DSGi’s credit rating has been cut on the back of its decreasing operating profit margin.
Fitch Ratings downgraded the electricals retailer to BB+ from BBB-, placing a negative outlook on the company’s debt.
The credit ratings agency said in a statement: “The downgrade reflects the deterioration in DSGi’s credit metrics over the past three years and the minimal improvement expected over the short-term.”
Fitch added that it had considered the positive measures taken by DSGi’s management to turn the group around, led by chief executive John Browett, who unveiled a five-point strategy in May to improve sales by 3 to 4 per cent.
It added: “The negative outlook reflects DSGi’s high lease-adjusted leverage for the rating, continued price deflation and the challenging consumer environment in the UK, which could further dampen the company’s recovery efforts.”
Fitch said that, in the short term, the positive impact of Browett’s plan might be offset by an increase in capital expenditure, adding to its negative cash flow position.
DSGi’s underlying operating profit margin has been falling – to 3.5 per cent in the full year to April 28, 2007 from 4.1 per cent in the full year in 2005.
Fitch added that, based on the full-year trading announcement on May 15, profitability and credit metrics are expected to fall further for the year ending May 3.
It said: “The trading environment remains challenging, particularly in the UK, Italy and Spain and consumers have become increasingly promotion and deal-driven, impacting gross margins.
Like-for-like gross margins across the group were down 0.7 per cent year on year. As a result, full-year underlying profit before tax for 2008 will be in the range of£200 million to£210 million.”