Wild Oats Gets 'CCC+' Rating from Standard & Poor's

NEW YORK -- Wild Oats Markets probably isn't too wild about its latest rating frm Standard & Poor's here. The credit rating service on Friday assigned a 'CCC+' corporate credit rating to the super natural, a 'CCC+' rating to the chain's $115 million 3.25% convertible bonds due 2034. The outlook is negative, S&P added.

"The ratings reflect the company's thin cash flow protection, high debt leverage, participation in a highly competitive industry, inconsistent comparable sales track record, recent margin deterioration, inherent risks associated with the company's geographic expansion plans and relatively small store base," said Standard & Poor's credit analyst Kristi Broderick.

Boulder, Colo.-based Wild Oats Markets Inc. is the second-largest natural foods supermarket chain in North America, with approximately 111 stores in 24 states and Canada, but its most comparable competitor is Whole Foods Market, a larger and much higher-rated retailer due to its consistent operating performance, leading market position, and significantly less leveraged capital structure.

Wild Oats' lease-adjusted operating margins, at about 5 percent for 2004, are around 600 basis points below Whole Foods'. While overall industry dynamics for the natural foods segment are positive, Wild Oats still faces many challenges going forward, given its more value-oriented pricing strategy and price-sensitive customer base.

Comparable-sales results for Wild Oats have been inconsistent over the past few years for various reasons, said S&P analysts. A healthy 5.2 percent comparable-sales growth rate in 2002 fell to 2.4 percent in 2003, due to disruptions in operations resulting from a SKU rationalization program, transitioning to a new distributor, challenges associated with implementing a new private label program, and a continued weak economy.

Comparable sales during the fourth quarter of 2003 and the first quarter of 2004 materially benefited from the labor strike in Southern California, which had a significant effect on the three large players, Kroger, Safeway and Albertson's. However, after the strike ended, comparable-sales growth deteriorated again to low single-digit levels as competitors increased promotional activity to win back customers.

For the full year ended Jan. 1, 2005, Wild Oats had a 1.4 percent gain in comps, but it was achieved primarily through very aggressive promotional pricing and advertising activity, which significantly hurt operating margins. Total EBITDA generated in 2004 was about $21 million, or 35 percent lower than 2003's level.
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