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Investing.com -- S&P Global Ratings has revised its outlook for U.S.-based Advantage Solutions Inc. to negative from stable, following weaker-than-expected results for the first quarter of fiscal year 2025. The company also lowered its expectations for the remainder of the year due to a decline in consumer spending and internal staffing issues.
S&P Global Ratings has adjusted its revenue, EBITDA, and cash flow forecasts for Advantage in response to these challenges. The company’s S&P Global Ratings-adjusted leverage is expected to remain high at around 6x in fiscal year 2025, which is 1x higher than the previous forecast.
The ’B’ issuer credit rating for Advantage was confirmed, but the issue-level rating for the company’s first-lien term loan facility and senior secured notes was lowered to ’B’ from ’B+’. The recovery rating was also revised to ’3’ from ’2’, reflecting an expected decrease in enterprise value in the event of a hypothetical default scenario. This is due to multiple asset sales Advantage has recently completed.
Despite the negative outlook, S&P Global Ratings believes Advantage’s staffing issues are temporary and expects that the company’s restructuring and reorganization-related costs will be offset by its near-term profit. For the first quarter of fiscal year 2025, the company reported a 5% decline in its organic revenue. Advantage’s branded, retailer, and experiential services segments reported revenue declines due to client exits, client losses, and market softness. The company is working to rectify its staffing issues by increasing its recruiter base and hiring a new Chief Workforce Operations Officer.
However, macroeconomic conditions for the company’s key customers remain weak. The recent pullback in discretionary spending by consumer product companies and retailer inventory de-stocking are expected to be near-term challenges. As a result, S&P Global Ratings anticipates Advantage’s S&P Global Ratings-adjusted leverage will remain high at about 6.8x at the end of 2025. The company’s S&P Global Ratings-adjusted EBITDA is expected to grow by about 7% in 2025, primarily due to reduced restructuring and reorganization-related costs.
Advantage is vulnerable to economic downturns and may face execution risk related to its recent transformation efforts. The company’s business remains focused on the center-of-store space and its recent restructuring efforts could lead to operational disruptions. Advantage’s recent staffing problems are believed to have stemmed from its reorganization efforts.
Advantage is expected to generate a reported free operating cash flow (FOCF) deficit of about $60 million-$70 million in 2025, improving to an inflow of about $100 million in 2026. The company’s 2025 cash flow will be negatively affected by a $50 million payroll shift in 2025, unfavorable DSOs due to the implementation of its new ERP system, higher capital expenditure of about $70 million related to its IT transformation, and elevated interest expense of about $145 million. However, as of March 2025, Advantage maintained an adequate liquidity position, supported by unrestricted cash balances of about $121 million, about $399 million of availability under its $500 million asset-based lending (ABL) credit facility expiring in 2027, and about $50 million of expected cash proceeds from its July 2024 Jun Group sale.
Advantage remains committed to achieving its 3.5x net leverage target, compared with the company’s net leverage of 4.2x as of March 31, 2025. The company is expected to use its excess cash to reduce debt rather than to finance transformational mergers and acquisitions or shareholder returns.
The negative outlook reflects the potential that S&P Global Ratings will lower its rating on Advantage over the next several quarters if its operating performance weakens such that its S&P Global Ratings-adjusted debt to EBITDA remains above 7x. The rating could be lowered if the company faces various challenges such as persistent labor cost inflation, inability to attract and retain staff, a decline in the usage of outsourced sales and marketing agencies, loss of multiple customers due to intensifying competition, and significant operational disruptions related to technology transformation efforts.
On the other hand, the outlook could be revised to stable if Advantage sustains leverage comfortably below 7x. This could occur if the company meets customer demand for its services, resolves its staffing issues, successfully recovers its higher costs through price increases without damaging its customer relationships, and completes its technology modernization efforts without facing major issues while reducing its restructuring costs.
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