NEW YORK — Fitch Ratings on Friday affirmed its ratings on Safeway’s debt, but revised its outlook from "stable” to “negative” based on Fitch’s expectation that soft sales and operating results will continue amid relatively high leverage.
“The negative outlook reflects Safeway's weak traction on identical store sales and soft operating trends, as Safeway and other traditional supermarkets have ceded market share to discounters and other alternative formats over the past few years,” Fitch said in a statement. “The outlook also considers Safeway's relatively high financial leverage due to leveraged share repurchase activity over the past year, and Fitch's expectation that it may remain above its historical year-end level of around [three times earnings] beyond 2013.”
Fitch rates Safeway’s long-term default rating at BBB- — at the low end for companies with generally good credit quality — and its short-term default rating at F3, indicating “fair.”
Read more: Safeway Q3 Sales Dip on Genuardi's Sale
Fitch said its affirmed ratings reflect Safeway's position as the No. 2 traditional supermarket chain in the U.S., its updated store base, and healthy free cash flow.
“While Safeway has seen some stabilization in its market share over the past two quarters, and the 'Just for U' digital marketing effort and food price inflation should support some traction to its business in the near term, Fitch remains concerned about the company's overall competitive positioning,” the agency added.
Read more: Safeway Cites Just for U Gains
It expects nonfuel identical-store sales will trend around 1% to 2% over the next year and said it was too early to determine whether Safeway’s Just for U and health and wellness initiatives would drive sales gains above 2%.
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