Investing.com -- S&P Global Ratings has revised the outlook for retail company FNAC Darty S.A. to stable from negative, following a strong performance in 2024 and the acquisition of Italian electronics retailer Unieuro. The rating agency has also affirmed the ’BB+’ long-term issuer credit ratings and rating on the group’s debt.

In 2024, FNAC Darty’s stand-alone operating performance improved in line with expectations, with a reported revenue increase of 0.7%, an adjusted EBITDA margin of 6.6%, and free operating cash flow (FOCF) after leases at €118 million ($130.5 million). The integration of Unieuro has expanded Fnac’s scope and geographic diversification, reducing its reliance on the French market and to some extent, mitigating the seasonality of its business model.

Despite the acquisition temporarily impacting the group’s credit metrics due to Unieuro’s lower profitability and higher weight of operating leases, S&P Global Ratings believes Fnac could quickly restore its credit metrics through an improvement in the combined group’s operating performance and its conservative financial policy.

Unieuro, holding a 17% market share in Italy, reported over €2.6 billion ($2.87 billion) of revenue and about €130 million ($143.7 million) of EBITDA in the fiscal year ended February 28, 2024. The acquisition expands Fnac’s size to about €10.5 billion ($11.6 billion) revenue and about €665 million ($735.5 million) S&P Global Ratings-adjusted EBITDA in 2024, on a 12-month pro forma basis. This integration also reduces Fnac’s reliance on France, which now represents about 62% of total revenue, compared with about 83% in 2023.

Despite difficult trading conditions in the first half of 2024, Fnac’s operating performance improved, with reported revenue up by 0.7%. The group benefited from a reduction of inflation and an improvement in consumer confidence, thanks to its premium placement and diverse products and services offering and its omnichannel positioning. The group’s savvy working capital management freed up €118 million ($130.5 million) of FOCF after leases, about €20 million ($22.1 million) above previous expectations.

The acquisition of Unieuro will temporarily dilute the group’s profitability, given its higher reliance on promotional activity. However, Fnac’s strong FOCF after leases generation will allow the group to retain its net cash position at year-end 2025 and maintain a level of financial flexibility that is commensurate with the rating level.

Fnac’s management remains committed to a net leverage target of about 1.5x (about 2x in adjusted terms) at the year-end and expects to achieve this in the next three years. The financial policy commitment supports the current ’BB+’ long-term issuer credit rating on Fnac.

The stable outlook reflects S&P Global Ratings’ expectation that Fnac will successfully integrate Unieuro, achieve synergies in line with the planned budget, reinforce its sales and EBITDA, and benefit from a solid market position in the consumer electronics and domestic appliances industries. The agency forecasts S&P Global Ratings-adjusted leverage at about 2.5x and positive FOCF after leases in excess of €100 million ($110.6 million) per year over 2025-2026.

S&P Global Ratings could lower the rating if weaker-than-expected operating performance results in reported FOCF after leases below €100 million ($110.6 million), adjusted debt to EBITDA approaching 3x, or adjusted funds from operations (FFO) to debt declining below 30%. This could stem from strains on consumer discretionary spending amid a very competitive landscape, or any direct substantial impact from global supply chain disruptions due to geopolitical tensions.

Although unlikely over the near term, an upgrade could be considered if Fnac meaningfully increased its service offerings and other product initiatives that provide more stable revenue, reducing intrayear working capital volatility. This would result in cash generation more evenly balanced between quarters and would allow the group to materially improve the EBITDAR coverage ratio, reflecting enhanced financial flexibility.

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