L Brands Inc. Rating Lowered To 'B+' On Expectation For Weak Demand Amid COVID-19; Outlook Negative

  • We believe Columbus, Ohio-based L Brands Inc. will face significant top-line headwinds this year, as restrictive government mandates to contain the coronavirus pandemic lead to temporary store closures, deflated consumer confidence, and a swift and severe drop in discretionary consumer spending.
  • As a result, we expect L Brands' operating performance and credit metrics will be meaningfully weaker than our previous expectations.
  • We are lowering all ratings on L Brands, including our issuer credit rating to 'B+' from 'BB-'.
  • The negative outlook reflects the potential for a lower rating if performance comes under further pressure because of an extended disruption to consumer spending or a weaker-than-expected recovery that hinders the company from restoring credit metrics in fiscal 2021 and tightens liquidity.
NEW YORK (S&P Global Ratings) March 27, 2020--S&P Global Ratings today took the rating actions listed above.
The downgrade reflects our view of Bath & Body Works' (BBW) weakened earnings prospects.  L Brands recently announced temporary closure of all its stores in the U.S. and Canada from March 17 through an unspecified date. We believe closures could extend further given the increasingly drastic actions governments are taking to contain the rapid rise in new COVID-19 cases, temporarily elevating cash burn. BBW's online channel, with decent penetration (15%-20% of annual sales), remains operational and could modestly offset some impact of closed stores. Still, we believe consumer demand for discretionary merchandise, including personal care and home fragrance products, sold by BBW will be depressed over the next few quarters as confidence rapidly deflates from mounting uncertainty over the severity and duration of the pandemic. In addition, we expect consumers to trade down to similar, lower-priced products offered by mass merchandisers, during an economic slowdown further depressing BBW's earnings and cash flows.
The negative outlook reflects the heightened uncertainty regarding the impact of the coronavirus pandemic and impending recession on L Brands' credit metrics. A prolonged store closure, coupled with a slowdown in consumer spending could affect the company's ability to recover operationally.
We could lower the ratings if profit declines and cash flow shortfall are greater than our forecast, if we believe the company will have difficulties securing a waiver or amendment to its credit agreement under adequate terms, or if we expect credit metrics to be sustained around 5x. We could also lower the rating if competitive pressures heighten and the company loses market share, leading us to view its competitive standing less favorably.
We could revise the outlook to stable if the impact of the pandemic is less severe than we currently anticipate and the company is able to quickly recover from the impact. Under this scenario, L Brands' sales and earnings would begin to rebound later this year and we would anticipate debt to EBITDA well below 5x on a sustained basis.
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