Qivalio has assigned a long-term corporate rating of BBB to l’Occitane International and to its envisaged NEU MTN program of up to €300m. Meanwhile, Qivalio has reaffirmed its SR1 short-term rating for the NEU CP program of L’Occitane International, of up to €500m.
L’Occitane is an international manufacturer and retailer of body, face, fragrance and home products using natural and organic ingredients. The company mainly sells skincare products through 6 different brands, the primary one being L’Occitane en Provence (c.78% of company revenues in FY21). The company has been listed on the Hong Kong Stock Exchange since 2010 and is majority-owned by Reinold Geiger, its chairman and former CEO.
In January 2021, L’Occitane Inc, the US subsidiary for retail sales, voluntarily filed for Chapter 11 in an attempt to renegotiate its lease terms, which the company deemed disconnected with respect to the prevailing financial performance of its bricks and mortar stores. This triggered a deconsolidation of l’Occitane Inc for February and March 2021 and an impact of +€8.6m on the operating profit of the group for FY21 (to end-March 2021). The procedure was closed as of end-August 2021, which, from a credit standpoint, has entailed a re-consolidation of l’Occitane Inc as of September 1, 2021. We reiterate that the situation post-Chapter 11 is expected to be favourable for the group as lease liabilities will be lower whereas EBITDA is expected to be higher, thereby improving the Qivalio-adjusted net leverage ratio. On November 15, 2021, l’Occitane announced the upcoming acquisition of an 83% stake in the US-based brand Sol de Janeiro for a total equity value of $450m (for 100%). Sol de Janeiro is a Brazilian-inspired lifestyle skincare brand which is expected to report revenues of $103m and adjusted EBITDA of $21m for its FY21 (year ending December 31). This acquisition will complement the group’s offering in skincare and beauty products all over the world, but especially in the US, where Sol de Janeiro generates c.80% of its revenues.
Meanwhile, the rest of the group remained resilient through the pandemic as L’Occitane reported consolidated revenues down only 6.5% for FY21 (-5.7% including l’Occitane Inc sales for February and March 2021). Pro forma 1H22 results (to end-September 2021) including l’Occitane Inc are good as well, with revenues of €725m, up 17.6% yoy (18.6% at constant FX rates).
Since our October 2021 report, the group’s liquidity profile is unchanged, supported by the RCF with a 5 + 1 +1 years maturity. We expect the company to exceed €2.0bn of revenues between 2023 and 2024 (the end of our forecast horizon) while the net adjusted leverage ratio is expected to decrease to 1.1x.
Overall, the rating remains underpinned by historically good cash generation, attractive margins, good geographic diversification, especially with a good presence in Asia, which is a fast-recovering market, and a sound growth track record, albeit one temporarily hampered by the pandemic. We believe the cosmetics industry’s outlook remains unchanged since our latest rating update. The fundamentals (greater penetration of organic/natural products within the healthcare industry, rising middle class in emerging countries) are unaffected and demand is expected to be more balanced between hard sales and online sales going forward.
However, our rating remains constrained by the limited size of the company compared to many of its peers, and its dependence upon the success of its main brand L’Occitane en Provence, which still accounts for 78% of consolidated revenues, even though diversification has improved with the acquisition of Elemis in 2019 (c.10% of FY21 sales) and will improve further with the acquisition of Sol de Janeiro.
Our ESG assessment is unaffected by the latest results, the emergence from the Chapter 11 filing of l’Occitane Inc in the US, or the upcoming Sol de Janeiro acquisition, and does not weigh on the rating.
As of end-March 2021, l’Occitane reported c.€0.8bn of financial debt, almost 38% of which related to lease liabilities under IFRS 16. Besides lease liabilities, l’Occitane had mainly €275m in term loan A, and €116m in NEU CP. The company also had some €0.6bn of undrawn, committed, sustainability-linked credit lines maturing in 2026 (with an option for two additional years).
Banks and financial creditors (outside lessors) had waived all potential cross default clauses and covenants before the L’Occitane Inc Chapter 11 procedure was initiated by the company.
The liquidity score for l’Occitane is unchanged, at 3 years, the highest on our grid. It remains supported by the RCF with a maturity in 2026 plus an option for two additional years. The group is also expected to generate significant FCF excluding the Sol de Janeiro acquisition, while facing limited debt redemption, which reinforces the very good liquidity profile.
We have a Stable outlook for the next 12 months, which reflects our view that credit metrics will slightly improve - but not to a significant degree - as the pandemic fades away and l’Occitane completes its acquisition of Sol de Janeiro.
List of ratings:
- LT corporate rating: BBB
- Envisaged NEU MTN rating: BBB
- NEU CP/short-term rating: SR1
An upgrade to SR0 is improbable at present and would result from a significant unforeseen change in credit metrics, both in the financial risk profile and the business risk profile of the group. An upgrade of our long-term ratings to BBB+ would result from a significant improvement in credit metrics on the back of strong growth post-pandemic and post-acquisition of Sol de Janeiro.
Conversely, a downgrade of both long-term and short-term ratings could result from a deterioration of credit metrics and/or liquidity on the back of lasting effects of the pandemic or new lockdowns, as well as a failure to integrate Sol de Janeiro or further significant debt-funded M&A.
SPRR/2021/00665 & 693/23/11/2021
Rating initiation: 12 September 2019 at SR2 for the NEU CP rating and November 23, 2021 at BBB for the long-term corporate and NEU MTN ratings
Last rating action: Upgraded to SR1 on October 12, 2021.
Rating nature: Solicited, public long-term corporate rating, long-term instrument rating and short-term instrument rating
With rated entity or third-participation: Yes, the ratings were issued after having been reviewed by the issuer
With access to internal documents: Yes
With access to management: Yes
Ancillary services provided to the rated entity: No
Name of the rating committee chair: Marc PIERRON, Senior Credit Analyst
Material sources used to support the rating decision:
- Consolidated financial statements 2018,2019, 2020, 2021
- FY21 results presentation and press release
- 1H22 press release, Sol de Janeiro acquisition press release and presentation
Limitation of the rating action:
- Qivalio believes that the quality and quantity of information available on the rated entity is sufficient to provide a rating
- Qivalio has no obligation to audit the data provided
Our methodologies used for this rating:
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