S&P Global Ratings upgraded the debt ratings of Samsonite International S.A. to reflect the company’s sales recovery in fiscal 2022 and the expectation of continued global travel recovery supporting further performance improvement through 2023.
Samsonite International makes luggage, business and computer bags, outdoor and casual bags and travel accessories under the Samsonite, Tumi, American Tourister, Gregory, High Sierra, Kamiliant, ebags, Lipault, and Hartmann.
S&P raised its issuer credit rating on Samsonite to ‘BB’ from ‘BB-‘. It also raised our issue-level rating on its senior secured debt to ‘BB+’ from ‘BB’ and its rating on its senior unsecured debt to ‘BB’ from ‘BB-‘.
The stable outlook reflects S&P’s expectation that Samsonite maintains its S&P Global Ratings-adjusted EBITDA margin near current levels while expanding revenue, which will decrease S&P Global Ratings lease-adjusted leverage below 3x in 2023 and 2024 from 3x in 2022.
S&P said in its analysis, “The upgrade reflects our expectation that increasing demand for travel will drive continued sales momentum and deleveraging this year. Samsonite reported net sales growth of 52 percent in fiscal 2022 on a constant currency basis relative to 2021, along with good profit generation owing to its expense-reduction initiatives. The sales growth relative to the prior year reflects rebounding global demand for leisure travel.
“Still, sales remained 10 percent below prepandemic levels on a constant currency basis (excluding Russia and Speck), partially due to restrictions during the year in some parts of the world, primarily in China, that we believe stifled demand for travel-related merchandise. These restrictions have since been lifted, and we anticipate pent-up travel demand in China will drive sales growth towards pre-pandemic levels because China is one of Samsonite’s largest markets, accounting for approximately 8 percent of consolidated net sales prepandemic.
“Samsonite will benefit as pandemic-related restrictions ease globally and corporate travel resumes. Meanwhile, we expect the company’s inventory investments from 2022 will allow it to cater to the increased demand levels expected in 2023. We anticipate sustained revenue growth and improved profitability, culminating in S&P Global Ratings-adjusted leverage in the high-2x area over the next two years. This also reflects the decreasing volatility in cash flows that we expect over the forecast period as travel normalizes.
“We expect the ongoing recovery of global air travel trends will offset potential slowing demand amid macroeconomic uncertainty. S&P Global Ratings believes there is a 63 percent chance of a technical recession in the U.S. over the next 12 months. This increased risk of recession and persistent inflation could impair consumer spending and limit Samsonite’s revenue growth. However, in our view, pent-up demand for leisure travel globally will likely persist over the next 12-18 months and support ongoing sales recovery toward prepandemic levels.
“Through February of 2023, the company’s regional sales exceeded 2019 levels (excluding Speck) on a constant currency basis, by 3.1 percent in North America and by 12.0 percent in Asia. We believe this reflects an early indication of the expected improvements in top-line performance as travel restrictions continue to ease, especially in Asia. We note that unit volumes continue to lag 2019 levels, indicating a potential upside as demand continues to recover.
“Samsonite’s products are discretionary in nature, and there is risk that weaker consumer spending could hurt financial performance. However, Samsonite’s diverse portfolio of brands, including value-oriented brands such as American Tourister, may offset the risk by appealing to price-sensitive customers even in an economic downturn.
“Samsonite executed on cost-cutting initiatives that increased margins, improved credit measures, and strengthened cash flow generation. The company’s aggressive measures to address its fixed-cost structure during the pandemic included headcount reductions, store closures, and corporate spending cutbacks. These measures reduced fixed selling, general, and administrative (SG&A) expenses approximately $300 million relative to 2019. These actions also allowed the company to generate S&P Global Ratings-adjusted EBITDA margin of 21.2 percent in 2022
(compared with 19.1 percent in 2019). We believe management will remain focused on expense management while the company benefits from abating freight and supply chain costs, allowing Samsonite to sustain S&P Global Ratings-adjusted EBITDA margin in the low-20 percent area over the next two years.
“The stable outlook reflects our expectation that Samsonite will maintain S&P Global Ratings-adjusted leverage in the mid- to high-2x area as it benefits from the ongoing recovery in global travel trends. While macroeconomic uncertainty presents a threat to our forecast, we think management will likely take action to maintain leverage near its 2x target.”
