Dive Brief:
- S&P Global Ratings on Friday revised its outlook for Staples to stable and affirmed its B- issuer credit rating. S&P said Staples is positioned to successfully refinance upcoming debt due to improved performance and market conditions.
- Staples in April sold its DEX Imaging business to private equity firm Gamut Capital Management. S&P characterized the move as “modestly credit positive,” saying it will generate cash for debt repayment and enable Staples to streamline operations and focus on the core business. Terms of the deal weren’t disclosed.
- S&P expects credit metrics at the privately held office supplies retailer to improve this year, with debt to EBITDA likely strengthening. S&P said Staples is lowering the risk on its balance sheet “while navigating through secular headwinds that a substantial portion of its business faces.”
Dive Insight:
Staples’ adjusted EBITDA margins of 9% for fiscal year 2023 beat expectations, partly due to sales initiatives and cost-cutting measures, according to S&P. But weaker demand for certain products is hurting the company’s top line, S&P analysts Andy Sookram and Pasha Azadmard said.
“We believe demand declines in core paper and printing products may accelerate because the level of employees returning to the office has been fewer than originally expected,” Sookram and Azadmard said. “Further, offices are likely to use less paper-based processes and opt for more digitized tools when employees return, so we do not believe office printing will return to pre-pandemic levels.”
S&P Global expects Staples’ revenue to remain almost flat for FY 2024. For fiscal year 2025, S&P forecasts that top-line revenue will grow in the low-single-digit percent area. The analysts attribute that to an anticipated improved demand for technology products and a product shift mix. The analysts said the expectations for modest EBITDA expansion will lead to further credit metrics improvement.
“The stable outlook on Staples reflects our expectation that the refinancing transaction will be completed, and credit metrics will improve this year due to debt reduction, as well as better profits and cash flows as envisioned in our base-case scenario,” S&P’s analysts said.
Staples’ rating could lower again if the company's capital structure becomes unsustainable due to unanticipated performance weaknesses from competitive pressures; if Staples can’t complete the proposed transaction, leading to a return of debt financing risks; or if business initiatives fail to drive top line or margin growth, S&P said.
Staples acquired DEX in 2019 – also under undisclosed terms – and grew the business through mergers and acquisitions, Gamut Capital said in an April announcement.
