C&S Wholesale Grocers

S&P Global Ratings' negative outlook on C&S reflects our expectation that operating performance pressure will continue in the next 12 months, but that operating margin will rebound toward historical levels. There is limited cushion at the rating for margin erosion from our projection given how even a few basis points of decline can drive material decreases in EBITDA. We could lower the rating if the challenging grocery environment leads to continued margin pressure and a weakened competitive position, or if there are material litigation or restructuring charges. This could also occur if C&S pursues a more aggressive financial policy from debt-financed acquisitions. If, for instance, we expect FOCF to debt approaching 5% or funds from operations (FFO) to total debt

...We believe the dynamic and highly competitive nature of the U.S. grocery industry will continue to temper growth in the coming year. In our view, C&S Wholesale Grocers will remain pressured as its grocery customer base navigates e-commerce and merchandising changes. C&S is also subject to industrywide inflationary pressures with elevated wages, freight, and pension-related expenses, which all continue to pressure razor-thin margins. We do not expect grocery distributors to pass on all cost increases to the customers in the near term. We anticipate continued pressure on credit metrics given high adjusted debt, significant revolver borrowings and limited free operating cash flow (FOCF) generation. We expect limited improvement in the company's credit metrics over the next year as it continues to redirect spending toward distribution center automation, as well as manage increased asset-based revolver borrowings and higher pension-related and lease liabilities. Revolver borrowings remain elevated...

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