S&P Lifts Outlook on Coach (COH) to Stable; Notes Stabilization in Operating Performance

S&P Global Ratings revised the outlook on Coach Inc. (NYSE: COH) to stable from negative. At the same time, we affirmed all ratings, including the 'BBB-' corporate credit rating.

"The outlook revision reflects the company's gains in stabilizing its operating performance, with same-store sales in North America moderating toward flat in the most recent quarter. We believe operating performance will continue to improve as the company continues its transformational initiatives, and that same-store sales will turn positive in the remainder of fiscal 2016 (June year-end)and in 2017," said credit analyst Helena Song. "We also believe the company will maintain credit metrics at around the current levels, including debt to EBITDA in the low-1x range."

The stable outlook reflects our expectation that operating performance will continue to stabilize and improve as the company continues its transformational initiatives, with same-store sales turning positive in the remainder of fiscal 2016 and in 2017. We also believe the company will maintain credit metrics at around the current levels, including debt to EBITDA in the low-1x range.

We would lower the ratings if Coach's operating trends significantly underperform our base-case expectations. This could occur if sales trends in North America revert back to consistently negative while margins further decline. This could lead us to reassess the comparable rating analysis as "negative" from "neutral" compared with other 'BBB-' rated companies because of extended market share loss and negative comparable sales trends, which would lead to a lower rating. Although unlikely given the current capital structure, we could lower the rating if the company's financial policy becomes more aggressive and we reassessed the financial risk profile unfavorably.

We could raise the ratings if the company's operating performance improved consistently from its on-going operating initiatives and further effectiveness of its transformational initiates, with positive same-store sales and stabilized margins, resulting in expanded market share and strengthened free operating cash flow generation. Continued solid international performance would also be a factor in any positive rating action.

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