CompUSA Ratings Affirmed by Standard & Poor's After Acquisition Announcement
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NEW YORK, June 22 /PRNewswire/ -- Standard & Poor's today affirmed its ratings of CompUSA Inc. (see list below), following the company's announcement that it has reached an agreement to acquire Computer City from Tandy Corp [NYSE:TAN - news].
The purchase price for Computer City is approximately $275 million, payable in a $150 million note and cash. The acquisition strengthens CompUSA's market position by accelerating its store expansion program and removing its only national retail competitor. Although the acquisition adds incremental lease and funded debt, coverage ratios are expected to continue to be well within parameters for the existing rating.
The ratings for CompUSA reflect the company's participation in the competitive, thin-margin personal computer (PC) retail industry, mitigated by a successful business strategy that extends beyond retail sales. Difficulties with predicting demand, price deflation, and short product cycles add to the challenges of operating in this sector.
While the purchase of Computer City eliminates the only other national computer superstore retailer, CompUSA's 160-superstore chain faces considerable competition from other retail outlets, as well as competition in its direct sales, mail order, technical services, and training functions. The company's successful diversification of customers, products, and services reduces its exposure to consumer sales trends and adds significant incremental margin. These actions have driven a steady rise in lease-adjusted operating margin to 5% from only 2% three years ago, and a rise in adjusted earnings before interest, taxes, depreciation, and amortization interest coverage to more than 5 times (x) from 1.5x. Moreover, management has demonstrated a solid ability to manage working capital, which is especially important given the short product life associated with CompUSA's inventory.
While CompUSA plans to open 20 stores in 1999, Standard & Poor's expects that the pace of store openings beyond 1999 will take into account the large base of Computer City stores to be acquired (100), as well as possible store closings. Fixed and working capital needs should be adequately funded through funds from operations, lease financing, vendor and floor plan financing, cash balances ($217 million at March 28, 1998), and a $150 million revolving credit facility. Financial flexibility is further enhanced by a light maturity schedule.
OUTLOOK: STABLE
Ratings stability is supported by solid execution of CompUSA's superstore format, including expansion of the core business to mitigate the impact of volatile consumer sales. Yet management will be challenged to absorb a faster rate of expansion than originally anticipated, given the Computer City acquisition. Moreover, the company faces substantial competition from various players as it grows its newer businesses. Upgrade potential is further limited by the unpredictability of sales and thin margins characteristic of the industry. -- CreditWire
RATINGS AFFIRMED
CompUSA Inc.
Corporate credit rating BB
Subordinated debt B+
Bank loan rating BB
SOURCE: Standard & Poor's CreditWire
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