DBRS Morningstar Confirms Walmart Inc. at AA With a Stable Trend, and Discontinues and Withdraws the Senior Unsecured Debt Rating

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Walmart Inc. (Walmart or the Company) at AA with a Stable trend. DBRS Morningstar also discontinued and withdrew its rating on Walmart’s Senior Unsecured Debt. The discontinuation does not reflect any change in DBRS Morningstar’s view of the Company’s credit quality. While DBRS Morningstar acknowledges the current near-term headwinds given decreased consumer purchasing power, the rating confirmation and Stable trend reflect DBRS Morningstar's view that Walmart is well positioned to navigate these challenges within the context of the current AA rating category. Walmart's ratings continue to be supported by its size, dominant market position, and relative resilience to economic cycles while also considering the competitive landscape and mature nature of some of its core markets.

DBRS Morningstar expects Walmart's earnings profile to remain relatively stable over the medium term and continue to underpin the current rating category. DBRS Morningstar forecasts the Company's revenue to grow in the low single digits to $627 billion for the fiscal year ended January 2024 (F2024) and to $650 billion in F2025 from $611 billion in F2023, primarily driven by price increases that are partially offset by volume moderation, especially for general merchandise or more discretionary categories. DBRS Morningstar anticipates EBITDA margins to experience some pressure but remain relatively flat in F2024 as inflationary pressures on input costs and higher contributions from the lower-margin food business are partially offset by lower markdowns and lapping of higher supply chain costs compared with F2023. That said, DBRS Morningstar expects EBITDA margins to improve to levels above 6.0% in F2025 as inflationary pressure eases and Walmart benefits from ongoing cost-saving initiatives and supply chain investments. As such, DBRS Morningstar expects Walmart's EBITDA to remain relatively flat at around $35 billion in F2024 but grow to $37 billion in F2025.

DBRS Morningstar believes Walmart's financial profile should remain appropriate for the current rating category, despite a modest increase in leverage and pressure on interest coverage ratios. DBRS Morningstar expects Walmart's cash flow from operations (before changes in working capital) to improve to more than $28 billion in F2024 from $26 billion in F2023, benefitting from lower cash outflow on legal and restructuring charges incurred in F2023, and further increase to $31 billion in F2025 with growth in operating income. DBRS Morningstar expects capital expenditures and dividend outlay to remain relatively flat between $16 billion and $17 billion and approximately $6 billion, respectively. As such, DBRS Morningstar forecasts free cash flow (before changes in working capital) to be more than $6 billion in F2024 and grow to $9 billion in F2025, which DBRS Morningstar believes the Company, will use primarily, potentially in combination with some incremental debt, for share repurchases. Over the medium term, DBRS Morningstar expects any improvement in leverage to be primarily driven by EBITDA growth.

Should credit metrics weaken for a sustained period (i.e., lease-adjusted debt-to-EBITDA increase above 2.0 times) as a result of either weaker-than-expected operating income and/or more aggressive financial management, the ratings could be pressured. Conversely, although highly unlikely, DBRS Morningstar could take a positive rating action should the Company’s business risk profile meaningfully strengthen, combined with a commensurate improvement in credit metrics on a normalized and sustainable basis.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology applicable to the rating is Global Methodology for Rating Companies in the Merchandising Industry (https://www.dbrsmorningstar.com/research/402334; September 2, 2022).

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process for this rating action.

DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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