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Moody's Assigns 'Baa2' Rating to Coach's (COH) Unsecured Note Offering; Outlook Stable

February 23, 2015 12:10 PM EST

Moody's Investors Service today assigned a Baa2 rating to Coach Inc's (NYSE: COH) ("Coach") senior unsecured note offering. Coach intends to use the proceeds from this offering for general corporate purposes, which may include capital expenditures, working capital, repayment of outstanding revolver borrowings, acquisitions, or investments in, and funding for, its Hudson Yards development. The rating outlook remains stable.

The following ratings were assigned:

Senior unsecured notes rating: Baa2

RATINGS RATIONALE

Coach's Baa2 senior unsecured rating reflects its ownership of the long-lived "Coach" brand which continues to hold one of the leading shares in the women's handbag and small leather goods segment in its key geographic markets and its meaningful scale with excess of $4.5 billion in global revenue. The rating also reflects Moody's expectations Coach will maintain a moderate debt burden and strong credit metrics. We expect Debt/EBITDA (incorporating Moody's standard analytical adjustments) will be in the mid 2 times range by the end of the current year following this bond offering. While the company's current business transformation initiatives will adversely impact sales and margins, Moody's expects Coach will maintain mid to high teen operating margins and with sales in excess of $4 billion in the current fiscal year. Coach's ratings also reflects Moody's generally positive view of the global handbag and accessory market which we believe has credible organic growth opportunities for Coach, mostly in international markets such as China and Europe and its men's business which has performed well for Coach the past few years. The rating is constrained by the company's high reliance on a relatively narrow product mix, mostly women's handbags and small leather goods, for a significant portion of revenues, and the execution risk around the business transformation. The rating also reflects the company's excellent liquidity with total cash and investments in excess of $1 billion as of 12/27/14 (the vast majority of which is held outside the US) and access to a $700 million revolving credit facility maturing in 2019. We expect the company to use a portion of its cash balance to fund the acquisition of Stuart Weitzman for up to $574 million (if certain targets are achieved).

Coach's rating outlook is stable. Moody's expect the company will continue to execute its business transformation program which is likely to lead to continued pressure on sales and operating margins for the next few quarters before signs of stabilization occur. Moody's also expect the company will maintain balanced financial policies while in the midst of its transformation though we believe continuing the current dividend payment will remain a priority.

Downward rating momentum would build primarily if Coach's business transformation effort leads to a greater than expected loss of revenue and/or pressure on operating margins. Quantitatively ratings could be downgraded if debt/EBITDA were expected to be sustained above 3 times or if interest coverage were to fall below 4.75 times.

Upward rating momentum would build over time if Coach is successful with its business transformation efforts, which would be evidenced by organic growth trends at least in line with the category (indicating Coach is maintaining market share) and if operating margins began to recover from the depressed levels expected in the current fiscal year. Quantitatively ratings could be upgraded if debt/EBITDA was sustained below 2.25 times and interest coverage exceeded 6 times while maintaining at least a very good liquidity profile.



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