Fitch Ratings has affirmed Capri Holdings Limited's and Michael Kors (USA), Inc.'s ratings, including their Long-Term Issuer Default Ratings (IDR) at 'BBB-'.
Fitch has also assigned a 'BBB-' IDR to Gianni Versace S.r.l. The Rating Outlook is Stable.
Capri's rating reflects its strong positioning in the U.S. handbag market and good growth at its various brands along with its demonstrated commitment to debt reduction. The rating also considers the fashion risk inherent in the accessories and apparel space.
The ratings consider Capri's good execution both from a topline and a margin standpoint, which support Fitch's longer-term expectations of low-single digit revenue and EBITDA growth. Although there could be some near-term pressure to operating results given ongoing shifts in consumer behavior, difficult comparisons, and global macroeconomic uncertainty, Fitch expects that Capri will be able to sustain adjusted leverage in the low-3x range, as appropriate for the 'BBB-' rating.
Key Rating Drivers
Strong Recent Performance:
Capri generated LTM September 2022 revenue and EBITDA of USD5.87 billion and USD1.36 billion, relative to USD5.7 billion and USD1.1 billion in revenue and EBITDA achieved in calendar 2019. Capri's recent results have been supported by the company's topline initiatives and margin strategies. Over the last few years, the company has accelerated its omnichannel investments, eliminated unproductive expenses, streamlined processes to improve corporate speed and agility, and pruned its real estate portfolio.
Capri's margin strategies have helped to offset some of the near-term inflationary and supply-chain pressures seen by the company and support Fitch's expectations that EBITDA margins will trend in the mid-to-upper 21% range beginning in fiscal 2023 (ending in March 2023), relative to calendar 2019 EBITDA margins of approximately 19%. After growing around 8.5% during the first half of fiscal 2023, Fitch projects Capri's revenue could decline in the mid-single digits during the second half of fiscal 2023, driven in part by difficult comparisons and an increased consumer focus on services like travel and entertainment following pandemic-induced softness.
Focused Strategy Supports Growth:
Capri's strategic initiatives across its portfolio help support Fitch's expectations of low-single digit revenue growth beginning in fiscal 2024. Leading up to the pandemic, the Michael Kors brand experienced some challenges with revenue falling from USD4.7 billion in fiscal 2016 to USD4.35 billion in calendar 2019. Fitch believes that some of these challenges were macro-driven, including reduced interest in fashion and increased industry markdown levels. Since this period, management has taken several initiatives at the brand including, pulling back on its wholesale exposure, closing underperforming stores, and shifting its product assortment to higher price points.
At Jimmy Choo and Versace, management has been focused on growing the brands and leaning into underpenetrated categories. At Jimmy Choo, this includes the accessories and casual footwear categories. At Versace, this has centered around accessories, footwear and men's wear. Despite a more challenging macro, Fitch expects continued growth at Versace and Jimmy Choo in the near-term. This growth is expected to offset potential topline declines at Michael Kors as the brand could be more impacted by near-term macro uncertainty.
Strong Financial Flexibility:
Capri's financial flexibility is supported by its good FCF, which has averaged around USD560 million over the last four years, access to its USD1.5 billion revolver and reasonable levels of cash. Capri has historically utilized its FCF generation for debt repayment, share repurchases, and business investment. Through cash flow repayment, Capri's debt levels declined from USD2.6 billion at the end of fiscal 2019 to USD1.1 billion at the end of fiscal 2022. Fitch notes, however, that the company's total debt has increased modestly in the near-term and Capri could end fiscal 2023 with approximately USD1.4 billion in debt on its balance sheet.
The increase in debt correlates with a rise in share repurchases after several years of focusing on debt reduction-YTD as of October 1, 2022, Capri has repurchased USD650 million in shares. Fitch notes, however, that Capri's recent actions are within the bounds of the company's financial policy and expects that Capri will maintain its leverage in line with its publicly articulated financial target of below 2.0x net leverage (using operating lease liabilities; Fitch-adjusted equivalent is at or below low-3x).
Acquisitive Posture:
Capri's portfolio has evolved via acquisitions in recent years, somewhat benefiting its credit profile through diversification. In November 2017, the company purchased luxury shoe and accessory maker Jimmy Choo PLC for USD1.35 billion, or 16.5x EV/EBITDA (based on Fitch-defined EBITDA for the 12-month period ending June 30, 2017) which it financed with USD1 billion of unsecured term loans (later repaid) and USD450 million in unsecured notes.
On Dec. 31, 2018, Capri purchased Gianni Versace S.p.A., an independently operated luxury goods company, for USD2 billion (valuation unavailable given a lack of financial information on the asset). Capri Holdings partially financed the purchase of Versace with USD1.6 billion in unsecured term loans. By July 2022, Capri had fully repaid all outstanding borrowings on the USD1.6 billion term loans.
The Jimmy Choo acquisition increased Capri's revenue penetration of women's shoes, while the Versace brand increased Capri's exposure to the apparel category and to male customers. Both of these brands have European heritages and given their international penetration reduce Capri's exposure to the Americas. Longer-term, Fitch expects that Capri could undergo additional debt-funded acquisitions, in-line with how it has operated historically.
Parent Subsidiary Linkage:
Fitch's analysis includes a strong subsidiary/weak parent approach between the parent, Capri Holdings Limited and its subsidiaries Michael Kors (USA), Inc. and Gianni Versace S.r.l. Fitch assesses the quality of the overall linkage as high, which results in an equalization of IDRs.
Derivation Summary
Capri's 'BBB-'/Stable rating reflects its strong positioning in the U.S. handbag market and, good growth at its various brands along with its demonstrated commitment to debt reduction. The rating also considers the fashion risk inherent in the accessories and apparel space.
The ratings consider Capri's good execution both from a topline and a margin standpoint, which support Fitch's longer-term expectations of low-single digit revenue and EBITDA growth. Although there could be some near-term pressure to operating results given ongoing shifts in consumer behavior, difficult comparisons, and global macroeconomic uncertainty, Fitch expects that Capri will be able to sustain adjusted leverage in the low-3x range, as appropriate for the 'BBB-' rating.
Kohl's Corporation's 'BBB-'/Stable rating reflects the company's scale with a projected $18 billion of 2023 revenue, along with good positioning in the challenging U.S. department store space. The company benefits from its real estate positioning away from traditional regional malls, its mix of national and exclusive/owned brands and its value price focus.
The company's strong cash flow allows Kohl's to invest in revenue drivers, such as its omnichannel model and brand partnerships, which should support market share defensibility. Near term the company faces some operating challenges including cost inflation, consumer spending shifts and some mis-execution; however, the ratings reflect expectations that the company will be able to maintain adjusted leverage at or below 3.5x.
Macy's 'BBB-'/Stable rating reflects its recently strong operating trajectory, which demonstrates some success in implementation of its topline and other initiatives relative to other apparel and home retailers. Fitch expects Macy's can generate ongoing EBITDA in the low-$2 billion range beginning 2022, similar to pre-pandemic levels, yielding adjusted leverage (adjusted debt/EBITDAR, capitalizing leases at 8x) in the mid-2x.
Nordstrom, Inc.'s 'BBB-'/Negative rating reflects its historically good market position in the apparel, footwear and accessories space. Its differentiated merchandise and high level of customer service, including omnichannel offering, enable the company to enjoy strong customer loyalty. The rating also reflects the company's exposure to better-positioned shopping centers, its good mix of digital and off-price sales, and its full-price department store presence. The Negative Outlook reflects Nordstrom's protracted operating recovery due to pandemic-related effects and some ongoing execution challenges, particularly at its Rack division.
Fitch could revise the Outlook to Stable if Nordstrom is able to increase EBITDA toward prepandemic levels of around $1.5 billion, from expected 2023 levels of $1.1 billion to $1.2 billion, yielding adjusted leverage trending below 3.5x.
Levi's 'BB+'/Stable rating reflects its position as one of the world's largest branded apparel manufacturers, with broad channel and geographic exposure, while also considering the company's narrow focus on the Levi brand and in bottoms.
The ratings consider the company's good execution both from a topline and a margin standpoint, which support Fitch's longer-term expectations of low-single digit revenue and EBITDA growth. Although there could be some near-term pressure to operating results given ongoing shifts in consumer behavior, difficult comparisons, and global macroeconomic uncertainty, Fitch expects that Levi will be able to maintain adjusted leverage (adjusted debt/EBITDAR, capitalizing leases at 8x) below 3.5x over time
Signet's 'BB'/Stable rating reflect its leading market position as a U.S. specialty jeweler with approximately 9% share of a highly fragmented industry. The rating considers its recently strong operating trajectory, which demonstrates success in the implementation of its topline and other initiatives. Although Fitch expects some near-term contraction from record 2021 results, revenue and EBITDA beginning 2023 are projected to trend in the mid-$7 billion and mid-$800 million ranges, respectively, well above pre-pandemic levels of $6 billion and $504 million.
The rating reflects expectations that Signet will be able to maintain adjusted leverage (adjusted debt/EBITDAR, capitalizing leases at 8x) in the low-4x range, in line with their publicly articulated financial policy. The rating reflects expectations that Signet will be able to maintain adjusted leverage (adjusted debt/EBITDAR, capitalizing leases at 8x) in the low-4x range, in line with their publicly articulated financial policy.
Tempur Sealy International, Inc.'s (TPX) 'BB+'/Stable ratings reflect its strong global position with a portfolio of well-known, established brands with broad price points and channel distribution. The ratings also consider its single product focus in a competitive, fragmented market and susceptibility to pullbacks in discretionary consumer spending. As a result, based on Fitch assumptions, EBITDA could be around $850 million in 2022 and potentially the low $800 million in 2023, with EBITDA leverage in the high 2x and EBITDAR leverage (adjusted debt/EBITDAR) in the high 3x.
While near-term pressures to operating results are expected to persist into 2023 given ongoing shifts in consumer behavior and global macroeconomic uncertainty, Fitch believes TPX's strong competitive position, brand portfolio and operational strategy with good FCF generation supports TPX's ability to maintain EBITDA in the low $900 million range and EBITDAR leverage in the mid-3x over the medium-term.
Key Assumptions
Capri's fiscal 2023 (ending March 2023) revenue is projected to be flattish around USD5.7 billion. After growing around 8.5% for the first half of fiscal 2023, Fitch projects that revenue will decline in the mid-single digits for the second half of the year given difficult comparisons and shifts in spending to services. Although fiscal 2024 topline could be down at Michael Kors due to a challenging macro environment, Fitch expects that continued growth at Versace and Jimmy Choo, will help support topline stability. Low-single digit growth over time will help support Fitch's expectations that revenue will reach USD6.0 billion by fiscal 2027.
EBITDA, which was USD1.36 billion for the TTM period ended Oct. 1, 2022, could moderate towards USD1.23 billion in fiscal 2023 as topline moderates during 2H23. EBITDA margins improved to 24% in fiscal 2022 relative to approximately 19% in calendar 2019, on reduced markdown activity and good cost control. Fitch projects that EBITDA margins could trend in the mid-to-upper 21%-range beginning in fiscal 2023 as the company's pricing initiatives and good cost control are somewhat offset by increased business investments along with near-term inflationary and supply chain pressures. Ongoing business shifts towards Michael Kors' direct-to-consumer channel should benefit margins over time.
FCF is expected to be around USD540 million in fiscal 2023, (assuming some working capital usage) and capex around USD300 million. FCF averaged USD560 million over the past four years. Thereafter, FCF, beginning in fiscal 2024, could trend in the USD800-USD900 million range assuming neutral working capital and capex of around USD250 million. Fitch expects Capri to deploy FCF towards a combination of debt reduction and share repurchases, in line with its recent history and financial policy. YTD as of 2Q23, Capri had repurchased approximately USD650 million in shares.
Adjusted debt/EBITDAR has been somewhat volatile in recent years given the debt-financed purchase of Versace in fiscal 2019 and the pandemic. Adjusted debt/EBITDAR, declined to 2.9x in fiscal 2022 from 4.4x in fiscal 2021 based on EBITDA rebound and debt repayment. Adjusted leverage is expected to increase modestly to 3.3x in fiscal 2023 based on EBITDA moderation and a slight increase in borrowings. Fitch expects that Capri will end fiscal 2023 with total debt at USD1.4 billion versus USD1.1 billion at the end of fiscal 2022.
In December 2022, Capri issued a EUR450 million term loan facility, due December 2025. The slight increase in borrowings correlates with a rise in share repurchases after several years of debt reduction. Fitch expects that adjusted debt/EBITDAR could moderate to 3.1x in fiscal 2024 based on some debt repayment and flattish EBITDA. Adjusted leverage could remain in the low-3x, thereafter, as appropriate for the 'BBB-' rating, assuming EBITDA remains near USD1.3 billion and assuming the company refinances upcoming maturities. Adjusted leverage could improve below 3.0x if the company continues to reduce debt.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A positive rating action could result from low single digit sales and EBITDA growth along with a change in financial policy which would increase Fitch's confidence in the company sustaining total adjusted debt/EBITDAR (capitalizing rent at 8.0x) below the high-2x range.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A negative rating action could result from EBITDA declining below USD1 billion, suggesting longer term brand challenges and which could cause adjusted debt/EBITDAR (capitalizing rent at 8.0x) to sustain above the low-3x range.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: As of October 1, 2022, the company had USD215 million in cash and USD1.13 billion outstanding on its USD1.5 billion revolving credit facility. After accounting for LOC outstanding, the amount available on the revolving credit facility was USD352 million.
The company's debt structure as of Oct. 1, 2022 consisted of its USD1.5 billion unsecured revolving credit facility due July 2027 and USD450 million in unsecured senior notes due September 2024. In July 2022, the company entered into a new USD1.5 billion senior unsecured revolving credit facility maturing in July 2027, which replaced its previous USD1.0 billion revolving facility which was set to mature in November 2023.
The revolving facility is co-borrowed under Capri Holdings Limited and Michael Kors (USA), Inc. and the senior notes are issued under Michael Kors (USA), Inc. In December 2022, Capri issued a EUR450 million unsecured term loan facility, maturing in December 2025. The term loan facility is borrowed under Gianni Versace S.r.l., a wholly owned subsidiary of Capri Holdings Limited.
The senior notes have been affirmed at 'BBB-'. The new term loan facility and revolving credit facility have been assigned at 'BBB-'.
Issuer Profile
Capri Holdings Limited is a leading global manufacturer and retailer of accessories and leather goods, primarily handbags, and footwear. The company's portfolio consists of three brands: Michael Kors, Jimmy Choo and Versace.
Summary of Financial Adjustments
Historical and projected EBITDA is adjusted for non-cash stock-based compensation and non-recurring charges. Fitch has adjusted the historical and projected debt by adding 8.0x annual gross rent expense.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
CAPRI HOLDINGS LIMITED 
