Moody’s Investors Service changed the outlook for Target Corporation to stable from positive due to the discounter’s below-plan fourth-quarter results and deteriorating credit metrics.
All other ratings were affirmed, including the A2 long-term issuer rating, A2 senior unsecured notes ratings, (P)A2 senior unsecured shelf rating, A2 senior unsecured bank credit facility rating, and Prime-1 (P-1) short-term commercial paper rating.
“The change in outlook to stable from positive acknowledges Target’s weaker-than-expected operating performance and credit metrics. Although we expect an improvement in Target’s operating performance and metrics in 2023, there is considerable macroeconomic uncertainty and consumer stress that could prove difficult to navigate and we do not expect credit metrics to reach levels that warrant a higher rating”, Moody’s Vice President Mickey Chadha stated. “The affirmation of the A2 senior unsecured rating reflects Target’s strength as a strong multi-channel retailer, its market share gains over the past three years and our expectation that it will maintain a strong quantitative profile,” Chadha further stated.
Moody’s said in its analysis, “Target’s A2 senior unsecured rating is supported by its execution ability and formidable market position as evidenced by its meaningful retention of the explosive revenue growth that occurred during 2020. Target’s revenues have grown by about $30 billion in the last three years as it has gained market share. Other factors include its very strong liquidity, its strong and ever-growing suite of private and exclusive brands, and its substantial online business leveraging its large store base. However, changing consumer spending patterns due to unprecedented inflation and a shift in consumer spending in 2022 created a mismatch between demand and inventory levels. The combination of higher input costs along with increased promotions to lower inventories resulted in significant margin compression, lowering profitability and weakening credit metrics. As a result, Target’s credit metrics are weaker than historically, with debt/EBITDA of 2.8 times, EBIT/interest at 6.8 times, and retained cash flow/net debt at 28.9 percent on January 28, 2023. We expect Target’s leverage to improve over the next 12-18 months and revert to a normalized level of around 2.0 times as the company focuses on efficiencies, inventory levels and freight costs normalizing, thereby improving margins. Target’s credit profile is also supported by its long-standing predictable financial strategy, which allows it to execute its multi-year strategic shift with no meaningful credit impact. The company has not done any material share repurchases in the last three quarters, and we do not expect them to resume until credit metrics and profitability improve materially. Target’s credit profile also considers the risks inherent in its focus on fashionable merchandise within a highly competitive retail environment.
“The stable outlook reflects our expectation that Target’s operating performance, including margins and credit metrics, will improve materially in the next 12 to 18 months, that its financial strategies will remain conservative and liquidity will remain robust.”
Photo courtesy Target
