Iceland’s debt rating downgraded as it slips to annual loss

Iceland’s debt rating has been downgraded by Moody’s as newly filed accounts show the supermarket fell to a pre-tax loss last year.

Companies House accounts for the year to 25 March show Iceland Foods fell to a pre-tax loss of £4.1m compared to a profit of £73.1m in the prior year, which was boosted by exceptional Covid demand.

Iceland’s sales fell back 4.3% to £3.55bn as it lapped surging pandemic sales, while its market share edged back to 2.3% from 2.4%, reflecting the contraction of the online grocery market, in which Iceland achieved an overweight position during the pandemic.

Adjusted EBITDA for the period fell back to £127.1m from £171.9m, which saw a substantial decline in its first quarter before steady improvement through the year.

Exceptional items totalled £30m in the year, driven by impairment of intercompany loans, Covid costs, restructuring costs and expenses associated with the HGV driver shortage.

Iceland said it experienced a record-breaking Christmas in the third quarter and had traded well through the final quarter with improving in-store performance.

However, credit ratings agency Moody’s downgraded the company from B2 to B3 – now six notches below investment grade and rated “highly speculative” – on concerns over how inflation, energy costs and consumer spending will impact its finances.

Moody’s said: “Rising inflation is likely to erode the already thin operating margins of UK grocers this year as the sector remains very competitive and companies are cautious to raise prices in order to preserve market share.

“One of the main challenges for the industry, and for Iceland in particular given its greater focus on energy-intensive frozen food, is represented by rising energy costs.”

Moody’s said it expects that Iceland’s electricity bill will more than double in fiscal 2023, ending March, compared to the prior year, thus reducing the company’s EBITDA and causing leverage to increase more than previously anticipated.

It also notes that the supermarket faces refinancing risks, given its bonds trade “well below par” and its cost of debt is likely to increase after a refinancing.

“The company’s already weak credit metrics, and in particular its interest cover and free cash flows, would likely come under more pressure if the company is unable to refinance at similarly low rates,” Moody’s said.

Iceland’s own outlook was that it had “always performed strongly in the past during periods when GDP has contracted and household incomes have been squeezed”.

“Our unique positioning as a specialist frozen food discounter, offering savings versus the market, provides us with a further competitive edge which we are already seeing reflected in outperformance of the sector.”

It said it had traded well since year end, with year-on-year sales growth and footfall showing “encouraging signs” of recovery, while its online business is holding its increased post-pandemic market share.

However, it did note the “unprecedented pressures of both input and operating costs” facing the food retail industry, which will hit profits.

“Like all our competitors, we are raising retail prices where this is essential to recover cost increases from our suppliers, while taking care to maintain Iceland’s reputation for outstanding value.

“Within our own operations, we are pleased to report that we have been able to offset all cost increases to date – with the sole exception of energy – through early and decisive action to reduce costs in our stores, depots and delivered sales network.”

However, while it retains forward cover for a proportion of its energy bills, in the absence of market stabilisation it will “be unable to avoid a temporary reduction in our profits in the current year”.

The group said it will continue to invest in infrastructure and store estate – and has opened six new The Food Warehouse stores since year end and a further three Iceland departments opened in The Range stores.

In total, it expects 25 new stores in the UK over the year, mainly under The Food Warehouse fascia, with capex down £10m to around £50m.