NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the Long-term Issuer Default Rating (IDR) for Tiffany & Co. (Tiffany) to 'BBB+' from 'A-'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
The downgrade reflects Fitch's changing expectations for Tiffany's medium term EBITDA trends given signs of a luxury spending slowdown in the U.S. and other key markets as well as the impact of the strong U.S. dollar on tourist spend in the U.S. (Fitch projects foreign tourism accounts for approximately 25% of Tiffany's U.S. sales).
Fitch's prior rating was predicated on EBITDA improvement beginning 2016 after an approximate 10% reduction in 2015, yielding an improving adjusted leverage trend toward the low-2.0x range over the next 24 - 36 months from the mid-2.0x range in 2015. However, Fitch now sees negative comparable store sales (comps) driving a 1 - 3% decline in 2016 EBITDA and flattish leverage around 2.6x. Even with mid-single digit annual EBITDA growth beginning 2017, adjusted leverage is now expected to remain in the mid-2.0x range over the forecast horizon.
The rating continues to reflect Tiffany's strong position in the global premium jewelry segment, its iconic brand image, and generally strong cash flow and credit metrics.
Comps Deceleration: Tiffany's Americas comps were negative 8% during the Q4 holiday period (the Americas represents approximately 50% of Tiffany's sales). Fitch believes sales, especially in Tiffany's lower price point categories including silver jewelry, were negatively impacted by reduced international tourism related to the strong U.S. dollar as well as a general stagnation in U.S. luxury spending. Fitch now expects domestic comps in the negative low-single digits for 2016 against prior expectations for a modestly positive comp. Comps in the Asia-Pacific region (approximately 25% of sales) also decelerated during the holiday period to negative 9% on weakness in Hong Kong and Singapore, with recent economic pressure in China limiting Fitch's optimism for a rebound in 2016. Fitch notes ongoing strength in Tiffany's Japan business (approximately 13% of sales) is somewhat due to foreign travellers visiting Japan instead of the United States.
Continued EBITDA Decline: Fitch projects a 10% decline in 2015 EBITDA, to the $1 billion level. Fitch expects 2016 EBITDA to decline 1 - 3% to the $975 million range, predicated on negative low-single digit comps and continued transaction and translation pressure from the strong U.S. dollar. Gross margin is projected to modestly increase on favorable sourcing costs and continued, modest price increases. SG&A spend is expected to be flattish as the company seeks expense efficiency in a negative sales environment.
Fitch expects annual EBITDA growth to begin to turn positive in 2017 in the 4 - 5% range, assuming comps turn positive and the U.S. dollar does not continue to strengthen. Annual free cash flow after dividends (FCF) is expected to be in the $150 - $200 million range beginning 2016, with 2015 FCF expected in the $300 million range on reduced inventory buys.
Leverage To Remain in Mid-2x Range: As a result of continued EBITDA declines, Fitch now sees adjusted leverage remaining in the mid-2.0x range over the next 24 - 36 months,. Fitch expects Tiffany will use FCF and cash on hand to fund its recently announced $500 million share buyback, and does not project any debt pay-down in the forecast horizon.
--2015 total revenue growth expected to be down 3 - 4% due to currency headwinds, with constant currency same store sales flattish. Revenue growth in 2016 is expected to be down 1 - 3% on modestly negative comps, with annual growth beginning 2017 projected at 3 - 4%, predicated on 2% square footage growth and low single digit constant currency comps.
--Gross margin expected to rise 20bps annually on retail price increases and some fixed cost leverage. In 2016, gross margin should continue to benefit from the positive impact of mix shift to lower-priced items, which have higher margins.
--SG&A expense anticipated to grow 3% this year and be flattish in 2016, leading to deleverage given comp trends, and grow 3 - 4% thereafter, in line with sales growth.
--EBITDA is expected to be down approximately 10% in 2015 to $1 billion and down 1 - 3% in 2016 to the $975 million range on negative comps, fixed-cost deleverage and the negative impact of the strong U.S. dollar. Beginning 2017, annual EBITDA is expected to grow 4 - 5%.
--Dividends are planned to increase approximately 10% per year.
--FCF expectation of $300 million in 2015 and $150 to $200 million thereafter, which will be primarily deployed towards share repurchases.
--Leverage expected to be 2.5x in 2015, increasing to 2.6x in 2016 and remaining in the mid-2.0x range over the forecast horizon.
A positive rating action could occur if a comps reacceleration yields EBITDA growth such that leverage improves to 2.0x.
A negative rating action could result in the event of one or more of the following: (i) worse than expected organic top-line, profitability and cash flow trends driven by prolonged weakness in its mature markets that is not adequately offset by its faster growing new markets, (ii) deterioration in its brand or market positioning in the mid-to-upper tier luxury market, and (iii) leverage sustaining in the high 2.0x range on operational weakness or a move by management to more shareholder-friendly policies.
As of Oct. 31, 2015, Tiffany had $673 million of cash and cash equivalents and $818 million available under all its current revolving facilities. In October 2014, Tiffany refinanced and upsized its $550 million unsecured multi-currency credit facilities ($275 million due Dec. 2014 and Dec. 2016) with $750 million credit facilities (4-year and 5-year $375 million each). Fitch expects annual FCF after dividends to be approximately $300 million in 2015 and $80 million to $100 million thereafter. Fitch expects share repurchases to be funded with excess cash.
In 2014, Tiffany also issued $250 million and $300 million of 10-year and 30-year unsecured notes, respectively, to refinance $400 million in aggregate principal amount of private placement notes due 2015, 2017, 2018 and 2019. Post the transaction, the company's next debt maturity will be in 2024, with only $83 million of debt due Sept. 2016.
FULL LIST OF RATING ACTIONS
Fitch has downgraded Tiffany's ratings as follows:
--Long-term IDR to 'BBB+' from 'A-';
--Senior unsecured facilities to 'BBB+' from 'A-';
--Senior unsecured notes to 'BBB+' from 'A-'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Dodd-Frank Rating Information Disclosure Form