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Fitch Affirms New Look at 'B-'; Outlook Stable
October 6, 2016 / 1:42 PM / a year ago

Fitch Affirms New Look at 'B-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 06 (Fitch) Fitch Ratings has affirmed New Look Retail Group Ltd's (New Look) Long-Term Issuer Default Rating (IDR) at 'B-' with Stable Outlook. A full list of ratings actions is available below. The rating is constrained by New Look's high financial leverage, FX fluctuations impacting on pricing and competiveness and unfavourable sector-wide operating conditions in the UK. Positively, however, the rating reflects our view of New Look's sustainable business model, its leading market share in the UK, growing multichannel and e-commerce operations supported by the group's nationwide store network and expanding international presence. The Stable Outlook is underpinned by the group's proactive management of margin erosion, through supply chain optimisation which should help protect margin and cash flow generation over the next 12 to 18 months. KEY RATING DRIVERS Strong Multichannel Sales Platform Fitch expects New Look's business model to remain sustainable, and for group revenue to grow 2.3% in financial year to March 2017 (FY17). This will be driven by steady performance in the group's e-commerce, international and franchise divisions offset by LFL decline in the core UK retail business. The multichannel sales platform of New Look is a key differentiating and success factor in the fast-fashion business relative to sector peers, while in our view its lower price point positioning also helps to protect it from severe downturns. UK Consumer Confidence Hit Fitch expects sustained negative pressure on LFL growth in UK sales over our rating horizon to FY19. This will be partly mitigated by management's commitment to new store openings and margin management. Economic uncertainty following the UK referendum to exit the EU has led to some adverse impact on the general UK high street retail environment as evidenced by New Look's footfall decline, some loss of market share and negative LFL UK retail sales in 1Q FY17. However, as a 'value retailer' increasingly focused on e-commerce we expect New Look should retain certain defensive characteristics as (and if) consumers trade down in a downturn. Profit Margin Pressure In our forecasts we factor New Look's EBITDA margin to fall to 12.8% in FY17, before recovering to 13.4% by FY19. Weakness in sterling following the UK's referendum to exit the EU will impact on New Look's margins given that most of the group's revenue is realised in sterling and a significant portion of costs are denominated in US dollar (albeit foreign currency requirements are hedged substantially through to the spring/summer season). Measures by management to mitigate margin erosion will entail some execution risk, as they seek to rationalise New Look's cost structure, negotiate with existing suppliers and optimise their supply-chain infrastructure and sourcing geographies. Strategic Focus in China Fitch expects New Look's international segment to break-even after FY18, as higher penetration in the Chinese retail market begins to contribute to profitability, alongside positive contribution from the majority of its other international stores. New Look's value fashion proposition remains resilient in China, supported by a growing network of stores and third party e-commerce retailers as well as a favourable operating environment. However, this segment is yet to reach a critical mass to be a significant profit contributor to the overall group, thus impacting profitability in the division. Weak Metrics Constrain Rating We expect New Look's key debt protection metrics to stay in line with 'B-' peers in the sector albeit with low rating headroom. We factor only a mild deleveraging profile over our rating horizon to FY19, with some uncertainties around a more challenging operating environment in the UK which is fully captured in the rating. We forecast funds from operations (FFO) adjusted leverage trending to 6.6x and steady FFO fixed charge coverage at 1.5x in FY19. If achieved, such credit metrics will lead to stronger rating headroom. Above-Average Recovery Expectations for Senior Secured Noteholders The senior secured and senior instrument ratings continue to reflect Fitch's expectation that recoveries for creditors will be maximised in a going-concern restructuring, rather than in liquidation, due to the asset-light nature of the business. Fitch has applied a 25% discount to FY16 EBITDA and a distressed multiple of 5.5x (the latter reflecting the growing share of e-commerce and New Look's business model relative to listed peers in the sector. This analysis results in above-average expected recoveries ('RR3' or 58% recovery expectation) for the senior secured noteholders but negligible recoveries ('RR6' or 0%) for the senior notes translating into instrument ratings of 'B' and 'CCC' respectively. KEY ASSUMPTIONS Fitch's key assumptions within our conservative rating case for the issuer include: - Group revenue growth of 2.3% in FY17, driven by new store openings in the UK, and growth in e-commerce, and in international (China). This is partially offset by a more challenging operating environment in the UK with LFL sales decline and pricing impacts - Margin pressure leading to moderate group EBITDA margin of 12.8% in FY17, before rising to 13.4% by FY19 - Increase in expansionary capex for e-commerce and stores openings in the UK and China, with capex-to-sales at 6% in FY17 and 6.5% thereafter - No dividend payments or extraordinary non-recurring cash outflow RATING SENSITIVITIES Positive: Potential developments that may, individually or collectively, lead to positive rating action include: - 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%, (FY16: 15.1%) - FFO adjusted leverage consistently below 6.5x (FY16: 6.9x) - FFO fixed charge cover trending towards 2.0x (FY16: 1.5x) - FCF margin sustainably above 2% Negative: Potential developments that may, individually or collectively, lead to negative rating action include: - 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% - FFO adjusted leverage above 8.0x on a sustained basis - FFO fixed charge cover below 1.2x - Negative FCF generation (which Fitch defines after dividends) eroding the group's liquidity buffer LIQUIDITY Comfortable Liquidity Fitch views New Look's liquidity profile as comfortable following the 2015 refinancing with no material debt maturity until 2022. As of 1Q FY17, New Look had access to readily available cash of GBP56.1m (Fitch treats GBP2m held as guarantees over leases, GBP12m held for Employee Share Options Trusts and GBP45m for working capital requirements seasonality as restricted cash). In addition, New Look had access to GBP100m (undrawn) in a revolving credit facility due 2021. FULL LIST OF RATING ACTIONS New Look Retail Group Limited --Long-Term IDR affirmed at 'B-'; Outlook Stable New Look Secured Issuer Plc --Senior secured notes affirmed at 'B'/'RR3' New Look Senior Issuer Plc --Senior notes affirmed at 'CCC'/'RR6' Contact: Principal Analyst Timothy Li Associate Director +44 20 3530 1386 Supervisory Analyst Paula Murphy Director +44 20 3530 1718 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: 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 GBP165m expected in FY17) and 7x related to a small portion of group operating leases in Poland. We estimate GBP59m of cash as restricted comprising GBP2m held as guarantees over leases, GBP12m held for Employee Share Options Trusts and GBP45m for annual average working capital requirements. We also treat GBP59.8m of swap termination costs and early redemption premiums related to the 2015 refinancing as non-operating, non-recurring cash flows instead of cash interest paid. No adjustments made to EBITDA/R in respect of minority dividends. This is not relevant for the issuer. Additional information is available on 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. 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