Estée Lauder (EL) Ratings, Outlook Affirmed by Moody's Following Recent Acquisitions

November 17, 2016 3:41 PM EST

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Moody's Investors Service, affirmed Estee Lauder Company's (NYSE: EL)(Estee Lauder) ratings, including the company's A2 senior unsecured rating and the Prime-1 commercial paper rating. The rating outlook is stable. This action follows the company's announcement on November 14, 2016 that it will acquire Two Faced for $1.45 billion.

The affirmation reflects Moody's expectation that Estee Lauder will continue to be a strong global player in prestige beauty. While the company's pace of acquisitions has increased, Moody's does not believe that Estee Lauder will pursue any additional significant debt funded acquisitions until it has reduced leverage to levels the rating agency feels are more comfortable for its ratings. Pro-forma adjusted debt/EBITDA will increase to 2.3x from 1.8x following the Two Faced transaction. However, Moody's expects leverage to improve through a combination of earnings growth and debt reduction. Moody's believes that Estee Lauder will continue to deliver low-to-mid single digit organic sales growth and solid earnings trends for the next several years.

Ratings affirmed:

Senior Unsecured rating at A2;

Senior Unsecured Shelf rating at (P)A2;

Commercial Paper at Prime-1.

The rating outlook is stable.


Estee Lauder's A2 senior unsecured and Prime-1 short-term debt ratings reflect the company's leading market position in prestige beauty supported by a portfolio of well recognized brands. The company's conservative financial policies support strong credit metrics with good cash flow generated from its geographically diverse portfolio. Further, the company's multi-year reorganization plan will deliver additional cash flow, while improving financial and operating flexibility. Moody's expects this flexibility, coupled with Estee Lauder's distribution capabilities and strong track record of innovation, to continue to drive revenue growth at or above the industry average. Cash flow remains healthy through economic cycles, providing flexibility to re-invest in a range of economic environments. Products are somewhat discretionary and vulnerable to consumer spending pullbacks, but the company is resilient in economic downturns as cyclical revenue losses, if any, are manageable. The rating is tempered by the discretionary and highly competitive prestige beauty category and limited product diversification as it focuses exclusively on the beauty segment.

The stable rating outlook reflects Moody's view that Estee Lauder will continue to grow revenue and generate a healthy level of cash relative to its overall funded debt. Moody's expects share repurchases and acquisitions to be funded from free cash flow and modest additional debt.

Estee Lauder's ratings could be upgraded if the company maintains its strong global franchise of beauty brands, and sustains strong profitability and cash flows. Additionally, a commitment to improve and sustain lower leverage and maintain solid interest coverage would be necessary for an upgrade. Specifically, Estee Lauder would need to maintain EBIT margins above 20% and retained cash flow to net debt above 40% before Moody's would consider an upgrade.

The ratings could be downgraded if the value of the company's global franchise deteriorates, or the company adopts a more aggressive financial policy that meaningfully increases leverage. Specifically, Estee Lauder's ratings could be downgraded if EBIT margins fall below 10% or retained cash flow to net debt is sustained below 30%.

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