Rodan & Fields LLC Issuer Credit Rating Lowered To 'B+' On Higher Leverage, Eroding Sales And Margins; Outlook Stable

  • A sharp decline in revenue at Rodan & Fields LLC (R&F) in the second half of 2018 was fundamentally different from our initial expectations for the company to continue to grow at a fast pace. We now expect the company's performance will remain volatile at least through 2019 as it works to stabilize declining sales. As a result, we expect leverage to peak in the mid-3x area in 2019 as compared to our initial expectation for the company to maintain leverage around 2x.
  • We are lowering our issuer credit rating on Rodan & Fields to 'B+' from 'BB-'. At the same time, we are lowering the issue-level rating on the company's senior secured credit facility to 'BB-' from 'BB'. The recovery rating is unchanged at '2'.
  • The stable outlook reflects our view that the company's performance should stabilize by the end of the year, with sequential improvement in the second half, resulting in leverage in the low-3x area at the end of 2019. This will occur if the company's turnaround initiatives are successful and consultant enrollment returns to growth.
CHICAGO (S&P Global Ratings) April 8, 2019—S&P Global Ratings today took the rating actions listed above. The downgrade reflects our view that Rodan & Fields performance in fiscal 2019 will remain significantly below our previous expectations, with continuous sales and margin erosion leading to leverage increasing toward the mid-to-high 3x area from about 2.7x at end of 2018. We previously expected the company to continue to grow revenue at a double digit percentage rate and maintain leverage in the low 2x area. The anticipated steep increase in leverage over a very short period of time indicates that the company's operations and profitability are volatile and that management efforts to stabilize the declining business could stretch well into 2020.
The stable outlook reflects our view that the company will be able to stem its revenue decline by the second half of the year, with revenue returning to modest growth by the end of 2019. As such, we expect leverage to improve to the low-3x area by the end of 2019 from the mid-to-high 3x area in the first half of the year.
We could lower our ratings if the company cannot improve enrollment and increase the productivity of its consultants, or if greater industry competition hinders the company's efforts to stabilize declining sales and margins, resulting in leverage exceeding 4.5x. For this to occur, we estimate that EBITDA would have to decline by 40% from current levels.
Given our expectation that the company could exhibit very high volatility of earnings and cash flows, we could raise our ratings if we saw stable sales growth and margin expansion such that leverage declined to low-to-mid 2x area, which would provide sufficient cushion for any performance downside. We believe this could occur if R&F improves consultant enrollment and productivity. We estimate that for this to occur, EBITDA would need to improve by 10% from current levels, or improve by 25% from our projected EBITDA at the end of 2019.
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