S&P Global Ratings upgraded the debt ratings of Samsonite International S.A. to ‘BB-‘ from ‘B+’ as the luggage company’s sales recovered through the first half of fiscal 2022, and modest continued global travel upside is expected to improve performance through 2023.
Samsonite manufactures luggage, business and computer bags, outdoor and casual bags, and travel accessories, primarily under the Samsonite, Tumi, American Tourister, Gregory, High Sierra, Kamiliant, ebags, Lipault, and Hartmann brands.
In a statement, S&P said it raised its rating to reflect its forecast for deleveraging toward 3x in fiscal 2022 from an elevated 6.4x in 2021.
S&P’s issue-level rating on its senior secured debt was raised to ‘BB’ from ‘BB-‘, and its rating on its senior unsecured debt to ‘BB-‘ from ‘B+’.
The positive outlook reflects that ratings on the company could be raised again over the next 12 months if its top-line recovery trend continues and it preserves margin gains from the past year, leading to an expectation for S&P Global Ratings-adjusted leverage sustained below 3x.
S&P said in its analysis, “Accelerated sales recovery through the first half of 2022 amid global pent-up demand for travel and easing COVID-19 pandemic restrictions are driving faster deleveraging than we anticipated. Samsonite reported comparable sales growth of 75 percent in the first half on a constant currency basis, along with good profit generation from expense-reduction initiatives. The sales growth reflects the rebounding global demand for leisure travel. Still, sales remained 20 percent below pre-pandemic levels on a constant currency basis, partially driven by ongoing restrictions in some parts of the world that we believe are stifling demand for travel-related merchandise. Over the coming quarters, we anticipate further easing of restrictions, which should allow international travel to continue to recover. We believe this will lead Samsonite to approach pre-pandemic revenues in fiscal 2023.
“Though we expect total sales to remain about 15 percent below 2019 levels this year, our forecast for a faster recovery and sustained profitability improvements should lead to S&P Global Ratings-adjusted leverage of only about 3x by the end of 2022 (from 6.4x in 2021), compared to our earlier forecast of 4x. We also anticipate leverage will continue to improve to the mid-2x area in 2023. Therefore, we revised our financial risk profile assessment to significant from aggressive. This also reflects volatility in cash flows that we expect will continue over the coming year given the lack of clarity on medium-term travel spending. Furthermore, many retailers have reported a glut of inventory this year with softer than initially anticipated sales trends leading to clearance activities and contracting margins. This could pose a risk to Samsonite’s wholesale business as retailers look to maintain leaner inventory.
“Risk of further travel industry disruptions limit the rating. Samsonite continues to recover from the COVID-19 pandemic, which revealed the travel industry’s sensitivity to external disruptions. While our forecast does not consider broad-based mobility restrictions, we believe restrictions could be reinstated or consumer discretionary spending reduced amid persistent inflation. We maintain a negative comparable rating analysis modifier on Samsonite to reflect the risk of possible adversities that would sharply reduce performance. This also reflects our view that Samsonite’s credit profile is comparably riskier than that of ‘BB’ rated peers that are less exposed to the travel and tourism industry.
“We expect the ongoing recovery of global air travel trends will offset potential slowing demand amid macroeconomic uncertainty. Increasing risk of recession in the U.S. (S&P Global Ratings believes there is a 45 percent chance of a technical recession over the next 12 months) and persistent inflation could impair consumer spending and limit Samsonite’s revenue growth. Still, pent-up demand for leisure travel globally is likely to persist over the next 12-24 months and support ongoing sales recovery toward pre-pandemic levels, in our view. As of the second quarter, regional sales lagged 2019 levels on a constant currency basis, by 17 percent in North America and 35 percent in Asia. We believe easing travel restrictions, especially in China, Japan, and South Korea, will continue to lift Samsonite’s top-line performance. Similarly, we believe sales recovery in North America, aided by the U.S. elimination of COVID-19 testing requirements for international travelers in June, will also help recovery toward pre-pandemic revenue. Meanwhile, Samsonite’s diversified portfolio of brands allows it to accommodate consumer trade-downs to its value-oriented brands such as American Tourister, maintaining market share.
“We use 2019 as a reference point for pre-pandemic performance but note reported sales that year were down about 4 percent from the previous year (2 percent on a constant-currency basis) on heightened tensions between the U.S. and China, political unrest in Hong Kong, and weakening economic conditions elsewhere. As high inflation and reduced consumption growth improve beyond 2023, we expect Samsonite will exceed 2019 revenue and profitability.
“Samsonite has already expanded beyond pre-pandemic profit margins, leading to improved credit measures and 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, and led to a $200 million run-rate reduction in selling, general, and administrative expenses relative to 2019. These actions allowed the company to generate the last 12 months’ S&P Global Ratings-adjusted EBITDA margin of about 21 percent (compared to 19.1 percent in 2019) as the last 12 months’ revenue remains more than $1 billion below 2019 levels as of the second quarter. We believe the last 12 months’ profitability benefited from temporary cost reductions, including lower advertising spending, reduced store operations, and reduced payroll expenses. As these dissipate through the remainder of 2022, we anticipate they will offset profitability benefits from expanding revenues.
“We forecast Samsonite will sustain EBITDA margins at about 21 percent this year and expand incrementally next year as freight and supply chain costs begin to abate. This reflects a significant improvement relative to our earlier projection for EBITDA margin in the 15 percent area. We expect Samsonite will continue to invest in working capital, which will limit cash generation. We also expect it will ramp up toward pre-pandemic capital expenditures (CAPEX). With these actions, we forecast over $250 million of free operating cash flow (FOCF) this year. We expect Samsonite will begin to generate consistently positive cash flow, leading to our forecast of about $400 million of FOCF in 2023.
“The positive outlook reflects that we could raise our ratings over the next 12 months if Samsonite continues to recover sales while maintaining good profitability with only limited effect on its performance from anticipated macroeconomic weakness.”
