Fixed-income retail analysts and investors were stunned last week when Standard & Poor's upgraded Target Stores from A to A+. "From a balance sheet and cash flow perspective, it's tough to look at the story and believe they merit an upgrade," says Matt Clark, an analyst at Morgan Stanley. Several observers note that the discount retailer was not on review for an upgrade, and had only a "stable," rather than "positive," outlook from the agency. As the economy continues to slump, an upgrade to an increasingly leveraged retailer struck many as bizarre. Standard & Poor's own retail group head Jerry Hirschberg wrote in a report last month that "the outlook for credit quality [in the sector] is bleak."
"It was the timing that surprised all of us here," says Filippe Goossens, analyst at Credit Suisse First Boston. While noting that Target may have eventually merited an upgrade because its brand names and low prices make it a solid competitor in any economic climate, he says that the company is aggressively building new stores, which will force it to take on more debt.
The ratings boost should come in handy, given Target's future financing plans.Sara Ross, an assistant treasurer at Target, confirms that during the recent conference call company CEORobert Ulrich indicated that Target will access the debt markets to raise over $2 billion in the next 12 to 18 months to build new stores and finance its new credit card business.
Standard & Poor's Hirschberg says the agency upgraded Target largely because its earnings are holding up surprisingly well relative to similar retailers. Also, he says the company's rating needed to be adjusted to conform to other companies in the sector and "to possible future actions we may take with those," adding "it does serve as a target, if you will, for other ratings." Hirschberg declined to comment about whether other ratings changes in the sector are imminent. Philip Emma, the analyst at Moody's Investors Service who covers Target, declined comment, citing corporate policy.