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Rating Action:

MOODY'S UPGRADES MARY KAY'S BANK CREDIT FACILITIES TO Ba2 FROM Ba3 ; OUTLOOK REMAINS STABLE

13 Nov 2003
MOODY'S UPGRADES MARY KAY'S BANK CREDIT FACILITIES TO Ba2 FROM Ba3 ; OUTLOOK REMAINS STABLE

Approximately $188 million of Debt Securities Affected

New York, November 13, 2003 -- Moody's Investors Service upgraded the rating for Mary Kay, Inc.'s existing $188 million senior secured bank credit facilities from Ba3 to Ba2. Moody's also upgraded Mary Kay's senior implied rating from Ba3 to Ba2 and the senior unsecured issuer rating from B1 to Ba3. The rating outlook remains stable.

The upgrade reflects strong growth in revenues coupled with a significant improvement in profit margins and operating cash flow over the past two years, which has resulted in a substantial reduction of debt and stronger credit metrics. The company has been able to steadily grow the number of its active consultants and has begun to realize greater consultant productivity through improved product mix, merchandising incentives and greater use of the Internet for order taking and quicker corporate communication.

The following ratings were upgraded:

$50 million guaranteed senior secured revolving credit facilities due 2006 from Ba3 to Ba2;

$138 million guaranteed senior secured term loan B due 2007 from Ba3 to Ba2;

Senior Implied from Ba3 to Ba2;

Senior Unsecured Issuer from B1 to Ba3.

As one of the largest direct-selling skin care and color cosmetics companies in the world, Mary Kay's ratings reflect the company's powerful brand name recognition; its diverse and loyal customer and growing independent consultant base; its proven and durable direct selling business model; and its strategically-placed pricing points at the low end of the prestige market segment that have resulted in a strong market position in the highly competitive world of cosmetics. The ratings are also supported by the return in mid-2001 of the company's co-founder, Richard Rogers (son of Mary Kay Ash) to, once again, take the reins in managing the operating company, which has resulted in a significant improvement in the operating performance over the past two years. Mr. Rogers' decision to liquidate the company's non-core investment subsidiaries upon his return has helped to facilitate the substantial reduction in debt.

The ratings are restrained by increasing cash flow requirements emanating principally from deferred compensation programs that reflect the improved state of operations plus term loan amortization which steps-up in the latter years. Moody's notes that while bank debt leverage is relatively low, Mary Kay has sizable amounts of other accrued liabilities which significantly increase effective leverage. While the turnover rate for the company's consultants is substantially below that of other operators in the direct selling industry, Mary Kay's continued prosperity is very much dependent upon its ability to 1) maintain its consultant base to provide necessary market coverage and 2) consistently introduce new products that maintain the interest of existing and prospective new customers and consultants. With the withdrawal from several unprofitable foreign markets over the past year or so, Mary Kay has become increasingly reliant on a smaller number of profitable operations outside the U.S., whose performance is subject to global economic and political volatility.

The stable ratings outlook anticipates that Mary Kay will be able to maintain both its current operating performance and consultant base through the continued execution of appropriate cost cutting and productivity programs plus innovative merchandising, Internet, and sales force initiatives for both existing and new product introductions. Continued reduction of debt in amounts significantly in excess of scheduled amortization payments could create upward ratings momentum. Over the last two years the company has successfully completed a number of cost reduction and supply chain initiatives that have resulted in meaningful cost savings and a more streamlined manufacturing and distribution operation. The effectiveness of these improvements may be offset by potential volatility in international markets or by greater pricing pressure brought on by larger players in today's highly competitive marketplace. A significant deterioration in operating margins leading to a reduction in available free cash flow that results in an elimination of debt prepayments over an extended period of time could pressure ratings.

Mary Kay, Inc., is a privately-held worldwide manufacturer and direct marketer of skin care products, cosmetics and fragrances, with headquarters in Dallas, Texas.

New York
Angela Jameson
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
Senior Vice President
Unknown Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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