S&P Rates Abercrombie & Fitch (ANF) at 'BB-'; Outlook Stable

Standard & Poor's Ratings Services today assigned its 'BB-' corporate credit rating to New Albany, Ohio-based Abercrombie & Fitch Co. (NYSE: ANF). The outlook is stable.

At the same time, we assigned a 'BB+' issue-level rating to the company's proposed $400 million ABL facility with a '1' recovery rating. The '1' recovery rating indicates our expectation of a very high (90%-100%) recovery in the event of payment default. We also assigned a 'BB-' issue-level rating to the company's new $325 million term loan B with a '3' recovery rating, indicating our expectation of meaningful (50%-70%) recovery in the event of a payment default.

The company will use the proceeds from the transaction to refinance a $131 million term loan and $60 million outstanding under an unsecured revolving credit facility. We expect the remainder of the funds to be held in cash at the close of the transaction and be used for general corporate purposes, including share repurchases, throughout the remainder of 2014.

"Abercrombie participates in the competitive and widely fragmented specialty apparel industry. We view the company's highly recognizable brand that has an extensive global presence and solid business position focusing on the teen segment, as strengths," said credit analyst Kristina Koltunicki. "Challenges include its high historical volatility of profitability and continued depressed operating performance, highlighted by persistent negative same-store sales. We view Abercrombie's omni-channel initiatives and international expansion as the two primary vehicles of growth for the company, as we believe its U.S. store presence has been overbuilt and will decline over the next two years."

The rating outlook on Abercrombie is stable. We expect revenues and margins to remain pressured for the remainder of 2014 given our view that the retail environment will continue to be competitive and highly promotional. However, we believe operating performance will begin to improve in the beginning of 2015 as the company gains further momentum in realizing the benefits of its strategic initiatives. Despite our view for an uneven performance cadence, we still expect credit protection measures to improve some from pro forma levels.

Downside scenario

We could lower our ratings on Abercrombie if operating performance does not show signs of rebounding in 2015 possibly as a result of merchandise missteps related to its fashion-conscience teen consumer and a persistent slowdown in U.S. mall traffic. At that point, EBITDA would erode by about 10% from forecasted levels, which would result in leverage approaching the mid-5.0x area. We could also lower the ratings if Abercrombie becomes more aggressive with shareholder friendly activities, including debt-financed share repurchases, resulting in the deterioration of leverage to similar levels.

Upside scenario

An upgrade is not under consideration over the next year, given our tempered performance expectations. We could consider raising our ratings over a longer time horizon, if operating performance becomes less volatile, demonstrated through more consistent EBITDA generation. An alternative scenario for an upgrade would include an improvement to credit metrics, such that debt leverage would improve to under 4.0x and FFO to debt would increase more than 20%, on a sustained basis. EBITDA would need to increase by approximately 25% from forecasted levels for this to occur.

You May Also Be Interested In

• Evercore ISI Upgrades First Solar (FSLR) to Outperform
• Goldman Sachs expects 2024 S&P 500 total cash spending to rise
• Roth/MKM Upgrades Albertsons Companies Inc. (ACI) to Buy, 'Fundamental Floor and Improved Deal Likelihood'