Fitch Ratings assigned a Long-Term Issuer Default Rating of BBB- to Michael Kors USA Inc. and a BBB- rating to the new senior unsecured notes. The notes and the $1 billion senior unsecured term loans issued in August will together fund the fashion firm’s planned $1.35 billion acquisition of the Jimmy Choo brand. Kors said in July that the deal is expected to close by the end of 2017.
Fitch said its ratings are based on Kors’ long-term growth trajectory, its strong positioning in the U.S. handbag and small leather goods market and its “conservative financial policy of targeting a two-times to 2.25-times leverage range.”
The ratings firm also said that due to Kors’ debt paydown plans, Fitch “believes the company could operate within this leverage range even if its operating turnaround takes 12 or so months longer to execute.”
According to Fitch, Kors’ operations produce “ample cash flow with annual free cash flow of $850 million the past two years.” It noted that Kors recently began a share buyback program, repurchasing $2.1 billion in stock over the past two fiscal years.
Two ratings firms — Standard & Poor’s and Moody’s Investors Service — also reported similar ratings for the proposed senior unsecured notes.
S&P Global Ratings said, “We expect that meaningful debt reduction at the end of fiscal 2018 and operating performance stabilization in fiscal 2019 could lead to gradual credit metrics improvement over the next two years.”
Moody’s assigned a Baa3 rating to the note offering, adding that the rating is “constrained by recent sales and earnings declines” and the rating firm’s expectation that the near term performance of Kors will remain challenged while the company implements its business transformation initiatives.
Kors has said those initiatives include reducing promotional sales activities and closing between 100 and 125 retail doors. Moody’s also said it expects the company to “suspend share repurchases through at least fiscal 2018 in order to significantly pay down acquisition debt and maintain modest leverage.”