Rating Methodologies - Retail-Industry - 04may18

MAY 4, 2018 CORPORATES
RATING Retail Industry

METHODOLOGY
This rating methodology replaces “Retail Industry”, last revised on October 28, 2015. We have
updated some outdated links and removed certain issuer-specific information.
Table of Contents:
SUMMARY 1
ABOUT THE RATED UNIVERSE 3
Summary
ABOUT THIS RATING METHODOLOGY 3
ASSUMPTIONS, LIMITATIONS AND RATING
CONSIDERATIONS THAT ARE NOT This rating methodology explains our approach to assessing credit risk for companies in the retail
COVERED IN THE SCORECARD 11 industry globally and provides general guidance that helps companies, investors, and other
OTHER RATING CONSIDERATIONS 12 interested market participants understand how qualitative and quantitative risk characteristics are
APPENDIX A: RETAIL METHODOLOGY likely to affect rating outcomes for companies in this industry. This document does not include an
FACTOR SCORECARD 13 exhaustive treatment of all factors that are reflected in our ratings but should enable the reader
APPENDIX B: A BRIEF OVERVIEW OF to understand the qualitative considerations and financial information and ratios that are usually
THE RETAIL INDUSTRY 16 most important for ratings in this sector. 1
APPENDIX C: SOME KEY ISSUES FOR THE
RETAIL INDUSTRY OVER THE
This report includes a detailed scorecard. The scorecard is a reference tool that can be used to
INTERMEDIATE TERM 17
approximate credit profiles within the retail sector in most cases. The scorecard provides
APPENDIX D: CONSIDERATIONS FOR
RATING AUTO DEALERS 18 summarized guidance for the factors that are generally most important in assigning ratings to
APPENDIX E: ONLINE SALES 19 companies in the retail industry. However, the scorecard is a summary that does not include every
MOODY’S RELATED PUBLICATIONS 20
rating consideration. The weights shown for each factor in the scorecard represent an
approximation of their importance for rating decisions but actual importance may vary
Analyst Contacts: substantially. The scorecard-indicated rating is not expected to match the actual rating of each
company.
NEW YORK +1.212.553.1653
Charlie O’Shea +1.212.553.3722

Vice President - Senior Credit Officer
charles.o’shea@moodys.com
Janice Hofferber +1.212.553.4493
Managing Director – Corporate Finance
janice.hofferber@moodys.com
>> contacts continued on page 21
1 This update may not be effective in certain jurisdictions until certain requirements are met.
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The scorecard contains four factors that are important in our assessments for ratings in the retail sector:
1. Scale
2. Business Profile
3. Leverage and Coverage
4. Financial Policy
Some of these factors also encompass a number of sub-factors. An issuer’s scoring on a particular scorecard
factor or sub-factor often will not match its overall rating.
This rating methodology is not intended to be an exhaustive discussion of all factors that our analysts
consider in assigning ratings in this sector. We note that our analysis for ratings in this sector covers factors
that are common across all industries such as ownership, management, liquidity, corporate legal structure,
governance, and country-related risks which are not explained in detail in this document, as well as other
factors that can be meaningful on a company-specific basis. Our ratings consider these and other qualitative
considerations that do not lend themselves to a transparent presentation in a scorecard format. The
scorecard used for this methodology reflects a decision to favor a relatively simple and transparent
presentation rather than a more complex scorecard that would map scorecard-indicated ratings more
closely to actual ratings.
Highlights of this report include:

» An overview of the rated universe
» A summary of the rating methodology
» A description of factors that drive rating quality
» Comments on the rating methodology assumptions and limitations, including a discussion of rating
considerations that are not included in the scorecard
The Appendices show the full scorecard (Appendix A), a brief industry overview (Appendix B), key issues that
we believe face retailers over the intermediate term (Appendix C), detail on some of the unique factors we
consider when rating auto dealers (Appendix D), as well as the factors we consider in our evaluation of
online performance (Appendix E).
This methodology describes the analytical framework used in determining credit ratings. In some instances,
our analysis is also guided by additional publications which describe our approach for analytical
considerations that are not specific to any single sector. Examples of such considerations include but are not
limited to: the assignment of short-term ratings, the relative ranking of different classes of debt and hybrid
securities, how sovereign credit quality affects non-sovereign issuers, and the assessment of credit support
from other entities. 2
This publication does not
announce a credit rating
action. For any credit
ratings referenced in this
publication, please see the
ratings tab on the
issuer/entity page on
www.moodys.com for the
most updated credit rating
action information and
rating history.
2 The methodologies covering our approach to these cross-sector considerations can be found in the Related Publications section of this report.
2 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

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About the Rated Universe
The global rated retail universe is very diverse, covering a large number of segments (e.g. grocery store
retailers, automobile retailers, specialty apparel stores, or department stores), different business models, and
a wide range of formats (e.g. "big box" retailers, or internet- or catalog-based direct-sale operators).
Accordingly, retailers globally exhibit very diverse operational and financial dynamics.
About This Rating Methodology
This report explains the rating methodology for retailers in six sections, which are summarized as follows:
1. Identification and Discussion of the Scorecard Factors

The scorecard in this rating methodology is comprised of four factors. Some of the factors are comprised of
sub-factors that provide further detail.
FIGURE 1
Retail Industry Scorecard
Rating Factors Factor Weighting Sub-Factors Sub-Factor Weighting
Scale 10% Revenue 10%
Business Profile 30% Stability of Product 10%
Execution and Competitive Position 20%
Leverage and Coverage 45% EBIT / Interest Expense 15%

Retained Cash Flow / Net Debt 15%
Debt/EBITDA 15%
Financial Policy 15% Financial Policy 15%

Total 100% Total 100%
2. Measurement or Estimation of Factors in the Scorecard

We explain our general approach for scoring each scorecard factor and show the weights used in the
scorecard. We also provide a rationale for why each of these scorecard components is meaningful as a credit
indicator. The information used in assessing the sub-factors is generally found in or calculated from
information in company financial statements, derived from other observations or estimated by our analysts.
Our ratings are forward-looking and reflect our expectations for future financial and operating performance.
However, historical results are helpful in understanding patterns and trends in a company’s performance as
well as for peer comparisons. We utilize historical data from recent twelve-month periods of reported
results (the calendar period might not be the same for all companies) in the scorecard. However, the factors
in the scorecard can be assessed using various time periods. For example, rating committees may find it
analytically useful to examine both historic and expected future performance for periods of several years or
more.

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All of the quantitative credit metrics incorporate Moody’s standard adjustments to the income statement,
cash flow statement and balance sheet amounts for restructuring, impairment, off-balance sheet accounts,
receivable securitization programs, under-funded pension obligations, and recurring operating leases. 3 We
may also make other analytical adjustments that are specific to a particular company.
3. Mapping Scorecard Factors to the Rating Categories

After estimating or calculating each sub-factor, the outcomes for each of the sub-factors are mapped to a
broad Moody’s rating category (Aaa, Aa, A, Baa, Ba, B, Caa, or Ca).
4. Assumptions, Limitations and Rating Considerations Not Included in the Scorecard
This section discusses limitations in the use of the scorecard to map against actual ratings, some of the
additional factors that are not included in the scorecard but can be important in determining ratings, and
limitations and assumptions that pertain to the overall rating methodology.
5. Determining the Overall Scorecard-Indicated Rating 4

To determine the overall scorecard-indicated rating, we convert each of the sub-factor scores into a numeric
value based upon the scale below.
Aaa Aa A Baa Ba B Caa Ca

1 3 6 9 12 15 18 20
The numerical score for each sub-factor is multiplied by the weight for that sub-factor with the results then
summed to produce a composite weighted-factor score. The composite weighted factor score is then
mapped back to an alphanumeric rating based on the ranges in the table below.
Scorecard-Indicated Rating
Scorecard-Indicated Rating Aggregate Weighted Total Factor Score
Aaa x < 1.5
Aa1 1.5 ≤ x < 2.5
Aa2 2.5 ≤ x < 3.5
Aa3 3.5 ≤ x < 4.5
A1 4.5 ≤ x < 5.5
A2 5.5 ≤ x < 6.5
A3 6.5 ≤ x < 7.5
Baa1 7.5 ≤ x < 8.5
Baa2 8.5 ≤ x < 9.5
Baa3 9.5 ≤ x < 10.5
Ba1 10.5 ≤ x < 11.5
3 More information about our financial statement adjustments in the analysis of non-financial corporations can be accessed using the link in the Related Publications section
of this report.
4 In general, the scorecard-indicated rating is oriented to the Corporate Family Rating (CFR) for speculative-grade issuers and the senior unsecured rating for investment-
grade issuers. For issuers that benefit from ratings uplift due to parental support, government ownership or other institutional support, the scorecard-indicated rating is
oriented to the baseline credit assessment. For an explanation of baseline credit assessment, please refer to our rating methodology on government-related issuers.
Individual debt instrument ratings also factor in decisions on notching for seniority level and collateral. The documents that provide broad guidance for these notching
decisions are our rating methodologies on loss given default for speculative grade non-financial companies and for aligning corporate instrument ratings based on
differences in security and priority of claim. The link to these and other sector and cross-sector credit rating methodologies can be found in the Related Publications section
of this report.

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Scorecard-Indicated Rating
Scorecard-Indicated Rating Aggregate Weighted Total Factor Score
Ba2 11.5 ≤ x < 12.5
Ba3 12.5 ≤ x < 13.5
B1 13.5 ≤ x < 14.5
B2 14.5 ≤ x < 15.5
B3 15.5 ≤ x < 16.5
Caa1 16.5 ≤ x < 17.5
Caa2 17.5 ≤ x < 18.5
Caa3 18.5 ≤ x < 19.5
Ca x ≥ 19.5
For example, an issuer with a composite weighted factor score of 11.7 would have a Ba2 scorecard-indicated
rating.
6. Appendices
The Appendices provide the full scorecard and also provide additional commentary and insights on our view
of credit risks in this industry.
Factor 1: Scale (10% Weight)

Why It Matters
Scale for retailers carries many benefits, from buying power with vendors to potential price leadership, both
of which can result in meaningful competitive advantages versus smaller companies.
How We Assess It for the Scorecard

Scale is measured (estimated in the case of forward-looking expectations) using total reported
revenue.
FACTOR 1
Scale (10%)
Sub-factor
Sub-Factor Weight Aaa Aa A Baa Ba B Caa Ca
Revenue 10% ≥ $100 $50 - $100 $25 - $50 $10 - $25 $3.5 - $10 $1.5 - $3.5 $0.25 - $1.5 <$0.25
(USD Billion)
Factor 2: Business Profile (30% Weight)

Stability of Product (10% Weight)
Why It Matters
In the retail industry, those companies that are characterized by selling products with relatively inelastic
demand are viewed as less vulnerable to changes in consumer preferences or competitive threats than are
companies that offer more discretionary products or products with more elastic demand.

Scorecard scoring is assessed on a qualitative basis. We consider a variety of factors in our assessment of
Stability of Product, including the performance of the company through varying economic scenarios, which
we believe is the “acid test” in determining the necessity of its products. During times of economic stress,

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consumers will naturally focus their purchases around necessary products rather than discretionary
products. Conversely, during periods of economic strength, consumers may increase their purchases of
discretionary products, and may also “up-tier” their purchases of necessities.
Execution and Competitive Position (20% Weight)

Why It Matters
A company’s competitive position and execution ability are critical as they are the primary drivers of the
company’s operating performance and quantitative credit profile.

Scorecard scoring is assessed on a qualitative basis. We take a holistic view of execution and competitive
position. Depending on the issuer, we consider a variety of elements that can include margins, market share
in its chosen geographic locations, key competitors and its relative positioning within its peer or competitive
group, online capability in product segments where it is relevant, historical performance versus forecasts,
adaptability to potentially changing consumer preferences or macroeconomic factors, and brand or
franchise strength.

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FACTOR 2
Business Profile (30%)
Sub-factor
Stability of 10% Products are Products are highly- Products are Products are necessary, Products begin to Products are moderately Products are highly Products are absolutely
Product absolute necessities necessary for day-to- moderately-necessary though deferral of exhibit discretionary discretionary, with easily- discretionary or discretionary, with
for day-to-day living day living (essential for day-to-day living, purchases possible features, with some delayed purchases within a narrowly elimination of
with virtually zero food products), with with deferral of under certain delay of purchases due certain under even mild defined niche purchases certain
demand elasticity deferral of purchases purchases unlikely macroeconomic or to macroeconomic or macroeconomic or category with under even mild
(gasoline and highly unlikely regardless of other cyclical factors, cyclical factors evident, cyclical factors, and significantly delayed macroeconomic or
prescription drugs), regardless of macroeconomic or which has been and historically historically verifiable. or eliminated cyclical factors.
with deferral of macroeconomic or other cyclical factors. historically evidenced. verifiable. Demand Demand is elastic, purchases certain Demand is highly
purchases rare other cyclical factors, Moderately inelastic Demand exhibits some exhibits clear signs of fashion risk/technological under even mild elastic, fashion risk is
regardless of which has been demand, and moderate signs of elasticity, elasticity, fashion obsolescence is acute, macroeconomic or absolute, and easily
macroeconomic or historically evidenced. levels of fashion risk or fashion risk/technological and product substitution cyclical factors. substituted by other
other cyclical factors, Highly inelastic technological risk/technological obsolescence is readily is easy. broader retailers.
which has been demand, minimal obsolescence, with obsolescence begins to evident, as is moderate Product category may
historically fashion risk, some potential for surface, as does mild potential for product be recently emergent
evidenced. technological product substitution. potential for product substitution. or in significant secular
obsolescence, and substitution. decline.
remote possibility of
product substitution.
Execution 20% Flawless, best-in- Flawless, best-in-class Generally flawless, Execution is well-above Execution above peers. Execution can be Execution lags peers. Execution well below
and class execution and execution. Clear leader world-class execution. peers. Leadership is A leader in markets variable, but generally Credible competitor peers. Niche
Competitive dominant positions in multiple broad One of the leaders in evident in multiple where company consistent with peers. in markets where competitor at best in
Position in multiple broad markets across varying multiple broad markets markets across varying chooses to operate, as Key competitor in company chooses to markets where
markets across geographies, as well as across varying geographies, as well as well as within the markets where company operate, as well as in company chooses to
varying geographies, within the company's geographies, as well as within the company's company's product chooses to operate, as company's product operate. Online (where
as well as within the product categories no within the company's product category(ies) category(ies), with well as within the category(ies), which relevant) presence not
company's product matter the level of product category(ies) with some potential some fragmentation company's product are typically highly compelling. Little
categories no matter fragmentation. Online no matter the level of fragmentation evident. Online (where category(ies), with fragmented. Online control over market
the level of (where relevant) is fragmentation. Online acknowledged. Online relevant) is growing moderate levels of (where relevant) position.
fragmentation. growing and well- (where relevant) is (where relevant) is and base-level fragmentation evident. presence evident,
Online (where integrated, with growing and growing and in early capability for multi- Online (where relevant) though capability is
relevant) is growing company a bonafide integrated, with stages of integration, channel success is is growing and base-level rudimentary and
and well-integrated, multichannel retailer. company on its way to laying the groundwork evident. Market capability is becoming sales penetration is
with company a Market position easily becoming a bonafide for future multi- position can be evident, though ultimate minimal. Market
bonafide defended against any multi-channel retailer. channel capability. defended against most multi-channel capability position exhibits
multichannel type of threat. Market position easily Market position can be types of threats, is uncertain. Market variability, with
retailer. No defended against defended against most however some level of position can generally be sustainability
anticipated threats almost any type of types of threats, with market share erosion defended, however at questionable with
to current market threat. even minor market can occur. times some market share even moderate
position from any share losses unusual. erosion is expected. increase in
front. competition.

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Factor 3: Leverage and Coverage (45% Weight)

Why It Matters
Financial leverage and coverage measures are indicators for a company’s financial flexibility and long-term
viability. Financial flexibility is critical to retailers as they adapt their businesses to almost constant changes
in consumer behavior.
The factor is comprised of three sub-factors:
Earnings before interest and taxes (EBIT)/ Interest Expense is used as an indicator of a company’s ability
to pay interest and other fixed charges from its operating performance.
Retained Cash Flow / Net Debt is an indicator of a company’s ability to repay principal on its outstanding
debt. It is a measure or estimate for cash flow generation before working capital movements (funds from
operations) and after dividends in relation to outstanding debt less cash.
Debt to EBITDA is an indicator of debt serviceability and leverage and is commonly used in this sector as a
proxy for comparative financial strength.

» EBIT / Interest Expense:
This ratio is calculated as consolidated EBIT divided by consolidated interest expense.
» RCF / Net Debt:

This ratio is calculated as funds from operations less dividends divided by net debt.
» Debt / EBITDA:
This ratio is calculated as total debt divided by EBITDA.
FACTOR 3
Leverage and Coverage (45%)
Sub-factor
EBIT / Interest 15% ≥ 20x 12x - 20x 6x - 12x 4x - 6x 2.25x - 4x 1x - 2.25x 0.5x - 1x <0.5x
Expense
RCF / Net Debt 15% ≥ 100% 50% - 100% 35% - 50% 25% - 35% 12.5% - 25% 5% - 12.5% 0% - 5% <0%
Debt / EBITDA 15% <0.75x 0.75x - 1.5x 1.5x - 2.5x 2.5x - 3.5x 3.5x - 4.5x 4.5x - 6.5x 6.5x - 8x ≥ 8x

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Factor 4: Financial Policy (15% Weight)

Why It Matters
Management and board tolerance for financial risk is a rating determinant as it directly affects debt levels,
credit quality, and the risk of adverse changes in financing and capital structure.
Our assessment of financial policies includes the perceived tolerance of a company’s governing board and
management for financial risk and the future direction for the company’s capital structure. Considerations
include a company’s public commitments in this area, its track record for adhering to commitments, and
our views on the ability of the company to achieve its targets.
Financial risk tolerance serves as a guidepost to investment and capital allocation. An expectation that
management will be committed to sustaining an improved credit profile is often necessary to support an
upgrade. For example, we may not upgrade a company that has built flexibility within its rating category if
we believe the company will use that flexibility to fund a strategic acquisition, cash distribution to
shareholders, spin-off or other leveraging transaction. Conversely, a company’s credit rating may be better
able to withstand a moderate leveraging event if management places a high priority on returning credit
metrics to pre-transaction levels and has consistently demonstrated the commitment to do so through
prior actions.
Retailers have historically utilized expanded store networks, obtained either via acquisition or development,
to spur revenue growth, expand their geographic footprint, etc. Currently, we are seeing many retailers shift
their capital expenditure focus to growing the online channel, which involves increased spending on
technology and personnel as the companies are essentially building out a second business. The impact of
these various methods of growth on a rating will invariably depend on the company’s existing capital
structure and the degree to which it is changed by the financial requirements of the chosen path.

Financial Policy
We assess the issuer’s desired capital structure or targeted credit profile, history of prior actions and
adherence to its commitments. Attention is paid to management’s operating performance and use of cash
flow through different phases of economic cycles. Also of interest is the way in which management
responds to key events, such as changes in the credit markets and liquidity environment, legal actions,
competitive challenges, and regulatory pressures.
Management’s appetite for M&A activity is assessed with a focus on the type of transactions (i.e. core
competency or new business) and funding decisions. Frequency and materiality of acquisitions and previous
financing choices are evaluated. A history of debt-financed or credit-transforming acquisitions will generally
result in a lower score for this factor.
We also consider a company and its owners’ past record of balancing shareholder returns and debt holders’
interests. A track record of favoring shareholder returns at the expense of debt holders is likely to be viewed
negatively in scoring this factor.

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FACTOR 4
Financial Policy (15%)
Sub-
Sub- factor
Factor Weight Aaa Aa A Baa Ba B Caa Ca
Financial 15% Expected to have Expected to have Expected to have predictable Expected to have financial Expected to have financial Expected to have financial Expected to have Expected to have
Policy extremely very stable and financial policies that policies that balance the policies that tend to favor policies that favor financial policies that financial policies that
conservative conservative preserve creditor interests. interest of creditors and shareholders over creditors; shareholders over create elevated risk of create elevated risk of
financial policies; financial policies; Although modest event risk shareholders; some risk above average financial risk creditors; high financial debt restructuring in debt restructuring
very stable metrics; stable metrics; exists, the effect on leverage that debt funded resulting from shareholder risk resulting from varied economic even in healthy
public commitment minimal event is likely to be small and acquisitions or shareholder distributions, acquisitions or shareholder distributions, environments. economic
to very strong risk that would temporary; strong distributions could lead to other significant capital acquisitions or other environments.
credit profile over cause a rating commitment to a solid a weaker credit profile. structure changes. significant capital
the long term. transition; public credit profile. structure changes.
commitment to
strong credit
profile over the
long term.

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Assumptions, Limitations and Rating Considerations That Are Not Covered in the
Scorecard
The scorecard in this rating methodology represents a decision to favor simplicity that enhances
transparency and to avoid greater complexity that would enable the scorecard to map more closely to
actual ratings. Accordingly, the four rating factors in the scorecard do not constitute an exhaustive
treatment of all of the considerations that are important for ratings of companies in the retail sector. In
addition, our ratings incorporate expectations for future performance, while the financial information that is
used for mapping in the scorecard is mainly historical. In some cases, our expectations for future
performance may be informed by confidential information that we cannot disclose. In other cases, we
estimate future results based upon past performance, industry trends, competitor actions or other factors.
In either case, predicting the future is subject to the risk of substantial inaccuracy.
Assumptions that may cause our forward-looking expectations to be incorrect include unanticipated
changes in any of the following factors: the macroeconomic environment and general financial market
conditions, industry competition, disruptive technology, regulatory and legal actions.
Key rating assumptions that apply in this sector include our view that sovereign credit risk is strongly
correlated with that of other domestic issuers, that legal priority of claim affects average recovery on
different classes of debt sufficiently to generally warrant differences in ratings for different debt classes of
the same issuer, and the assumption that access to liquidity is a strong driver of credit risk.
In choosing metrics for this rating methodology scorecard, we did not explicitly include certain important
factors that are common to all companies in any industry such as the quality and experience of
management, assessments of corporate governance and the quality of financial reporting and information
disclosure. Ranking these factors by rating category in a scorecard would in some cases suggest too much
precision in the relative ranking of particular issuers against all other issuers that are rated in various industry
sectors.
Ratings may include additional factors that are difficult to quantify or that have a meaningful effect in
differentiating credit quality only in some cases, but not all. Such factors include financial controls, exposure
to uncertain licensing regimes and possible government interference in some countries. Regulatory,
litigation, liquidity, technology and reputational risk as well as changes to consumer and business spending
patterns, competitor strategies and macroeconomic trends also affect ratings. While these are important
considerations, it is not possible to precisely express these in the rating methodology scorecard without
making the scorecard excessively complex and significantly less transparent. Ratings may also reflect
circumstances in which the weighting of a particular factor will be substantially different from the weighting
suggested by the scorecard.
This variation in weighting rating considerations can also apply to factors that we choose not to represent in
the scorecard. For example, liquidity is a consideration frequently critical to ratings and which may not, in
other circumstances, have a substantial impact in discriminating between two issuers with a similar credit
profile. As an example of the limitations, ratings can be heavily affected by extremely weak liquidity that
magnifies default risk. However, two identical companies might be rated the same if their only
differentiating feature is that one has a good liquidity position while the other has an extremely good
liquidity position, unless these are very low rated companies for which liquidity can play an outsized role in
avoiding default.

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Other Rating Considerations

Ratings encompass a number of additional considerations. These include but are not limited to: our
assessment of the quality of management, corporate governance, financial controls, liquidity management,
event risk, and seasonality.
Management Strategy
The quality of management is an important factor supporting a company’s credit strength. Assessing the
execution of business plans over time can be helpful in assessing management’s business strategies, policies,
and philosophies and in evaluating management performance relative to performance of competitors and
our projections. A record of consistency provides us with insight into management’s likely future
performance in stressed situations and can be an indicator of management’s tendency to depart
significantly from its stated plans and guidelines.
Corporate Governance
Among the areas of focus in corporate governance are audit committee financial expertise, the incentives
created by executive compensation packages, related party transactions, interactions with outside auditors,
and ownership structure.
Financial Controls
We rely on the accuracy of audited financial statements to assign and monitor ratings in this sector. The
quality of financial statements may be influenced by internal controls, including centralized operations and
the proper tone at the top and consistency in accounting policies and procedures. Auditors’ comments in
financial reports and unusual financial statement restatements or delays in regulatory filings may indicate
weaknesses in internal controls.
Liquidity Management
Liquidity is an important rating consideration for all retailers, and can be particularly important for non-
investment grade retailers where issuers typically have less operating and financial flexibility. We form an
opinion on likely near-term liquidity requirements from the perspective of both sources and uses of cash.
Event Risk
We also recognize the possibility that an unexpected event could cause a sudden and sharp decline in an
issuer's fundamental creditworthiness. Typical special events include cyber risk, mergers and acquisitions,
asset sales, spin-offs, capital restructuring programs, litigation and shareholder distributions. In addition, we
are cognizant of the disruption that “activist” investors can cause when they become involved, and believe
that their involvement increases risk to debt holders.
Seasonality
Seasonality can be a concern for some retailers. Higher volatility creates less room for errors in product or
operational execution.

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Appendix A: Retail Methodology Factor Scorecard

FACTOR 1 – SCALE (10%)
Revenue (USD 10% ≥ $100 $50 - $100 $25 - $50 $10 - $25 $3.5 - $10 $1.5 - $3.5 $0.25 - $1.5 <$0.25
Billion)
FACTOR 2 - BUSINESS PROFILE (30%)
Stability of 10% Products are absolute Products are highly- Products are Products are necessary, Products begin to Products are Products are highly Products are
Product necessities for day- necessary for day-to- moderately- though deferral of exhibit discretionary moderately discretionary or within absolutely
to-day living with day living (essential necessary for day-to- purchases possible features, with some discretionary, with a narrowly defined discretionary, with
virtually zero demand food products), with day living, with under certain delay of purchases due easily-delayed niche category with elimination of
elasticity (gasoline deferral of purchases deferral of purchases macroeconomic or to macroeconomic or purchases certain under significantly delayed purchases certain
and prescription highly unlikely unlikely regardless of other cyclical factors, cyclical factors evident, even mild or eliminated under even mild
drugs), with deferral regardless of macroeconomy or which has been and historically macroeconomic or purchases certain macroeconomic or
of purchases rare macroeconomy or other cyclical factors. historically evidenced. verifiable. Demand cyclical factors, and under even mild cyclical factors.
regardless of other cyclical factors, Moderately inelastic Demand exhibits some exhibits clear signs of historically verifiable. macroeconomic or Demand is highly
macroeconomy or which has been demand, and signs of elasticity, elasticity, fashion Demand is elastic, cyclical factors. elastic, fashion risk is
other cyclical factors, historically moderate levels of fashion risk/technological fashion absolute, and easily
which has been evidenced. Highly fashion risk or risk/technological obsolescence is readily risk/technological substituted by other
historically inelastic demand, technological obsolescence begins to evident, as is moderate obsolescence is acute, broader retailers.
evidenced. minimal fashion risk, obsolescence, with surface, as does mild potential for product and product Product category may
technological some potential for potential for product substitution. substitution is easy. be recently emergent
obsolescence, and product substitution. substitution. or in significant
remote possibility of secular decline.
product substitution.
13 MAY 4, 2018 • RATING METHODOLOGY: RETAIL INDUSTRY

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Execution and 20% Flawless, best-in-classFlawless, best-in-class Generally flawless, Execution is well-above Execution above peers. Execution can be Execution lags peers. Execution well below
Competitive execution and execution. Clear world-class peers. Leadership is A leader in markets variable, but generally Credible competitor in peers. Niche
Position dominant positions in leader in multiple execution. One of the evident in multiple where company chooses consistent with peers. markets where competitor at best in
multiple broad broad markets across leaders in multiple markets across varying to operate, as well as Key competitor in company chooses to markets where
markets across varying geographies, broad markets across geographies, as well as within the company's markets where operate, as well as in company chooses to
varying geographies, as well as within the varying geographies, within the company’s product category(ies), company chooses to company's product operate. Online
as well as within the company’s product as well as within the product category(ies) with some operate, as well as category(ies), which (where relevant)
company’s product categories no matter company’s product with some potential fragmentation evident. within the company's are typically highly presence not
categories no matter the level of category(ies) no fragmentation Online (where relevant) product category(ies), fragmented. Online compelling. Little
the level of fragmentation. matter the level of acknowledged. Online is growing and base- with moderate levels of (where relevant) control over market
fragmentation. Online (where fragmentation. (where relevant) is level capability for fragmentation evident. presence evident, position.
Online (where relevant) is growing Online (where growing and in early multi-channel success is Online (where relevant) though capability is
relevant) is growing and well-integrated, relevant) is growing stages of integration, evident. Market position is growing and base- rudimentary and sales
and well-integrated, with company a and integrated, with laying the groundwork can be defended against level capability is penetration is
with company a bonafide company on its way for future multi-channel most types of threats, becoming evident, minimal. Market
bonafide multichannel retailer. to becoming a capability. Market however some level of though ultimate multi- position exhibits
multichannel retailer. Market position easily bonafide multi- position can be market share erosion channel capability is variability, with
No anticipated defended against any channel retailer. defended against most can occur. uncertain. Market sustainability
threats to current type of threat. Market position easily types of threats, with position can generally questionable with
market position from defended against even minor market be defended, however even moderate
any front. almost any type of share losses unusual. at times some market increase in
threat. share erosion is competition.
expected.
FACTOR 3 - LEVERAGE AND COVERAGE (45%)
EBIT / Interest 15% ≥ 20x 12x - 20x 6x - 12x 4x - 6x 2.25x - 4x 1x - 2.25x 0.5x - 1x <0.5x
Expense
RCF / Net Debt 15% ≥ 100% 50% - 100% 35% - 50% 25% - 35% 12.5% - 25% 5% - 12.5% 0% - 5% <0%
Debt / EBITDA 15% <0.75x 0.75x - 1.5x 1.5x - 2.5x 2.5x - 3.5x 3.5x - 4.5x 4.5x - 6.5x 6.5x - 8x ≥ 8x

CORPORATES

FACTOR 4 - FINANCIAL POLICY (15%)
Financial Policy 15% Expected to have Expected to have very Expected to have Expected to have Expected to have Expected to have Expected to have Expected to have
extremely stable and predictable financial financial policies that financial policies that financial policies that financial policies that financial policies that
conservative financial conservative financial policies that preserve balance the interest of tend to favor favor shareholders over create elevated risk of create elevated risk of
policies; very stable policies; stable creditor interests. creditors and shareholders over creditors; high financial debt restructuring in debt restructuring
metrics; public metrics; minimal Although modest shareholders; some risk creditors; above average risk resulting from varied economic even in healthy
commitment to very event risk that would event risk exists, the that debt funded financial risk resulting shareholder environments. economic
strong credit profile cause a rating effect on leverage is acquisitions or from shareholder distributions, environments.
over the long term. transition; public likely to be small and shareholder distributions, acquisitions or other
commitment to temporary; strong distributions could lead acquisitions or other significant capital
strong credit profile commitment to a to a weaker credit significant capital structure changes.
over the long term. solid credit profile. profile. structure changes.

CORPORATES
Appendix B: A Brief Overview of the Retail Industry
The rated universe for retailers encompasses issuers covering a broad spectrum of products, segments, and
sub-segments. Our overriding definition is a company that sells products to an end-user. This eliminates food
distributors that sell to companies that sell to the end user. We segment the industry as follows:
» Discounters and Warehouse Clubs
» Drug Stores
» Home Improvement
» Specialty Retail, which includes Big Box retailers
» Apparel and Footwear
» Supermarkets
» Convenience Stores
» Auto Retailers
» Department Stores
» Auto Parts
» Dollar Stores
» Office Supply
For analysis purposes, peer groups are drawn from both the broad industry category, by sub-segment where
applicable, and by rating category.

CORPORATES
Appendix C: Some Key Issues for the Retail Industry Over the Intermediate Term
We believe the most important competitive factor facing retailers is the proliferation of online purchasing
by consumers. While there are certain sub-segments that may be insulated from this threat for a variety of
reasons (for instance, in the US, we believe the actual purchase of a new vehicle may be difficult to execute
online in any meaningful fashion), the internet remains a compelling research and shopping vehicle, which
we believe will become even more critical for retailers to realize going forward. A large majority of actual
“sales” begin in some fashion online through research and price comparisons. Our Rating Committees will
continue to heavily-focus on this topic, with the Execution and Competitive Position scorecard sub-factor
most impacted.
Shareholder activism is another key issue that has ripple effects throughout Financial Policy and the Key
Credit Metric sub-factors. We believe retail as a segment will continue to be the target of opportunistic
activity on the part of short-term investors, which we believe is typically a credit negative as the execution
of these short-term actions to cause a pop in a company’s share price are almost always detrimental to
debtholders.
We continue to believe that financial sponsor activity will continue to play a large part in retail, particularly
in the US. Our view is that companies owned by sponsors have an inherently more aggressive financial
policy above and beyond the typical appetite for using large amounts of debt to acquire companies. Equity
extractions are common.
Cyber security is an additional issue. We have seen a number of significant security breaches which have
impacted well over 100 million customers. We believe that despite their best efforts, retailers will find it
difficult to combat the “crooks are always ahead of the cops” phenomenon. The conversion to chip
technology in credit cards will help, but we still believe the risk will remain heightened for the foreseeable
future. We view breaches as event risk and incorporate in our ratings the assumption that companies are
doing everything practically possible to protect the security of their customers.

CORPORATES
Appendix D: Considerations for Rating Auto Dealers
This section explains some additional considerations for ratings of automobile retailers covered under this
methodology.
Scale
» In the US, even the largest dealer does not have significant scale when compared to other retailers. We
consider auto retail to be an inherently local business, with typically 90% of purchases made within
close proximity of the purchaser’s home. Therefore, size in and of itself is not terribly relevant to overall
success.
Business Profile
» Stability of Product-New car sales can vary widely as was demonstrated during the Great Recession,
when new car sales in the US plummeted to around 10 million. However, Parts and Service, which
typically generates around 70% of a dealership’s gross profit despite only generating around 25% of
overall revenue, remained fairly stable during the recession. We believe this is a very “sticky” business,
providing steady, annuity-type benefits to dealers. While it is true that new car sales fuel some demand
for this sub-segment, what is more relevant is overall vehicles on the road, miles driven, and average
age of vehicle, all categories that are favorable on balance. In addition, used car sales annually provide
“opportunities” for vehicle repairs.
» Execution and Competitive Position- For auto retail, we focus heavily on the company’s competitive
position in the markets in which it chooses to operate. We also strongly consider product mix, with
flexibility in our evaluation depending on sales activity and consumer perception of quality by brand
and nameplate. Key metrics we focus on to determine execution ability include parts and service as a
percentage of gross profit and SG&A as a percentage of gross profit.
Leverage and Coverage

We consider the predictability of performance in the sector, as well as similarities between operations of
“full service” (service as well as sell cars), in our evaluation of auto retailers’ quantitative credit profile. Our
ratings have historically reflected leverage that is slightly higher within a rating category for this sub-
segment as compared to other sub-segments of retail as we had previously accounted for 25% of floor plan
financing as debt. We no longer make this adjustment, and instead treat floor plan financing as secured
accounts payable.
Financial Policy
Given the fragmentation in the sector, growth is fueled by acquisition, and our view is that the rated US
dealers will be active in the ongoing consolidation of the segment. A larger amount of expected acquisition
activity is therefore factored into our ratings for the automobile retailers than is the case for the overall
universe of rated retailers.

CORPORATES
Appendix E: Online Sales
We note that online sales are still a very low percentage of total retail sales. However, we view the online
category as a necessary component of almost any retailer’s strategy, although some segments will be more
penetrated than others. For instance, in our view, food will likely be no more than a niche category online.
However, in certain geographies, and in certain income demographics, the food category may end up being
reasonably penetrated, making online expertise for companies in those markets a necessary capability. Auto
retail is another segment where we believe online sales will likely not be meaningful, but where an internet
strategy for shopping, marketing, and service appointment scheduling will be critical for success.
In our assessment of online capability, we take a holistic view. Some of the factors we consider are
summarized below:
The necessity of becoming multi-channel given the product category and the competition. As we stated
above, there are certain product categories where only a “casual” online presence is necessary to compete.
The ability to leverage the existing physical footprint. We believe brick-and-mortar store networks afford
traditional retailers significant advantages over their pure-play online competitors. Some of these
advantages include, but are not limited to:
» Ability to offer customers buy-online/pick-up-in-store options, which can mean same-day availability
at no cost.
» Ship-from-store capability, which reduces shipping costs, and will in our view ultimately optimize
inventory and staffing.
» Utilization of some retail stores as mini-distribution centers, similar to the “hub” store concept
employed by auto parts retailers.
» In certain segments such as consumer electronics and appliances, try-before-you-buy is prevalent, and
consumers have the ability to actually see and touch the product before they buy.
The level of online sales penetration- we consider this both on a percentage basis and an actual dollar
amount of sales basis, again considering the category.
Progress towards multi-channel efficiency. We believe it takes time to build out the online channel, and
“you have to spend money to make money”. It is also important to realize that brick-and-mortar retailers
moving online are effectively building out a new business, and there will be duplicative operating costs and
other inefficiencies, many in the logistics and inventory areas. Once the segment becomes more developed,
we believe SG&A expenses will level off as companies optimize their personnel, and we also believe
inventory will become more efficient. Data points for our analysis include SG&A expense trends in dollars,
and inventory levels. Our view is that at some point, as efficiencies are generated, a company will reach a
point where it can reduce its staffing levels (an example: utilizing store employees for both in-store and
online sales as ship-from-store capability improves and broadens).

CORPORATES
Moody’s Related Publications
Credit ratings are primarily determined by sector credit rating methodologies. Certain broad
methodological considerations (described in one or more cross-sector rating methodologies) may also be
relevant to the determination of credit ratings of issuers and instruments. An index of sector and cross-
sector credit rating methodologies can be found here.
For data summarizing the historical robustness and predictive power of credit ratings, please click here.
For further information, please refer to Rating Symbols and Definitions, which is available here.
Moody’s Basic Definitions for Credit Statistics (User’s Guide) can be found here.

CORPORATES
» contacts continued from page 1
Analyst Contacts:
NEW YORK +1.212.553.1653 PARIS +33.1.5330.1020 TOKYO +81.3.5408.4100
Adam McLaren +1.212.553.2753 Vincent Gusdorf +33.1.5330.1056 Akifumi Fukushi +81.3.5408.4167

Assistant Vice President - Analyst Vice President - Senior Analyst Vice President - Senior Analyst
adam.mclaren@moodys.com vincent.gusdorf@moodys.com akifumi.fukushi@moodys.com
Brian Silver, CFA +1.212.553.1663 Yasmina Serghini +33.1.5330.1064 MOSCOW +7.495.228.6060

Vice President - Senior Analyst Associate Managing Director
brian.silver@moodys.com yasmina.serghini@moodys.com Mikhail Shipilov +7.495.228.6168
Assistant Vice President - Analyst
Christina Boni +1.212.553.0514 Guillaume Leglise +33.1.5330.5979
mikhail.shipilov@moodys.com
Vice President - Senior Credit Officer Assistant Vice President - Analyst
christina.boni@moodys.com guillaume.leglise@moodys.com BUENOS AIRES +54.11.4816.2332
Keith Foley +1.212.553.7185 Francesco Bozzano +33.679.631.755
Veronica Amendola +54.11.5129.2610
Senior Vice President Analyst
Vice President - Senior Analyst
keith.foley@moodys.com francesco.bozzano@moodys.com
veronica.amendola@moodys.com
Linda Montag +1.212.553.1336
SINGAPORE +65.6398.8308
Senior Vice President SAO PAULO +55.11.3043.7300
linda.montag@moodys.com Jacintha Poh +65.6398.8320
Erick Rodrigues +55.11.3043.7345
Manoj Chadha +1.212.553.1420 Vice President - Senior Analyst
Vice President - Senior Credit Officer jacintha.poh@moodys.com
erick.rodrigues@moodys.com
manoj.chadha@moodys.com Maisam Hasnain +65.6398.8325
Peggy Holloway +1.212.553.4542 Analyst TORONTO +1.416.214.1635
Senior Vice President maisam.hasnain@moodys.com
Peter Adu +1.416.214.3060
margaret.holloway@moodys.com Vice President - Senior Analyst
HONG KONG +852.3551.3077
Michael Zuccaro +1.212.553.4596 peter.adu@moodys.com
Assistant Vice President - Analyst Danny Chan +852.3758.1558
michael.zuccaro@moodys.com Analyst SYDNEY +612.9270.8117
danny.chan@moodys.com
Peter Trombetta +1.212.553.1356 Ian Chitterer +612.9270.1420
Assistant Vice President - Analyst Chenyi Lu +852.3758.1353 Vice President - Senior Credit Officer
peter.trombetta@moodys.com Vice President - Senior Credit Officer ian.chitterer@moodys.com
chenyi.lu@moodys.com
Raya Sokolyanska +1.212.553.7415
Nino Siu +852.3758.1667 MEXICO CITY +52.55.1253.5700
raya.sokolyanska@moodys.com Vice President - Senior Analyst Alonso Sanchez +52.55.1253.5706
nino.siu@moodys.com Vice President - Senior Analyst
William Fahy +1.212.553.1687
Vice President - Senior Credit Officer Gerwin Ho +852.3758.1566 alonso.sanchezrosario@moodys.com
william.fahy@moodys.com Vice President - Senior Credit Officer
gerwin.ho@moodys.com
LONDON +44.20.7772.5454 Gloria Tsuen +852.3758.1583
Vice President- Senior Analyst
David Beadle +44.20.7772.5390
gloria.tsuen@moodys.com
david.beadle@moodys.com Wai Choi +852 3758-1369
Ernesto Bisagno +44.20.7772.5403 wai.choi@moodys.com
Wan Hee Yoo +852.3758.1316
ernesto.bisagno@moodys.com
Sebastien Cieniewski +44.20.7772.1964 wanhee.yoo@moodys.com
sebastien.cieniewski@moodys.com
DIFC +971.4.401.953
Victor Garcia Capdevila +44.20.7772.1590 Lahlou Meksaoui +971.561.755.236
Analyst Assistant Vice President - Analyst
victor.garciacapdevila@moodys.com lahlou.meksaoui@moodys.com
Marina Albo +44.20.7772.5365 Douglas Rowlings +9714.237.9543
Managing Director - Corporate Finance Vice President - Senior Analyst
marina.albo@moodys.com douglas.rowlings@moodys.com

CORPORATES
Report Number: 1120379
Author Senior Production Associate

Charles O’Shea Amanda Kissoon
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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MAY 4, 2018 CORPORATES

RATING Retail Industry

Charlie O’Shea +1.212.553.3722

>> contacts continued on page 21

Highlights of this report include:

2 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

About the Rated Universe

About This Rating Methodology

1. Identification and Discussion of the Scorecard Factors

Leverage and Coverage 45% EBIT / Interest Expense 15%

Financial Policy 15% Financial Policy 15%

2. Measurement or Estimation of Factors in the Scorecard

3 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

3. Mapping Scorecard Factors to the Rating Categories

4. Assumptions, Limitations and Rating Considerations Not Included in the Scorecard

5. Determining the Overall Scorecard-Indicated Rating 4

Aaa Aa A Baa Ba B Caa Ca

4 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

Factor 1: Scale (10% Weight)

How We Assess It for the Scorecard

Factor 2: Business Profile (30% Weight)

How We Assess It for the Scorecard

5 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

Execution and Competitive Position (20% Weight)

How We Assess It for the Scorecard

6 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

7 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

Factor 3: Leverage and Coverage (45% Weight)

The factor is comprised of three sub-factors:

How We Assess It for the Scorecard

» RCF / Net Debt:

8 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

Factor 4: Financial Policy (15% Weight)

How We Assess It for the Scorecard

9 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

10 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

11 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

Other Rating Considerations

12 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

Appendix A: Retail Methodology Factor Scorecard

Aaa Aa A Baa Ba B Caa Ca

13 MAY 4, 2018 • RATING METHODOLOGY: RETAIL INDUSTRY

Aaa Aa A Baa Ba B Caa Ca

14 MAY 4, 2018 • RATING METHODOLOGY: RETAIL INDUSTRY

Aaa Aa A Baa Ba B Caa Ca

15 MAY 4, 2018 • RATING METHODOLOGY: RETAIL INDUSTRY

Appendix B: A Brief Overview of the Retail Industry

16 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

17 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

Appendix D: Considerations for Rating Auto Dealers

Leverage and Coverage

18 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

Appendix E: Online Sales

19 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

Moody’s Related Publications

20 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

» contacts continued from page 1

NEW YORK +1.212.553.1653 PARIS +33.1.5330.1020 TOKYO +81.3.5408.4100

Adam McLaren +1.212.553.2753 Vincent Gusdorf +33.1.5330.1056 Akifumi Fukushi +81.3.5408.4167

Brian Silver, CFA +1.212.553.1663 Yasmina Serghini +33.1.5330.1064 MOSCOW +7.495.228.6060

21 MAY 4, 2018 RATING METHODOLOGY: RETAIL INDUSTRY

Report Number: 1120379

Author Senior Production Associate