S&P Global Ratings affirmed Decathlon’s ‘A-2’ short-term credit rating on strong operating performance. S&P said consistent outperformance in 2021 and the first half of 2022 had positioned Decathlon favorably as market headwinds arise.
The rating agency said Decathlon had consistently outperformed its forecasts, following its strategy to increase turnover and improve profitability and cash flow. Its focus on costs and positioning as a mid-market sports goods player, that benefits from consumer downtrading, is expected to enable the company to weather economic headwinds to remain profitable and cash generative.
S&P said in its analysis:
“The group ended 2021 with revenue growth of 20 percent, surpassing the global market’s 14 percent rebound as demand supported higher pricing. This led to S&P Global Ratings-adjusted EBITDA margin improvement of 60 basis points (bps) to 14.4 percent. Subsequent strong cash generation enabled the group to pare down debt to €838.5 million in 2021 from about €1,400 million in 2020 and to accumulate cash worth €1.2 billion, thereby halving adjusted debt to EBITDA to 0.5x in 2021 from 1.0x in 2020. The group continued to benefit from robust demand in the first half of 2022. As such, we think Decathlon has built a sufficient cushion in its balance sheet as it enters a recessionary period.
“Decathlon is favorably positioned to capture customers seeking cheaper quality sports goods as inflation erodes real income. We do not think budget tightening will necessarily alter the maintenance or adoption of sports activity because we view sports as a regular lifestyle choice that is consistent with the increasing public interest in health and nutrition. Rather, households are more likely to calibrate their budgets in order to accommodate their sports activities, with consumers becoming more selective on purchases based on price. Since Decathlon’s own-brand products deliver decent quality corresponding to its affordable price points, it stands to benefit from reducing volumes of branded product sales, such as Adidas and Nike. Decathlon’s goods are already cheaper, so we think the group can afford to pass on some inflation without leading to material demand destruction. That said, Decathlon could still face volume declines from its customers in the lowest income bracket, who are more sensitive to price changes. We forecast 2022 sales will continue to post strong growth at 12 percent to 15 percent, with inflation passed through leading to sales growth of 3 percent to 6 percent in 2023 and 1 percent to 4 percent in 2024.
“Credit metrics have sufficient headroom at the ‘A-2’ rating level to absorb the effects of inflation thanks to efficient working capital management and limited capital expenditure (CAPEX).In our base case, we forecast that gross margin will reduce to about 51 percent in 2022 and 50 percent in 2023, on the back of a general increase in input and logistics costs. We also integrate an increase in salaries that would affect 2023 profitability. Our revised forecasts reflect that the adjusted EBITDA margin will be about 12 percent to 14 percent in 2022 and decline to 11 percent to 13 percent in 2023 and thereafter, near historical levels. That said, adjusted debt to EBITDA will remain at 0.3x to 0.6x in the next 12-to-24 months thanks to the group’s strong cash generation. Notwithstanding lease payments of about €450 million per year, equivalent lease debt of about €1.6 billion, we estimate free operating cash flow after leases will be €820 million in 2022 and €570 million in 2023, given the company’s focus on optimizing working capital and limited CAPEX as it concentrates more on developing its e-commerce capabilities and less on store openings. Earnings before interest, tax, debt, amortization, and rent (EBITDAR) interest and lease coverage will also remain healthy at above 4x during the forecast period. We, therefore, consider that the short-term rating is comfortably placed at the ‘A-2’ level.
“The risks of refinancing short-term debt and from the rise in interest rates are not material but constrain the rating. Regardless of the volatility in the capital markets, we do not perceive refinancing risk on Decathlon’s short-term debt. Since Decathlon is part of a larger conglomerate, Association Familial Mulliez, we consider the group’s relationship with banks as solid, which will allow it to continue rolling over its debt. Furthermore, we think the group can repay outstanding debt as a last recourse since it has a considerable cash balance. That said, we think refinancing risk could materialize if shareholder remuneration becomes more substantial or operational underperformance leads to reduced cash generation such that cash balances are exhausted, given the lack of diversity in its financing. We also note that similarly rated peers have more diversity in their financial instruments, notably with long-dated maturities. Regarding its interest rate exposure, our estimates already integrate an increase in the effective interest rate by 50 bps this year. Applying an additional 100 bps as a sensitivity adjustment to our base case results in a modest reduction in cash flow and a negligible effect on the leverage and coverage ratios.”
