Fitch Ratings on March 18 issued a rating of A- to Target Corp.'s proposed issuance of unsecured notes due 2029.
Fitch said it expects the issuance to reach up to $1 billion, with the company using the proceeds for general corporate purposes, including the refinancing of its $1 billion of unsecured notes due in June.
The agency based the A- rating on Target's improved comparable store sales, the expected stabilization of its EBITDA margin, its positive free cash flow, and its lower debt and stable leverage.
Fitch anticipates the general merchandiser to see comparable sales growth of 1% to 2% over the next two to three years, driven by improvements to its omnichannel model. "Revenue, which was $75 billion in 2018, could grow toward around $80 billion by 2021 on modestly positive comps and around 30 new stores per year on the current 1,844 store base," the rating agency said. However, it also noted that a big part of Target's product categories is at risk of online intrusion.
Fitch added that it expects the retailer's EBITDA margins to move toward mid-8% over the next two to three years. If the company maintains a neutral working capital with capital expenditures trending near $3.5 billion, the agency anticipates that Target will generate about $600 million of free cash flow annually. It also expects the general merchandiser's total adjusted debt to remain near 1.9x over the next two to three years.
Fitch said it may upgrade its rating to an A if Target sustains comparable sales growth of about 2% or higher, with an EBITDA margin of above 10%, and maintains its total adjusted debt under 2x. On the other hand, it may downgrade its rating if the retailer posts negative comparable sales consistently, lets its EBITDA margins fall to the mid-8% range and if its total adjusted debt nears the mid-2x range.