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Announcement:

Moody's: Global luxury retailers' earnings growth could double in 2017 but won't return to double-digit levels soon

Global Credit Research - 31 May 2017

Paris, May 31, 2017 -- Global luxury retailers' earnings growth could nearly double in 2017 (4% in 2016 to 7% in 2017), but is unlikely to reach the double-digit levels achieved in the halcyon 2010-13 period, says Moody's Investors Service in a report published today.

Moody's report looked at a sample of 11 luxury product manufacturers comparing a broad range of financial metrics including revenue growth, EBITDA margin, share buybacks and dividends.

"A return to double-digit growth for the global luxury retail segment is unlikely until at least 2020 as the Chinese consumer boom has slowed, value-conscious consumers are now less likely to stand for price hikes, and competition from other sectors like travel and fine dining remains elevated," says Vincent Gusdorf, Vice President -- Senior Analyst at Moody's.

Moody's report, "Luxury Retail -- Global: Earnings Are Picking Up But Acquisition Risk Will Constrain Credit Quality," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The rating agency's report is an update to the markets and does not constitute a rating action.

The overall credit quality of the luxury industry should improve slightly in 2017. Shiseido Company, Limited's (A2 stable) Moody's-adjusted debt/EBITDA Moody's-adjusted will strengthen on the back of higher earnings and conservative financial policies. SMCP Group (B1 stable), which owns the Sandro, Maje and Claudie Pierlot brands, will see the most marked improvement in credit metric terms on the back of new store openings and high like-for-like growth.

US firms Tiffany & Co. (Baa2 stable), and Ralph Lauren Corporation (A2 stable) will cut capex and shareholder remuneration to maintain stable leverage in the face of a slowdown in earnings growth into 2018 as a result of a strong dollar, department store deterioration and operating issues. On the other hand, The Estée Lauder Companies Inc. (A2 stable) should perform well thanks to its good international diversification and its portfolio of well-recognized brands.

Other factors facing the luxury goods sector include rising competition, which is pushing some to improve productivity. Many luxury groups also intend to reduce their reliance on department stores, particularly in the US where companies such as Macy's, Inc (Baa3, stable), Kohl's Corporation (Baa2, stable), or Nordstrom, Inc. (Baa1, stable), have been hard-hit by changing shopping trends, lower mall traffic, and competition from online and off-price retailers.

Companies are also now putting the brakes on new store openings, with some choosing to instead focus on improving the productivity of existing stores. Others, such as Ralph Lauren Corporation (A2, stable) are reducing their store portfolio. This decline in openings is credit positive as it reduces fixed costs such as rent, improves the financial flexibility of luxury companies and bolsters cash flow generation.

Luxury companies will also look to cut share buybacks when necessary to preserve their credit ratios, but payout ratios will remain high. Estée Lauder, which has a history of large and frequent share buybacks, will likely remain one of the most shareholder-friendly companies in the sector.

M&A will continue to constrain ratings as luxury companies are now considering large acquisitions. The companies in Moody's sample will spend $7 billion on acquisitions in 2017, compared to $2 billion in 2016. Coach, Inc.'s (Baa2, ratings under review) planned purchase of Kate Spade & Company for $2.4 billion, largely using debt, will be credit negative. More positively, multi-brand groups may sell underperforming subsidiaries and improve their credit ratios.

Subscribers can access the report at:

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1070148

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Vincent Gusdorf
Vice President - Senior Analyst
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yasmina Serghini
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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