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Rating Action:

Moody's affirms Tapestry's Baa2 senior unsecured rating; outlook changed to negative

27 Mar 2020

New York, March 27, 2020 -- Moody's Investors Service, ("Moody's") today affirmed Tapestry, Inc.'s ("Tapestry") Baa2 senior unsecured rating and changed the ratings outlook to negative from stable.

"Although Tapestry has taken decisive measures to enhance its already excellent liquidity, the negative outlook reflects the risk of continued disruption from COVID-19 in the face of unprecedented temporary store and mall closures as well as the potential for ongoing weakness in consumer demand", stated Vice President, Christina Boni. "In addition to $1.2 billion of cash and short term investments at the end of 2019, the company drew $700 million under its $900 million revolving credit facility and has suspended its common dividend while having no near term maturities", Boni added.

Affirmations:

..Issuer: Tapestry, Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

Outlook Actions:

..Issuer: Tapestry, Inc.

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The luxury apparel sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in Tapestry's credit profile, including its exposure to China have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Tapestry remains vulnerable to the outbreak continuing to spread. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Tapestry, Inc. of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

Tapestry's credit profile reflects its ownership of the long-lived "Coach" brand which continues to hold one of the leading shares in the women's handbag and small leather goods segment in its key geographic markets. The company has increased its scale further with the addition of Kate Spade & Company (Kate Spade) with $1.4 billion in global revenue during its fiscal 2019. The company has been working on stabilizing its Kate Spade segment as it has pursued international expansion opportunities which can leverage its existing infrastructure abroad. Although the company has excellent liquidity and we expect Tapestry's operating performance will remain pressured in the face of the disruption and reduced consumer demand as a result of COVID-19.

The company's business transformation which has improved the health and market positioning of the Coach brand reflected in positive comparable sales trends and Tapestry's high teens operating margins prior to COVID-19. The rating is constrained by the company's high reliance on a relatively narrow product mix, particularly women's handbags and small leather goods, for a significant portion of revenues.

The negative outlook reflects Tapestry's need to reset its cost base as it addreses disruption of COVID-19 as well as the negative effect on luxury spending. The negative outlook also reflects the need to manage its cash burn through its operational and financial policy actions.

Ratings could be upgraded if Tapestry posts consistent sales and operating performance at its core brand Coach while improving its operations at Kate Spade and Stuart Weitzman. An upgrade would also require that Tapestry's debt/EBITDA was sustained below 2.25 times and interest coverage remained above 7 times while maintaining an excellent liquidity profile.

Ratings could be downgraded if operating performance remains under pressure from either poor execution or a more pronounced contraction in luxury spending, liquidity deteriorates, financial policy does not remain conservative. Quantitatively ratings could be downgraded if debt/EBITDA were expected to be sustained above 3 times or if EBIT/interest was sustained below 4.75 times.

Headquartered in New York, NY, Tapestry, Inc., founded in 1941, operates 989 Coach stores in North American, Japan, China, Asia and Europe and also has meaningful Coach brand sales through a number of wholesale partners across the globe. Fiscal 2019 Coach brand revenues were $4.3 billion. Tapestry also operates 427 stores for Kate Spade & Company, a designer and marketer of luxury handbags, accessories and other products with approximately $1.4 billion in Fiscal 2019 sales, and its Stuart Weitzman brand which operates 159 stores globally with approximately $400 million in fiscal 2019 sales.

The principal methodology used in these ratings was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christina Boni
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Margaret Taylor
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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