recent years expanded its operations in Argentina, Brazil and China, where it has focused its investments.
Emerging markets represented 33% of DIA's gross sales under banner and 14% of its ‘adjusted EBITDA’ (as calculated by the company)
in the first quarter of 2016.
DIA has given priority to the development of its franchise network. Franchisees account for at least 65% of its stores in each of the
emerging markets where it operates. We believe that franchises can accelerate DIA's store openings in territories where it has a fairly
small market presence, especially through master franchise agreements in Argentina and Brazil, where the company opened 235 new
stores in the last 12 months to March 2016. In Iberia, DIA is most likely to focus its franchise efforts on the Clarel brand since this store
format suits well the company’s traditional franchise concept.
ACQUISITION OF EL ARBOL AND EROSKI STORES IS MARGIN DILUTIVE DESPITE SUCCESSFUL INTEGRATION
In November 2014 DIA acquired El Arbol for a symbolic amount and assumed the company's debt worth approximately EUR114
million. Shortly after this acquisition, in April 2015 DIA also bought 144 Eroski stores for EUR135 million located predominantly in the
Madrid Area. In 2015, DIA launched its new supermarket format ‘La Plaza de DIA’, based on the concept of a local family supermarket
with a larger assortment, circa 5,500 stocking keeping units (SKUs), and a stronger focus on fresh produce. Most of the 144 Eroski
stores were transformed into this new format. At the same time, over 400 stores from the acquisition of El Arbol were also fully
integrated into DIA’s supplier purchase programmes, IT and logistics functions. Moreover, the integration of El Arbol as part of the
wider DIA group improved the commercial proposition of El Arbol considerably, owing to the introduction of DIA private labels, lower
prices and increased promotional activity and loyalty programme benefits.
One of DIA’s main objectives during 2016 is to optimise El Arbol’s store network and improve the operating performance of La Plaza
de DIA. Amongst other things DIA aims to convert 235 El Arbol stores into 95 La Plaza de DIA and 140 DIA Market stores, and close
approximately 50 non-profitable stores.
Despite the rapid and smooth integration of El Arbol and the Eroski stores, these acquisitions are margin dilutive for DIA. In Iberia,
DIA experienced an EBITDA margin contraction of 0.9% in 2015 to 8.7%, mainly driven by the lower margin yielding business of El
Arbol and to a lesser extent by the price investments in Portugal. We expect DIA to continue to implement further efficiency and
productivity measures in order to reduce the cost structure of El Arbol, which coupled with the benefit of commercial synergies is likely
to help improve the operating profit margin in Iberia. However, we anticipate that this will only happen towards the end of FY2016,
and therefore we anticipate a flat or even a slightly lower EBITDA margin in 2016 compared to the previous year.
GOOD PROFITABILITY COMPARED TO RATED FOOD RETAILERS ALBEIT WEAKER IN EMERGING MARKETS
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MOODY'S INVESTORS SERVICE
DIA's Moody's- adjusted EBIT margin decreased to 3.9% in 2015 from 4.9% in 2014 as a result of the integration of the lower margin
business of El Arbol and the transformation of the Eroski stores. Despite this decrease, the company’s operating profit margin continues
to compares well with most other rated European retailers, such as Wm Morrison Plc (Baa3 stable) with a EBIT margin of 2.6%, or
Delhaize Group (Baa2 stable) at 3.2%. Given it is predominately a discounter, DIA's business model is highly focused on efficiency
and productivity, both in its stores and across its supply chain, in order to ultimately offer lower prices to its customer. DIA's store
concept is articulated around limited service in store and on a narrow number of products. Both DIA Market and DIA Maxi carry a
relatively low number of SKUs, between 2,800 to 3,500. Moreover, there is a high proportion of private label products in DIA stores,
representing circa 50% of the company's total purchases (excluding fresh produces), which are negotiated centrally. In our opinion, a
high proportion of private label brands supports DIA's profitability, because retailers tend to have higher pricing power and therefore
higher margins on these products than on branded products.
However, DIA displays much lower operating margins in emerging markets than in Iberia where it is highly efficient, as indicated by
an ‘adjusted’ EBITDA margin (as calculated by the company) of 8.7% in 2015. In emerging markets, DIA's margins are well below
the company's average because it has a more modest scale than in its core Iberian market and because it is still investing into its
infrastructure. Conversely DIA's return on investments is considerably higher in emerging markets than in Iberia driven by lower capital
expenditures and higher asset rotation.
As the company's sales continue to grow in these markets, we expect that profitability will continue to gradually improve. After a 20
basis points increase in DIA's ‘adjusted’ EBITDA margin (as calculated by the company) in emerging markets in 2014, the company
improved its margin by an additional 30 basis points in 2015 to 3.4%.
WEAKER FINANCIAL PROFILE AS A CONSEQUENCE OF ACQUISITIONS AND SHARE BUY-BACKS
DIA’s key credit ratios weakened in 2015 driven by (1) the purchase of the 144 Eroski stores for EUR135.3 million; (2) the margin
dilution effect of the El Arbol and Eroski stores acquisitions; and (3) the EUR200 million of share buy-backs that took place during the
year.
The company’s Moody’s-adjusted leverage rose to 3.6x at the end of FY2015 (2014: 2.6x), led by a EUR563 million increase in gross
financial debt to EUR1,295 million and an increase of the capitalised operating lease liabilities (using a 5x rent expense multiple) by
EUR272 million to EUR1,534 million owing to higher rent expense commitments, while DIA’s Moody’s-adjusted EBITDA remained
largely unchanged. The retained cash flow/net debt metric also deteriorated significantly, decreasing to 19.1% in 2015 from 32.8% a
year earlier, mainly driven by the aforementioned increase in debt and the cash outflows related to the integration and restructuring of
El Arbol and the Eroski stores.
Exhibit 3
Reconciliation Of DIA's Moody's Adjusted Debt As Of FY2015
Source: Moody's Financial Metrics
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Exhibit 4
Reconciliation Of DIA's Mooy's Adjusted EBITDA As Of FY2015
Source: Moody's Financial Metrics
DIA's Q1 2016 results were heavily impacted by negative foreign-exchange movements which were driven mainly by the depreciation
of the Argentine peso, which decreased by more than 40% to the Euro at the end of Q1 2016 compared to the same period last year.
The company’s sales rose by 10.5% in local currency to EUR2,760 million in Q1 21016, with all five geographic regions registering
positive growth. However, large negative currency movements caused a negative translation effect of EUR360 million leading to a
year-on-year sales decline of 3.9% to EUR2,400 million. The company’s ‘adjusted’ EBITDA margin increased to 5.8% from 5.6% in Q1
2015, driven entirely by the 0.2% margin expansion in emerging markets, as the margin in Iberia was flat at 7.5%.
Absent any material acquisition, we believe that DIA's financial metrics will improve in 2016 as a result of debt reduction driven
by incremental free cash flow from (1) lower capital expenditures; (2) higher working capital inflow as outflows which occurred in
2015 related to El Arbol reverse over time; (3) the use of deferred tax assets related to El Arbol, which reduces the effective tax bill
considerably; and (4) the company incurring lower restructuring costs.
Liquidity Analysis
DIA has a solid liquidity position supported by a cash balance of EUR107 million as of 31 March 2016, recurring cash flows from
operations and access to two syndicated revolving credit facilities (RCF), with a total volume of EUR700 million. The EUR400 million
RCF matures in 2019. In addition, DIA signed in April 2015 a three-year (plus two one-year extension options) EUR300 million RCF
that replaced the previous EUR350 million RCF signed in 2011. At the end of Q1 2016, DIA had drawn EUR100 million under the two
RCFs. The syndicated RCFs are subject to a financial covenant: adjusted net debt to ‘adjusted’ EBITDA of no more than 3.5x. DIA's
adjusted net debt to adjusted EBITDA was 2.6x as of December2015 and we expect that the company's covenant headroom will
remain comfortable going forward.
In addition to its revolving credit facilities, DIA has access to various other committed short-term credit facilities, which are used to
fund its day-to-day requirements in the areas where it operates. DIA’s liquidity profile improved in April 2016 when the company
issued a EUR300 million 5-year note; the proceeds from the issuance were primarily used to repay the bilateral credit bank facilities
that were due to expire i 2016 and 2017, thereby extending considerably the average weighted maturity of DIA’s debt.
DIA's liquid resources compare favourably with the much improved debt maturity schedule following the EUR300 million bond
issuance. Besides short-term debt of EUR400 million at the end of Q1 2016, DIA has no material debt repayments until the EUR500
million bond matures in 2019. For 2016 we expect that funds from operations will remain at least stable at the level of EUR408
million achieved in 2015 but that cash flow from operations (CFO) will improve substantially driven by largely neutral working capital
movements compared with an outflow of EUR150 million in 2015. Accordingly, absent any acquisitions or share buy-backs, we expect
that CFO will largely cover capital expenditures of around EUR300 million and dividend payments of around EUR120 million resulting
in neutral free cash flow in 2016.
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MOODY'S INVESTORS SERVICE
Profile
Headquartered in Madrid, Spain, Distribuidora Internacional de Alimentacion SA (DIA, S.A.) is a leading food discount retailer operating
under three different formats: (1) discount stores, the largest business unit, representing 78% of DIA’s total sales; (2) Clarel stores,
with a share of 15% of total sales and with a focus on health and beauty, household and personal care products; and (3) Supermarkets
which are specialised in fresh produce with 7% of total sales. Outside of its main markets of Spain and Portugal, DIA also operates in
Argentina, Brazil and China.
In 2015, DIA had a total of 7,718 stores and its net sales grew by more than 12% to reach EUR8,925 million. This was partly owing to
the good progress in integrating more than 400 stores from the purchase of El Arbol in November 2014, as well as the acquisition of
144 supermarkets from Eroski in April 2015. The company has a mixed development strategy based on the opening of both whollyowned stores and franchise stores. At year-end 2015, DIA had around 3,700 franchised stores globally, equivalent to 48% of the total
store estate.
Rating Methodology and Scorecard Factors
We used Moody's Global Retail Industry rating methodology (published in June 2011) to assist in our assessment of DIA's credit quality.
On the basis of DIA's 2015 financial statements (including our standard adjustments), the grid-indicated rating is Ba1, one notch below
the issuer rating assigned to the company. The 12-18 months forward-looking grid, which entails our expectations of stronger key
credit metrics in 2016 and 2017 maps to a Baa3 rating.
Exhibit 5
Rating Factors
DIA
[1] All ratios are based on 'Adjusted financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations
[2] As of 12/31/2015
[3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures
Source: Moody's Financial Metrics
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MOODY'S INVESTORS SERVICE
Ratings
Exhibit 6
Category
DISTRIBUIDORA INTERNACIONAL DE
ALIMENTACION
Outlook
Issuer Rating -Dom Curr
Senior Unsecured -Dom Curr
Moody's Rating
Positive
Baa3
Baa3
Source: Moody's Investors Service
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MOODY'S INVESTORS SERVICE
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Distribuidora Internacional de Alimentacion: Update Following Q1 2016 Results
CORPORATES
MOODY'S INVESTORS SERVICE
Contacts
Sven Reinke
VP-Sr Credit Officer
[email protected]
10
4 July 2016
CLIENT SERVICES
44-20-7772-1057
Marina Albo
Managing Director
[email protected]
44-20-7772-5365
Americas
1-212-553-1653
Asia Pacific
852-3551-3077
Japan
81-3-5408-4100
EMEA
44-20-7772-5454
Distribuidora Internacional de Alimentacion: Update Following Q1 2016 Results