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S&P downgrades Carrefour ratings to BBB; outlook stable

S&P Global Ratings on March 22 lowered Carrefour SA's long-term ratings and senior unsecured debt to BBB from BBB+, saying it believes the French food retailer will struggle to improve its margins significantly in the next two years.

The rating agency said it thinks Carrefour will face heightened competition in all the markets it operates in the coming years, along with challenges brought about by the longer-term nature of its restructuring initiative.

To achieve the retailer's increased cost-saving target of €2.8 billion by 2020, Ratings estimates the company to incur additional restructuring costs in the range of €500 million to €600 million in 2019 and €200 million to €300 million in 2020. The target is part of Carrefour's strategic plan.

Ratings added that these savings might not translate to higher profitability in the short to medium term because the group will need to continue cutting prices to ensure in-store traffic, volumes and market shares.

It also noted the company's weaker-than-expected 2018 results and said that its adjusted EBITDA margin after restructuring charges will likely stay below 5% in 2019 and discounted cash flow to debt to remain below 10%.

The agency expects Carrefour to see low single-digit revenue growth and moderate improvement in adjusted EBITDA margin in the next two years. It said an upgrade is possible if the transformation plan puts the company's adjusted EBITDA margin above 5% and improve its position in its main markets to the extent that adjusted funds from operation to debt stays above 30% while discounted cash flow to debt remains around 10%.

However, it can further lower Carrefour's ratings if adjusted EBITDA margin does not improve and remains below 5% over the medium term, or if its market share in France and revenue growth continues to decline.

Ratings affirmed Carrefour's short-term rating of A-2 and said the outlook remains stable to reflect the company's sound execution of its transformation program and its credit-supportive financial policy.

The downgrade from Ratings comes a week after Moody's revised its outlook on Carrefour to negative from stable.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.