On Tuesday, Tapestry (NYSE:TPR) Inc.'s financial outlook was revised to stable from negative by S&P Global Ratings, following the termination of its merger agreement with Capri Holdings (NYSE:CPRI) Ltd. due to regulatory approval uncertainties. Tapestry has also redeemed $6.1 billion of notes, which were funded with cash on hand. S&P Global Ratings confirmed Tapestry's 'BBB' issuer credit rating and expects the company to maintain leverage in the high-1x area over the next year while continuing consistent shareholder returns.
The stable outlook for Tapestry is based on projections that its sales will remain steady in the coming year with a slight increase expected in 2026 and beyond. The company is anticipated to sustain strong EBITDA margins when compared to its peers. This outlook comes after Tapestry redeemed a substantial amount of senior notes, reducing its financial obligations significantly. The company's gross funded debt is projected to be around $2.4 billion at the end of its fiscal year ending June 2025.
Tapestry's financial risk profile has been reassessed to modest from intermediate, with expectations of a sustained leverage in the high-1x area for the fiscal year 2025 and modest improvements in subsequent years. The company has approved an additional $2 billion share repurchase program, which it plans to finance through debt issuance. Tapestry currently has $750 million in term loans and $1 billion in revolving credit facility borrowings, which it aims to refinance soon.
Despite flat demand anticipated for 2025 and ongoing investments in its brands and digital channels, Tapestry is forecasted to generate over $850 million in free operating cash flow annually for the next two years. The company also plans to allocate approximately $200 million annually for capital expenditures to support its operations and store renovations. Tapestry's financial policy post-merger termination aims to keep leverage under 2.5x and maintain solid investment-grade capital allocation plans.
Tapestry's revenue growth is expected to remain stable despite a challenging discretionary spending environment. In the first quarter of fiscal 2025, revenue was flat compared to the previous year. Coach , Tapestry's flagship brand, saw a modest sales increase due to direct-to-consumer sales growth, while Kate Spade faced a decline. Coach's performance, driven by innovative products and digital sales growth, is expected to support Tapestry's long-term growth.
The company's profitability is projected to improve, supported by disciplined cost management and higher average unit retail. In the first quarter ended September 28, 2024, Tapestry's EBITDA margin improved, reflecting increased ticket sizes and reduced freight costs. Management's focus on attracting new customers, particularly from younger demographics, and an expanding digital sales channel are expected to contribute to profitability improvements.
The stable outlook from S&P Global Ratings is based on the expectation that Tapestry will maintain strong operating margins relative to its peers. Tapestry could face a ratings downgrade if leverage approaches 2.5x on a sustained basis due to worse-than-expected consumer spending or a more aggressive financial policy. Conversely, the rating could be raised if the company maintains leverage at 2.0x or below while balancing shareholder returns and a conservative debt load.
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