S&P Global Ratings on May 15 affirmed Compagnie Financière Richemont SA's ratings at A+ but revised its outlook to negative from stable, citing the possibility of a downgrade if the coronavirus pandemic causes the company's credit metrics to worsen.
The agency could also lower the Richemont's ratings if the S&P Global Ratings-adjusted debt to EBITDA ratio is about 1.5x in the fiscal year ending March 31, 2021, with low prospects for improvement in 2022.
Richemont, which makes luxury watches under the Vacheron and Piaget brands, reported a 33% drop in fiscal 2020 earnings after the COVID-19 outbreak led to a steep decline in fourth-quarter sales.
Ratings said it expects the weaknesses Richemont had seen during the January to March period to continue due to the impact of lockdowns and restrictions on international travel. The agency also expects the luxury goods sector to be hurt by the economic recession until the end of 2020 and probably beyond, due to the industry's discretionary nature.
In that scenario, Ratings anticipates Richemont's revenue to drop by 25% to 30% and a sharply lower EBITDA in year ending March 2021. It also expects the S&P Global Ratings-adjusted leverage ratio to approach 1.5x compared with 0.7x in fiscal 2020.
In addition, Ratings expects lease expenses for closed retail stores to weigh down on the luxury goods company's operating margin. It said Richemont will also likely face difficulties in the wholesale channel as a drop in sales will put pressure on wholesalers, who are already dealing with expensive inventories and softer demand.
According to Ratings, Richemont's outlook could be revised to stable if it maintains adjusted debt to EBITDA below 1.5x in the year to March 31, 2021, and there are clear signs that an economic recovery is supporting demand for luxury products.