Anastasia Holdings LLC Outlook Revised To Negative On Weak Sales Amid Cosmetic Market Decline; Ratings Affirmed

  • Anastasia Holdings LLC (Anastasia Beverly Hills or ABH) has underperformed in recent quarters as the overall growth in North American prestige color cosmetics market decelerated in the 2018. This has resulted in weaker sales, margin erosion, and deteriorating credit metrics.
  • We expect the company will continue to face topline and margin pressures during 2019 as weak sales combined with necessary investments in the company's infrastructure will put pressure on its credit metrics and cash flow.
  • S&P Global Ratings revised its outlook on Anastasia Parent, LLC and its subsidiary to negative from stable and affirmed all of our ratings, including the 'B' issuer credit rating.
  • The negative outlook reflects the risk that the company will fail to stabilize its declining sales and margins and adjusted leverage could be sustained above 10x (including preferred stock), and its cash flow could weaken materially from current levels.
CHICAGO (S&P Global Ratings) May 24, 2019—S&P Global Ratings today took the rating actions listed above. The outlook revision reflects the risk that ABH will have difficulties stabilizing its operations during 2019 as growth in the prestige color cosmetics sector continues to decelerate and the company requires significant investments to build out its infrastructure, expand its e-commerce capabilities, and invests in new product innovations to restore sales growth. This could result in credit metrics deteriorating further from the current low-9x area, including adjusted leverage sustained over 10x (or 5x, excluding preferred stock). We expect the company to end 2019 with adjusted leverage around 9x (or 4.5x, excluding preferred stock), which is significantly higher than our previous expectation for the 7x area.
The negative outlook reflects the risk that the company will fail to stabilize its declining sales and margins by the end of 2019, and leverage will be sustained above 10x.
We could lower the ratings if the company cannot maintain leverage below 10x (5x excluding preferred stock). We estimate that for this to occur, EBITDA would need to decline 10% from our 2019 projected levels. This could occur if the company cannot offset its revenue decline in the U.S. wholesale channel with growth in international markets and e-commerce. Failure to generate $10 million of free operating cash flow after required tax distribution could also result in a lower rating. Cash flow would be negatively affected if the company invests beyond our expectations on infrastructure and marketing for new product initiatives that fail to generate adequate returns.
We could revise the outlook to stable if ABH is able to stem the decline in its domestic wholesale business with new product introductions and continues to expand internationally such that its top line stabilizes, and the company generates moderate levels of cash flow after tax distributions.
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