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Investing.com -- S&P Global has downgraded its issuer credit rating for luxury accessory retailer Capri Holdings (NYSE:CPRI) Ltd. to ’BB’ from ’BBB-’, citing performance pressures and high leverage. Capri’s outlook remains negative, reflecting concerns that the company’s stabilization could take longer and cost more than anticipated.
Capri Holdings has seen a decrease in market share due to merchandise missteps and distractions from the failed merger with Tapestry (NYSE:TPR) last year. The ratings agency projects that Capri’s leverage will remain above 4x through fiscal 2025 (ending March 2025) due to ongoing weakness in operating performance.
In addition to the credit rating downgrade, S&P Global has also assigned an issue-level rating of ’BBB-’ to Capri’s secured revolver and term loan, indicating a full recovery of 90%-100% (rounded estimate: 90%).
Capri’s operating performance has been weak over the past two years, with underperformance across all brands and expected continued negative sales trends in the upcoming year. The company’s total revenue dropped by 11.6% in the third fiscal 2025 quarter ended Dec. 28, 2024. This decline was largely due to a global slowdown in demand for luxury fashion goods and the underperformance of strategic initiatives. Operational mistakes in repositioning the Versace and Michael Kors brands also negatively impacted performance.
Revenue fell across all three brands: Versace by 15%, Michael Kors by 12.1%, and Jimmy Choo by 4.2%, as products failed to resonate with customers. The company’s EBITDA margins also declined 370 basis points to 16.6%, partly due to lower full-price sell-throughs across the group in the latest twelve months through the third fiscal 2025 quarter.
Leverage is expected to remain high above 4x through 2025, risking the expectation for deleveraging to below 4x in 2026 amid recent trends. This compares with 3.0x for the bank’s fiscal 2025 covenant calculation. Capri’s revenue is anticipated to decline approximately 15% in 2025 due to ongoing store optimization efforts, reduction in the wholesale channel, and work to reposition its brands.
Capri announced plans to close 100 Michael Kors stores in fiscal 2025 and about 75 in fiscal 2026, offset with modest store openings. It also plans to reduce debt by about $200 million per year and end fiscal 2028 with about $600 million in net debt. The company aims to improve operating margins through global headcount reductions, store closures, office consolidations, and other efficiencies in areas like the supply chain.
Despite the acquisitions of Jimmy Choo and Versace increasing the company’s presence in Europe and Asia, weak global demand for luxury goods has weighed on performance. In the third quarter of fiscal 2025, the company reported revenue declines across all regions.
Capri announced plans to invest in e-commerce, store renovations, and product development, reduce debt with excess cash flow, and keep share buybacks paused. While a modest performance recovery is expected in the coming year, this is part of a long-term plan to improve brand positioning, pricing, and footprint.
Given the underperformance across regions and brands, as well as management’s lack of strategic initiative while performance deteriorated amid the Tapestry deal, S&P Global has revised Capri’s management and governance score to moderately negative from positive.
The negative outlook reflects risks in the company’s plans to turn around the business in the coming year in a cost-effective manner. S&P Global could lower the rating on Capri if the company’s brands continue to falter such that leverage exceeds 4x on a sustained basis. This could occur if sales continue to drop at current levels, more stores close, gross margins erode an additional 50 basis points, and the costs and investments required to turn around the business exceed the company’s current resources.
The outlook could be revised to stable if the company is successful in executing its strategy, which includes stabilizing revenues, improving profitability, bringing leverage comfortably below 4x on a sustained basis, and prioritizing deleveraging over shareholder-friendly dividends and share repurchases.
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