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Fitch: HY Consumer Co's Adapt to Structural Changes with M&A, Cost Savings
July 5, 2017 / 8:46 PM / 4 months ago

Fitch: HY Consumer Co's Adapt to Structural Changes with M&A, Cost Savings

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: U.S. High-Yield Consumer Handbook here NEW YORK, July 05 (Fitch) M&A and cost-saving initiatives are set to continue for U.S. high-yield consumer companies as they face structural issues in the industry including changing consumer preferences, distribution channel shifts, retail competition and consolidation, and rising minimum wages, according to the fifth edition of Fitch Ratings' U.S. High-Yield Consumer Handbook. Weak organic growth and a desire for diversification is driving M&A, while rising minimum wages and the effects of restaurant refranchising are driving productivity and general and administrative cost reductions. The sector has few short-term financing needs due to significant refinancing and recapitalization activity over the past 12 months. Few companies in Fitch's sample have upcoming maturities within the next two years that are viewed as not manageable, because of companies' adequate liquidity and financial flexibility. In addition, the sector has more companies on a positive trajectory (Spectrum, Pinnacle, Aramark, US Foods Holding Co, Weight Watchers) than negative (Revlon and Avon). Consumer Products Changes in the retail sector are having the biggest impact on the consumer products sector. "Consolidation within the traditional retail sector has increased retailers' bargaining power," says Ellen Itskovitz, Senior Director, U.S. Corporates. "This, combined with a heightened competitive environment, has led to further declines in retail inventory levels and additional pricing pressure for consumer product companies. Product innovation and further diversification of distribution channels can help consumer companies combat these challenges." Walmart is the largest retail customer for most of the high-yield consumer companies Fitch analyzes. It uses its scale as an advantage in continuing to pressure its supplier base for better terms and lower prices, especially in the increasingly competitive retail environment. Acquisitions have been and are expected to continue to be an important growth engine for high-yield consumer companies. These acquisitions often reflect key strategic objectives for the companies such as geographic expansion, new product platforms, and enhancing social media / online expertise. The online channel is increasingly important for growth and several companies have announced acquisitions or new initiatives in that space. Packaged Foods Consumer preferences for fresh, natural, organic and specialty products are pressuring volumes of traditional packaged foods. "With volumes down, acquisitions will be pervasive as companies seek to diversify their portfolio of products and brands that drive growth," says Itskovitz. Distribution channels and pricing are also in focus due to two pending competitive threats: Amazon's acquisition of Whole Foods and the arrival of European discount grocers. The Whole Foods transaction provides Amazon with a hard-to-replicate distribution and supply chain infrastructure that will support home deliveries. This could eventually drive down prices, as would an American expansion by Aldi or Lidl, who are already known for their low prices in Europe. Restaurants and Food Service Restaurant industry sales growth has slowed due to less aggressive menu price increases and weak traffic. However, revenue and EBITDA growth trends across individual companies vary. The casual dining segment remains weak versus quick-service with national chains potentially losing share to stronger peers and independent restaurants. Heightened competition is forcing some companies to reconsider their value propositions with enhanced food quality and larger portions. These efforts could add additional pressure to margins with productivity initiatives providing a modest offset. "The challenging operating environment will continue to separate the winners from the losers," says Carla Norfleet Taylor, Senior Director, U.S. Corporates. "Consumers' tastes and preferences are changing and restaurant companies must be able to quickly adjust." Corporate actions, including acquisitions, spinoffs, recapitalizations to return capital to shareholders and IPOs, have been widespread among restaurant and foodservice companies. YUM! Brands, Inc. spun off its China operations and continues to push towards a fully franchised business model, while Restaurant Brands International, Inc. is well positioned to continue to expand internationally with its acquisition of Popeyes. Additionally, Brinker International, Inc. and YUM both recapitalized their balance sheets within the past 12 months, transitioning to high-yield credits for the second time in their histories, while US Foods Holdings Corp., which completed its IPO in 2016, and Aramark are delevering but remain open to tuck-in acquisitions. The U.S. High-Yield Consumer Handbook is a comprehensive review of the leveraged food, beverage, restaurant, and consumer products sector. Published annually, it contains both sector themes and individual credit profiles for 18 high-yield issuers with more than $70 billion of debt outstanding collectively. The full report, "U.S. High-Yield Consumer Handbook: Comprehensive Analysis of High-Yield Food, Beverage, Restaurant and Consumer Product Issuers," is available at or by clicking on the link. Contact: Ellen Itskovitz, CFA Senior Director +1-1-312-368-3118 Fitch Ratings, Inc. 33 Whitehall St New York, NY 10004 Carla Norfleet Taylor, CFA Senior Director +1-312-368-3195 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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