S&P Downgrades Fossil Group (FOSL) Corp. Rating to Junk; Outlook Stable

S&P Global Ratings lowered its corporate credit rating on Fossil Group Inc. (Nasdaq: FOSL) to 'BB+' from 'BBB-'. The outlook is stable.

Concurrently, we lowered our issue-level rating on the company's $1.05 billion revolving credit facility and $231.25 million term loan to 'BB+' from 'BBB-' and assigned a '3' recovery ratings to these debt instruments, indicating our expectation for meaningful (50%-70%, at the high end of the range) recovery in the event of a payment default.

"The downgrade reflects Fossil's steep decline in earnings over the past five quarters, which resulted in a meaningful deterioration of the company's credit measures," said S&P Global Ratings credit analyst Mariola Borysiak. "The rating action also reflects our expectation that the weak operating trends will continue through the most of 2016 because of the difficult retail environment, intensified competitive pressures from wearable technology devices (a segment Fossil was late in entering), and slowing economic growth in its key markets. We now estimate that debt to EBITDA will remain above 2x at the end of 2016 before improving toward 2x one year later. These measures are significantly weaker than our previous expectations of debt leverage improving to 2x by the end of 2016. Moreover, we have factored into our ratings greater volatility of profits given its vulnerability to technology-enabled wearable devices."

The outlook is stable, reflecting our expectation for modest performance gains toward the end of 2016 and into 2017 as the company's sales and margins begin stabilizing following the introduction of technology-enabled wearable products. We anticipate the company's debt to EBITDA will be in the high-2x area by end of the third quarter of 2016 and will improve to below 2.5x by the end of 2016 and toward 2x one year later.

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