Conair Holdings LLC Outlook Revised To Negative On Weaker-Than-Expected Operating Performance And Uncertain Environment
- U.S.-based Conair Holdings LLC reported weaker-than-expected operating performance through the first three quarters of fiscal 2024. We believe operating performance could remain weak in 2025 due to constrained consumer budgets; cautious inventory management by retailers; higher freight costs; and, potentially, higher U.S. tariffs on imports from China.
- We revised our rating outlook on Conair to negative from stable.
- Concurrently, we affirmed our 'B-' issuer credit rating on the company and our 'B-' rating on its first-lien term loan. The recovery rating remains '3', reflecting our expectation for meaningful (50%-70%; rounded estimate: 50%) recovery in the event of a payment default.
- The negative outlook reflects the possibility that we may lower the ratings within the next 12 months if we believe the capital structure could become unsustainable.
SAN FRANCISCO (S&P Global Ratings) Dec. 3, 2024--S&P Global Ratings today took the rating actions listed above.
Our outlook revision to negative reflects Conair's weaker-than-expected operating performance through the first three quarters of 2024, tight EBITDA interest coverage ratio, and the uncertain operating environment. Conair reported weaker-than-expected operating performance, with a year-over-year sales decline in the first three quarters of fiscal 2024, compared with our expectation of low-single-digit percent sales growth. The company's beauty product categories experienced lower demand due to constrained consumer budgets, lower foot traffic in the mass channel, and consolidation in the drug store channel. We estimate Conair's S&P Global Ratings-adjusted EBITDA declined about 16% in the first three quarters of 2024, compared with the same period the previous year. Conair realized cost savings from Project Evolution and benefitted from lower ocean freight costs in the first half of the year. However, these benefits were more than offset by increased spending on advertising, promotion, investment in digital capabilities, restructuring actions, and duplicate costs related to opening a new distribution center.
Sales improved sequentially and increased year over year in the third quarter (ended Sept. 30, 2024), including the contribution from the acquisition of Fulham (now Cuisinart Outdoors), which closed in August 2023. The company reported year-over-year sales growth in its culinary segment while its beauty segment continued to experience lower demand and share losses in certain product categories. The company's Cuisinart brand continued to perform well and reported growth in coffee makers, cookware, cutlery, and air fryers. However, the company incurred one-time costs related to organizational restructuring and network optimization. Conair also delayed the ramp up of a new distribution facility and the closure of redundant facilities into 2025 to ensure satisfactory customer service levels during the key second half selling season, which resulted in higher costs. We now forecast S&P Global Ratings-adjusted leverage of about 8.2x in fiscal 2024, compared with 7.5x for fiscal 2023.
While we forecast low-single-digit percent sales growth in fiscal 2025 from continued strength in Cuisinart, new product launches, and international expansion, we view the company's exposure to potentially higher U.S. tariffs on imports and port strikes as key downside risks to our forecast. Approximately 70% of the company's sales are generated in the U.S. The company is analyzing various alternatives to mitigate these risks and has historically passed on higher import tariffs to customers to protect profitability. Nonetheless, a significant new increase on imports tariffs from China could have a negative effect on operating performance. We believe the company may be at a disadvantage compared with peers that have more diversified supply chains. In addition, prolonged port strikes on the East Coast could result in West Coast port congestion and supply chain constraints. As a result, we believe the company's EBITDA interest coverage, including interest rate hedging derivatives, could decline below 1.5x, which we would view as an indication of a potentially unsustainable capital structure.
The company reported negative free operating cash flow (FOCF), but we believe it maintains adequate liquidity. Conair reported negative FOCF for the first three quarters of fiscal 2024, compared with positive FOCF for the same period the previous year. The decline was driven by lower demand, higher advertising and promotion spending, restructuring costs, and higher working capital and distribution costs due to the delayed ramp up of the new distribution center.
We expect FOCF to turn positive in 2025 as the Hagerstown distribution facility ramp up and restructuring actions are completed in the first quarter of 2025. However, there are significant risks to our forecast given the uncertainty around tariffs and port strikes and the measures the company may need to take to mitigate the negative impact.
Conair borrowed under its asset-based lending (ABL) facility to finance higher inventory due to the delayed ramp up of its distribution center. As a result, its liquidity cushion, including cash on hand and ABL availability, declined in the third quarter. Nonetheless, we believe the company's current liquidity cushion is adequate to cover its principal liquidity needs over the next 12 months, including its peak working capital needs and capital expenditure (capex).
The negative outlook reflects the possibility that we may lower the ratings within the next 12 months if we believe the capital structure may become unsustainable.
We could lower our ratings on Conair if it were unable to offset higher import tariffs or required material investments to move its supply chain, which led to EBITDA interest coverage, including interest rate hedges, declining below 1.5x, or the company continuing to generate negative FOCF.
This could also occur if:
- The macroenvironment weakened, leading to lower consumer discretionary spending; or
- The expected benefits of the company's investments in advertising, promotion, digital capabilities, and a new distribution center were not realized.
We could revise our outlook to stable if Conair improved EBITDA interest coverage closer to 2x and generates positive FOCF. We believe this could happen if:
- Conair sustains market share and organic sales growth in both its culinary and beauty segments;
- The company realizes expected cost savings from Project Evolution; and
- The ramp up of the new distribution center is completed as planned without significant additional investments.
Governance factors are a moderately negative consideration in our credit rating analysis of Conair Holdings LLC. Our assessment of the company's financial risk profile as highly leveraged reflects corporate decision-making that prioritizes the interests of the controlling owners, in line with our view of the majority of rated entities owned by private-equity sponsors. Our assessment also reflects the generally finite holding periods and a focus on maximizing shareholder returns.
Related Criteria
- Criteria | Corporates | General: Sector-Specific Corporate Methodology, April 4, 2024
- Criteria | Corporates | General: Methodology: Management And Governance Credit Factors For Corporate Entities, Jan. 7, 2024
- Criteria | Corporates | General: Corporate Methodology, Jan. 7, 2024
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.spglobal.com/ratings for further information. Complete ratings information is available to RatingsDirect subscribers at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.spglobal.com/ratings.
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| Primary Credit Analyst: | Luis Medal, San Francisco +1 4153715084; luis.medal@spglobal.com |
| Secondary Contact: | Arpi Gupta, CFA, New York + 1 212 438 1676; arpi.gupta@spglobal.com |
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