Credit ratings agency Moody’s has changed Matalan’s ratings outlook from “stable” to “negative”, amid fears the value retailer may struggle to reverse its decline in profitability.
Moody’s made the change on January 22 after Matalan posted disappointing third quarter sales. Moody’s said it believes Matalan faces an uphill battle to recover market share in womenswear and menswear and to rebuild momentum in its online business, which was scaled back as part of a short term fix to its distribution centre.
It also said there was “no certainty that the planned improvements to operational efficiency that are required to offset staff cost increases in respect to the national living wage will be achieved”.
Fellow ratings agency Standard & Poor’s downgraded Matalan’s business risk profile from “weak” to “vulnerable” back in October, but Moody’s kept its rating at stable, believing that “appropriate actions had been taken to address the errors in planning the new DC [distribution centre], including an independent review of the project and new senior hires with relevant experience”.
However, last month Matalan revealed its online sales fell by 50.9% to £2.7m in the peak Christmas period ended January 2, while store sales fell by 6.4% to £133.8m.
At the time, managing director Jason Hargreaves highlighted progress made by its Liverpool warehouse, which it moved into in at the end of 2014 and has been having problems with over the last year, in delivering better in-store availability for customers.
He said the company is now working to repeat this improvement online.
Matalan ended the third quarter on January 2 with a £60m cash balance, which Moody’s said is currently adequate - given it is typically a low point in the annual cash flow cycle - to cover interest, tax and capex expenses.
But it warned that Matalan needs to reach agreement with its revolving credit facility lender to amend the financial covenant which needs to be passed to access more than 35% of that facility.
“The negative outlook reflects Moody’s concerns about Matalan’s ability to increase profitability following the decline experienced in fiscal 2015/2016,” it said. “The rating agency considers the company’s current leverage to be unsustainable in the longer term.”
Earlier this week, it was reported that Matalan has been placed in Lloyds Banking Group’s business support unit, which helps troubled companies.
Matalan declined to comment.