Value fashion and homewares retailer Matalan has had its ratings outlook downgraded by Moody's over concerns about the company's ability to reverse the decline in profitability in its current fiscal.

Last month, Matalan released results for its year-to-date, reducing its full-year EBITDA guidance for the third consecutive quarter, with a range of GBP54-56m (US$78.2m-$81.1m) now expected by the company.

UK holiday retail roundup

For the 39 weeks ended 28 November, the retailer moved to a loss of GBP8.7m from earnings of GBP8.7m in the prior year period. Revenues fell 2.1% to GBP817.3m. 

Moody's Investors Service reiterated its thoughts behind the fall in earnings, highlighting heavy discounting to clear stock due to problems with the new northern distribution centre as the primary reason. 

"The impact of these problems on Q3 profitability was in line with the rating agency's expectations," it explained. "However, in revising full-year profitability guidance downwards again, the company also referenced difficult trading conditions continuing into December, including unseasonal weather impacting footfall and driving increased discounting across the market. As such, the lower guidance implies a further material year-on-year shortfall in profitability in the final quarter of 2015/16, notwithstanding progress reported with regard to improving the efficiency of the distribution centre."

Moody's said it expects the competitive environment to remain "intense". And, while noting a relatively strong performance in product categories such as home, footwear and children's wear, believes Matalan faces significant challenges to recover market share in the larger categories of ladies and men's wear, and to rebuild momentum in e-commerce.

There are a number of factors that could have an effect on the rating, Moody's pointed out. Upward pressure is unlikely in the short term in light of the negative outlook. However, longer-term, the agency believes positive rating pressure could develop if there is a sustained improvement in Matalan's key financial metrics, including like-for-like sales growth, and a recovery in margins.

Conversely, negative pressure could be exerted on Matalan's ratings if profitability does not recover during the first half of fiscal 2016/17 towards previously recorded levels. 

"Furthermore, a sustained period of negative free cash flow or any negative pressure on liquidity, including specifically a failure or delay in reaching agreement with its revolving credit facility lender with respect to revised acceptable covenant levels, could also lead to a downgrade."