Moody’s Investors Service upgraded Canada Goose, Inc’s debt ratings due to the outerwear maker’s solid operating performance and potential to benefit from China’s recovery.

Ratings upgraded include corporate family rating (“CFR”) to Ba3 from B1, its probability of default rating (PDR) to Ba3-PD from B1-PD and its senior secured 1st lien term loan B rating to B1 from B2. The company’s speculative grade liquidity rating was downgraded to SGL-2 (good) from SGL-1 (very good). The outlook is stable.

“The upgrade reflects Canada Goose’s resilient operating performance and strong brand recognition that has kept credit metrics conservative over the past two years”, said Dion Bate Moody’s analyst. “We expect revenue and EBITDA growth to benefit from a modest demand recovery in mainland China and growth from its high margin Direct-to-Consumer (DTC) channel as Canada Goose expands its store footprint and broadens its product categories.”

Moody’s said in its analysis, “Canada Goose’s Ba3 rating benefits from (1) conservative credit metrics with debt/EBITDA expected to remain around 3x over the next 12 to 18 months, which provides a buffer in the rating to absorb any softness in consumer demand; (2) a strong global and well-established brand with sales in 62 countries evenly spread across APAC, US, EMEA and Canada; (3) vertically integrated business model and high proportion of Direct-to-Consumer (DTC) sales that support strong margins; and (4) positive free cash flow and good liquidity.

“However the rating is constrained by: (1) its narrow and discretionary luxury product and inherent seasonality in its down apparel business, whose demand can decline in difficult economic conditions or from shifts in consumer sentiment or preferences; (2) small scale and manufacturing concentration in Canada; (3) large private equity ownership that may take decisions that favor shareholders over creditors; and (4) social concerns around the use of down feather in its products.

“Canada Goose has good liquidity (SGL-2). Sources total around C$570 million while uses in the form of term loan amortization total about C$4 million in the next four quarters to September 2024. Liquidity is supported by C$48 million of cash at July 3, 2023 (Q1/2024), free cash flow of about C$120 million through to September 2024, and C$403 million (borrowing base as of Q1/2024) of availability under its C$467.5 million asset-based lending (ABL) facility expiring in May 2028. Canada Goose is subject to a springing fixed charge coverage covenant under its ABL facility; however, the covenant is not likely to be applicable through the next four quarters. The company has limited ability to generate liquidity from non-core asset sales.

“Canada Goose has three classes of debt: (1) unrated C$467.5 million ABL facility; (2) B1-rated $300 million secured term loan B due in 2027; and (3) unrated C$93 million (equivalent) unsecured facilities in Japan and mainland China of which C$44 million drawn as of Q1/2024. The term loan is rated one notch below the CFR (Ba3), to reflect its junior ranking behind the ABL facility. The term loan benefits from first priority lien on PP&E and a second priority lien on accounts receivable and inventory.

“The stable outlook reflects Moody’s expectation that the company’s performance will continue to improve as the company executes its DTC strategy through new stores and expanding its non-parka product offering while maintaining the current credit metrics and good liquidity in the next 12 to 18 months.”

Photo courtesy Canada Goose