We have upgraded our short-term rating for the NEU CP program of L’Occitane International, of up to €300m (which could be increased to up to €500m), to SR1 (from SR2). This rating upgrade comes after l’Occitane reported solid FY21 results (year to end-March 2021), and 1Q22 revenues (to end-June 2021), despite the pandemic and the ongoing Chapter 11 procedure at l’Occitane Inc.
L’Occitane is an international manufacturer and retailer of body, face, fragrance and home products using natural and organic ingredients. The company mainly sells skincare products through 6 different brands, the primary one being L’Occitane en Provence (c.78% of company revenues in FY21). The company has been listed on the Hong Kong Stock Exchange since 2010 and is majority-owned by Reinold Geiger, its chairman and former CEO.
In January 2021, L’Occitane Inc, the US subsidiary for retail sales, voluntarily filed for Chapter 11 in an attempt to renegotiate its lease terms, which the company deemed disconnected with respect to the current financial performance of its bricks and mortar stores. This triggered a deconsolidation of l’Occitane Inc for February and March 2021 and an impact of +€8.6m on the operating profit of the group for FY21. With the procedure set to close in the weeks ahead, l’Occitane Inc is expected to be reconsolidated. From a credit standpoint, the situation post-Chapter 11 is expected to be favourable for l’Occitane as lease liabilities will be lower whereas EBITDA is expected to be higher, thereby improving the Qivalio-adjusted net leverage ratio.
Meanwhile, the rest of the group remained resilient through the pandemic as L’Occitane reported consolidated revenues down only 6.5% for FY21 (-5.7% including l’Occitane Inc sales for February and March 2021), and reported revenues up 23% for 1Q22. Since our last rating report update in March 2021, the group’s liquidity profile has improved significantly with the renewal of its RCF with a 5 + 1+ 1 years maturity. We expect the company to exceed €2.0bn of revenues between 2023 and 2024 while the net adjusted leverage ratio is expected to decrease below 1.0x, back to the level pre-acquisition of Elemis.
Overall, the rating remains underpinned by historically good cash generation, attractive margins, good geographic diversification, especially with a good presence in Asia, which is a fast-recovering market, and a sound growth track record, albeit one temporarily hampered by the pandemic. We believe the cosmetics industry’s outlook remains unchanged since our latest rating update. The fundamentals (penetration of organic/natural products within the healthcare industry, rising middle class in emerging countries) are unaffected and demand is expected to be more balanced between hard sales and online sales going forward.
However, our rating remains constrained by the limited size of the company compared to bigger peers, and its dependence upon the success of its main brand L’Occitane en Provence, which still accounts for 78% of consolidated revenues, even though diversification has improved with the acquisition of Elemis in 2019 (c.10% of FY21 sales).
Our ESG assessment is unaffected by the latest results and the expected emergence from the Chapter 11 filing of l’Occitane Inc in the US, and does not weigh on the rating.
As of end-March 2021, l’Occitane reported c.€0.8bn of financial debt, almost 38% of which related to lease liabilities under IFRS 16. Besides lease liabilities, l’Occitane had mainly €275m in term loan A maturing in March 2022, and €116m in NEU CP. The company also had some €0.6bn of undrawn, committed, sustainability-linked credit lines maturing in 2026 (with an option for two additional years).
Banks and financial creditors (outside lessors) had waived all potential cross default clauses and covenants before the L’Occitane Inc Chapter 11 procedure was initiated by the company.
Compared to our previous rating report, the liquidity profile of the company has significantly improved as the group signed a new RCF in late March 2021 with a 5 +1 +1 years maturity. As a result of this, our liquidity score for l’Occitane is 3 years, the highest on our grid. In addition to signing a new RCF, the group is also expected to generate significant FCF while facing limited debt redemption, which reinforces the very good liquidity profile.
We have a Stable outlook for the next 12 months, which reflects our view that credit metrics will slightly improve - but not to a significant degree - as the pandemic fades away and stores open again in most countries, while the level of online sales is expected to be sustained as well.
An upgrade to SR0 is improbable at present and would result from a significant unforeseen change in credit metrics, both in the financial risk profile and the business risk profile of the group.
A downgrade back to SR2 could result from a deterioration of credit metrics and/or liquidity, as well as from debt-funded M&A.
Rating review report on existing NEU CP program
Rating initiation: 12 September 2019 at SR2
Last rating action: Affirmed at SR2 on March 16, 2021
Rating nature: Solicited, public short-term instrument rating
With rated entity or third-participation: Yes, the rating was issued after having been reviewed by the issuer
With access to internal documents: Yes
With access to management: Yes
Ancillary services provided to the rated entity: No
Name of the rating committee chair: Marc PIERRON, Senior Credit Analyst
Material sources used to support the rating decision:
- Consolidated financial statements 2018,2019, 2020, 2021
- FY2021 results presentation and press release
- 1Q22 presentation
Limitation of the rating action:
- Qivalio believes that the quality and quantity of information available on the rated entity is sufficient to provide a rating
- Qivalio has no obligation to audit the data provided
Our methodologies used for this rating:
20 boulevard Eugène Deruelle
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