Capri Holdings Ltd. Outlook Revised To Negative Due To Business Disruptions From Coronavirus; Ratings Affirmed

  • We expect the spread of the coronavirus will result in a swift and severe drop in consumer spending this year, as restrictive mandates to contain the outbreak, including store closures, and deflating confidence upend near-term consumer behavior.
  • We believe Capri's operating results will be significantly weaker than we previously expected, pressuring credit metrics in fiscal 2021 (ending March 31, 2021).
  • S&P Global Ratings is revising its outlook on Capri to negative from stable and affirming all of our ratings, including our 'BBB-' issuer credit rating, on the company.
  • The negative outlook reflects the risk for a lower rating if there is a prolonged disruption to consumer spending that causes us to reassess Capri's overall competitive standing or financial position.
NEW YORK (S&P Global Ratings) March 25, 2020--S&P Global Ratings today took the rating actions listed above.
We believe the coronavirus pandemic will heavily weigh on Capri's operating performance.  We anticipate unprecedented pressure on Capri's topline as the company faces business interruptions from COVID-19 globally. In addition to the 150 store closures in mainland China during the month of February (most of which have subsequently reopened), Capri announced the closure of all North American and European stores from March 18th and 19th, respectively, through April 10th. We believe closures could be extended for more than a month given the increasingly drastic actions governments are taking to quell the rapid rise in new COVID-19 cases, resulting in temporarily elevated levels of cash burn. We also think the increasing restrictions on tourist travel will place further pressure on the topline. We expect Capri will take the necessary actions to reduce variable costs, such as payroll and marketing expenses, which will help offset some margin pressure. For fiscal 2021, ending March 31, 2021, we now forecast a revenue decline of about 20% and an erosion in margins, causing leverage to temporarily increase above 3x.
The negative outlook reflects the heightened uncertainty regarding the impact of the coronavirus and impending recession on Capri's financial condition. A prolonged store closure in U.S. and Europe, coupled with a slowdown in consumer spending could affect the company's ability to recover operationally and reduce improving leverage below 3x in the next one to two years.
We could lower the rating if Capri's credit metrics weakened such that leverage increased to above 3x on a sustained basis. This could occur if the impact of the coronavirus and subsequent recessionary macroeconomic environment were more severe and prolonged than we currently expect, delaying operating performance stabilization and improvements starting toward the end of this calendar year.
We could revise the outlook to stable if the impact of the coronavirus were less severe than we currently anticipate. Under this scenario, Capri's sales and earnings would begin to rebound in the second half of this year, and we would anticipate debt to EBITDA improve to below 3x on a sustained basis in fiscal 2022.
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