Tapestry Inc. Outlook Revised To Negative From Stable On Weak Demand Amid COVID-19 Pandemic; Ratings Affirmed

  • We believe New York-based premium accessory retailer Tapestry Inc. will face significant top-line headwinds this year from store closures and a swift, severe drop in global discretionary consumer spending because of the coronavirus pandemic.
  • We expect Tapestry's operating performance will be significantly weaker than our previous expectations, meaningfully deteriorating headroom in its credit metrics at the end of fiscal 2020 (ending June 30, 2020), with funds from operations (FFO) to debt approaching 30% and leverage increasing to the mid- to high-2x area.
  • We are revising our outlook to negative from stable and affirming all our ratings, including our 'BBB-' issuer credit rating.
  • The negative outlook reflects the risk for a lower rating if a prolonged disruption to consumer spending causes us to reassess Tapestry's overall relative 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. The outlook revision reflects our expectations for a severe impact from the coronavirus pandemic on Tapestry's sales and cash flows this year. In addition to its vulnerability to store closures, we believe the luxury retail sector is particularly susceptible given its discretionary merchandise mix and our expectation for imminent elevated unemployment in the U.S. and weak consumer demand globally. We incorporated a substantial decline in operating performance in calendar year 2020 that assumes a severe disruption over the next 2-3 months, alleviating in the second half.
The negative outlook reflects the heightened uncertainty regarding the impact of the coronavirus pandemic and impending recession on Tapestry's financial condition. A prolonged store closure in North America and Europe, coupled with a slowdown in consumer spending could affect the company's ability to recover operationally.
We could lower the rating if Tapestry's credit metrics weaken such that debt to EBITDA rises to above 3x on a sustained basis. This could occur if the impact of the pandemic and subsequent recessionary macroeconomic environment are more severe and prolonged than we currently expect, delaying operating performance improvements in the second-half of the year and beyond.
We could revise the outlook to stable if the impact of the pandemic is less severe than we currently anticipate. Under this scenario, Tapestry's sales and earnings would begin to rebound later this year and we would anticipate meaningfully positive free operating cash flow, with debt to EBITDA below 3x on a sustained basis.
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