Reuters logo
Fitch Places New Look's 'B-' IDR on Rating Watch Negative
June 13, 2017 / 4:56 PM / in 6 months

Fitch Places New Look's 'B-' IDR on Rating Watch Negative

(The following statement was released by the rating agency) LONDON, June 13 (Fitch) Fitch Ratings has placed New Look Retail Group Ltd (New Look)'s 'B-' Long-Term Issuer Default Rating (IDR) on Rating Watch Negative (RWN). The RWN reflects New Look's deteriorating operating performance, our expectation of falling consumer confidence in the UK, rising input prices following the fall in sterling, economic uncertainty following the recent general election, exacerbated by heavy competition from pure online players. The RWN for the IDR and also the ratings for the instruments will be resolved following full review with management on their 2018 business strategy. The stabilisation of the Outlook will be subject to our confidence in management's ability to turn around their operating performance, maintain their business profile, remain competitive in a rapidly changing environment and improve their financial and liquidity profile back within our negative sensitivity guidance. KEY RATING DRIVERS Exposure to UK Uncertainty: Fitch expects continuing pressure on UK like-for-like (LFL) sales as the UK's exit from the EU which continues to weigh on consumer spending. New Look's significant exposure to the UK, which together with rising input prices following the fall in sterling, economic uncertainty following the recent general election, intense competition and the significant challenges ahead over the coming years supports our RWN for the company's rating. Eroding Margins: In our base case, we have revised our expectations for EBITDA margin to only slightly recover to 11.9% in the financial year to March (FY18) from 10.4% in FY17. We have also revised downwards our view on the business model to 'Intact' from 'Sustainable' given the structural change in the fast fashion sector in the UK. We expect margins to remain under pressure, mainly due to the heavy discounting in the UK, in addition to sterling's depreciation against the US dollar, which will further impact pricing and competitiveness when New Look's legacy hedges roll off during 2017. This should be partially offset by growth in e-commerce channels. New Look experienced a significantly poor fourth quarter in FY17, with EBITDA down GBP22 million to GBP151million from our full-year Fitch forecast of GBP173million. Of the GBP 22million decline that occurred in the last quarter, about GBP10 million is related to product (fashion) risk in the UK, and GBP 15m to discounting due to the prevalence of promotions as well as increased distribution, marketing and e-commerce costs related to organic growth. If this trend continues, this could put further pressure on the ratings. Weaker Free Cash Flow; Credit Metrics: Free cash flow (FCF) has become negative and is not expected to recover to previous levels in the near term. This has reduced liquidity although it remains manageable. We expect the FCF margin to be negative to reach -0.3% in FY18 and -1.2% in FY19. FFO adjusted leverage has increased to 8.5x in FY17, which is 1.0x higher than our previous Fitch forecast and in the absence of a significant improvement in operating performance, we only expect slight deleveraging to 8.0x by FY19, which is just on our 8.0x negative guidance. New Look's leverage increased following a refinancing in 2015 from 7.1x, this reduced headroom under its negative guidance. Financial flexibility has also weakened slightly with FFO fixed charge cover falling to 1.2x in FY17, although it is expected to recover to around 1.3x by FY19. DERIVATION SUMMARY New Look is a fast-fashion multichannel retailer operating in the value segment of the UK clothing and footwear market for women, men and teenage girls. The group also generates around 20% of revenue internationally. The e-commerce platform is a key differentiating factor relative to other sector peers such as Financiere IKKS S.A.S (CCC), which helps to offset weaknesses in the domestic UK retail market to which it is heavily exposed. No Country Ceiling, parent/subsidiary or operating environment aspects impacts the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - group revenue growth declining -0.4% for FY18, driven by continued challenging conditions in the UK, pricing pressure, intense competition, partially offset by growth in ecommerce and international (China) - EBITDA margin recovering to 11.9% in FY18 - capex steady at 4.5% of sales in FY18 - no dividend payments or extraordinary non-recurring cash outflow RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Improvement in the business model through successful expansion in China, increasing diversification and scale, and a proven track record of strategy implementation over the medium term, leading to EBITDA margin at or above 15% - FFO adjusted leverage consistently below 6.5x - FFO fixed charge cover trending towards 2.0x - FCF margin sustainably above 2% Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Failure to overcome profit margin pressures, FX impact, loss of market share and weaker consumer confidence in the UK leading to EBITDA margin below 10% (FY17: 10.4%) - FFO adjusted leverage above 8.0x on a sustained basis (FY17: 8.5x) - FFO fixed charge cover below 1.2x (FY17: 1.2x) - Negative FCF generation (which Fitch defines after dividends) eroding the group's liquidity buffer (FY17: Neg) LIQUIDITY Weaker Liquidity: Cash balances have declined, lowering the overall liquidity buffer. New Look had GBP72 million of cash at FYE17, together with access to a GBP 100million undrawn RCF and a bilateral GBP5 million overdraft. There is a springing covenant under the RCF when more than 25% of its total commitment is drawn, requiring net leverage to be below 8.7x at FYE18 (and below higher levels at the end of the first, second and third quarters) against our estimate of 7.9x at FYE18. Working capital peak to trough is in the range of GBP50-60 million, for which we set aside GBP50 million as restricted cash. Refinancing risk has risen although there are no significant debt maturities of the notes until 2022. Contact: Principal Analyst Timothy Li Director +44 203 530 1386 Supervisory Analyst Jean-Pierre Husband Director +44 203 530 1155 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Edward Eyerman Managing Director +44 203 530 1359 Summary of Financial Statement Adjustments - Fitch has adjusted the debt by adding 8x of yearly operating lease expense related to long-term assets in the UK (around GBP173million for FY18) and 7x related to a small portion of group operating leases in Poland. Fitch also sets aside an amount of GBP50m as restricted cash related to working capital requirements. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below