OREANDA-NEWS. Fitch Ratings has affirmed Wal-Mart Stores, Inc.'s (Walmart) Long-term Issuer Default Rating (IDR) at 'AA' and Short-term IDR and commercial paper (CP) ratings at 'F1+'. The Rating Outlook is Stable.

KEY RATING DRIVERS

Walmart's ratings reflect its substantial scale, dominant market position in North America, low cyclicality, meaningful free cash flow (FCF; CFO less capex less dividends), and relatively steady financial leverage, despite a history of partially financing share repurchases with debt. Walmart's success is enabled by its significant buying power, everyday low-price strategy, broad selection of grocery and general merchandise, and operating efficiency.

These factors are balanced by the negative impact that the continued pressure on low-income consumers, competition from hard discounters, dollar stores, and on-line retailers, and low inflation is having on comparable store sales (comp) performance. Key rating drivers include the on-going comp performance and market share trends, near-term pressure on operating income and margins, and the maintenance of relatively stable credit metrics.

Gradually Improving Comps: Walmart's strategy to improve comps includes continuing to lead on price, enhancing merchandise assortments, and investing in store labor and e-commerce to further improve its competitiveness and the customer shopping experience. Fitch believes Walmart is making progress with its efforts, as comps for Walmart U.S. have been positive for four straight quarters; rising 1.5% in the quarter ended July 31, 2015, due mainly to traffic which increased 1.3%. Walmart U.S. comps were relatively flat at 0.5% for the year in 2014, after declining 0.6% for the year in 2013. Fitch expects comps to approximate 1%-2% over the next 24 months and views comp growth above 2% as optimistic given Walmart's existing market penetration and the increased price competitiveness of dollar stores and supermarkets, many of which have narrowed their price gap to Walmart.

Near-term Margin Pressure: Fitch expects Walmart's EBITDA margin to fall below 7% by 2016, down from 7.5% in 2014 as the company continues to invest in labor in the U.S. and e-commerce worldwide. Walmart invested more than \\$1 billion to raise the minimum wage for U.S. associates to \\$9/hour in April and plans to increase it to at least \\$10/hour by February 2016. The company also added new department manager positions to improve customer service. Pharmacy reimbursement pressure along with increased inventory shrink are also pressuring margins in the U.S. Operating margins at Walmart U.S. contracted 80 basis points (bps) to 6.6% during the six months ended July 31, 2015, after narrowing 40 bps to 7.4% in 2014.

Stable Credit Metrics: Walmart has maintained relatively stable credit metrics, even during periods of soft sales and margin pressure, and debt-financed share repurchases. Adjusted debt/EBITDAR has remained around 2x and EBITDAR/interest plus rents in the 7x-8x range over the past five years. For the LTM period ended July 31, 2015, total adjusted debt/EBITDAR was 1.9x and EBITDAR/interest plus rents was 6.9x. Fitch expects Walmart's leverage to remain in line with historical levels over the next 24-36 months. Total debt was \\$49.1 billion at July 31, 2015, down from \\$56.6 billion at Jan. 31, 2014.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Walmart include:

--Total revenue is flat in 2015 (fiscal year ended January 2016) as an approximate 2% increase in retail square footage and 1% comp growth is offset by a negative 3% impact from currency; thereafter, revenue grows at 3% annually with comps up 1.5%.
--EBITDA margin declines 50 bps to 7% in 2015, an additional 30 bps in 2016, and then expands slightly thereafter.
--FCF after dividends approximates \\$5 billion- \\$6 billion annually.
--Adjusted leverage approximates 2x over the forecast horizon, with EBITDA growth offset by increased debt levels to fund share buybacks.

RATING SENSITIVITIES

Positive Rating Action: An upgrade is unlikely, given the rating is currently at the high end of the rating spectrum and fully captures the company's financial and qualitative strengths.

Negative Rating Action: Future developments that may, individually or collectively, lead to negative rating action include persistently weak comp store sales, higher than expected margin pressure, or adjusted leverage sustained above the 2x range due to debt-financed share buybacks concurrent with weak operating performance.

LIQUIDITY

Walmart had over \\$17 billion of liquidity including revolver availability and readily available cash. Fitch defines readily available cash as reported cash, which totalled \\$5.8 billion at July 31, 2015, less overseas cash of \\$1.2 billion and operational cash of \\$650 million. Walmart has an undrawn \\$9 billion 364-day revolver expiring in June 2016 and an undrawn \\$6 billion revolver expiring in June 2020, which back up its \\$20 billion CP program. Fitch expects Walmart to generate FCF of \\$5 billion-\\$6 billion annually, in line with its historical average, over the next several years.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Wal-Mart Stores, Inc.
--Long-term Issuer Default Rating (IDR) at 'AA';
--Senior unsecured debt at 'AA';
--Bank credit facility at 'AA';
--Short-term IDR at 'F1+';
--Commercial paper at 'F1+'.

The Rating Outlook is Stable.