Fitch Assigns Initial 'BB-' IDR to Vogue; Expects to Rate $445MM Bank
NEW YORK -- February 3, 2014
Fitch Ratings expects to assign the following initial ratings to Vogue
International LLC (Vogue) after The Carlyle Group closes its investment of 49%
of the company's equity. The transaction will add $445 million in senior
secured facilities and is expected to close by the end of this month:
--Long-term Issuer Default Rating (IDR) 'BB-';
--$30 million Senior Secured 5 year revolver 'BB+';
--$415 million Senior Secured 6 year term loan 'BB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Vogue is a small private company whose point of differentiation is in offering
products using ingredients that address specific hair conditions similar to
the products found in a salon but at more affordable price points. Most of the
company's brand support is with retailers rather than investments in national
advertising to pull consumers into the store. Consumers make the final
purchase decisions in store. Vogues approach has proven successful despite low
brand awareness relative to competitors.
Vogue has had a growing presence on-shelf with major retailers, particularly
in the mass and drug channel, for more than a decade. Major retailers such as
Target have grouped Vogues' OGX brand under a 'salon affordable' banner,
easily attracting consumers desiring specific hair solutions. Fitch notes that
over the past several years many large household and personal care companies
have modestly pulled back on advertising and increased trade spending to gain
more last minute attention from consumers.
Fitch expects the company's business momentum to continue but at a slower rate
than in the recent past as its revenue base increases. Near term actions to
improve its selling and customer facing organization, beginning with
centralizing much of its merchandising activities with a well-known national
brokers, are positive steps.
GROWING NICHE, GOOD POSITIONING
Vogue participates in the mass premium hair care category, which has exhibited
solid growth rates vis a vis a relatively flat overall category. Despite the
premium pricing to mid-tier brands Fitch notes that Nexxus, a mass premium
brand, had strong revenue growth during the recession of 2009. Pressured
consumers limited visits to the more expensive salon channel and migrated down
to mass premium brands during that time frame. Thus, there is good support for
Vogue's subcategory, although there could be modest negative impact during a
L'Oreal S.A. has commented on the bi-furcation in the beauty market where
mid-tier brands have generally lost share to premium or value. IRI scanner
data through mid-2013 shows modest or negative growth rates for mid-tier,
value brands, and the small portion of private label in this category. These
data points support Fitch's view of Vogue's better than average growth
At present, the company's ability to generate new, well-received products has
led to increased sales among existing and new customers. It appears however,
that new product development is led by the 51% owner (post The Carlyle Group's
investment), Todd Christopher. Fitch expects Mr. Christopher to continue
leading the business.
ATTRACTIVE COST STRUCTURE, FCF
Manufacturing is outsourced resulting in a highly variable cost structure. Net
sales growth has exceeded the low to mid-single digit average organic rate
experienced by the company's significantly larger peers. Margins have improved
sequentially for a number of years given higher top line growth and a more
modest rate of overhead increases. Limited fixed investments are required. The
company's FCF efficiency (Cash Flow from Operations - Capex)/Net Income) is
expected to be in the 90% range and in line with larger consumer product
companies such as the Procter & Gamble Company.
Fitch anticipates that Vogue should generate significant FCF to reduce debt
balances related to its $415 million, six-year senior secured term loan
rapidly. Borrowing under the $30 million secured revolver is expected to be
modest. There is room in the company's credit protection measures for modest
discretionary activities within the rating category as long as its business
momentum continues along its current path.
SIZE, LACK OF DIVERSIFICATION
The company participates primarily in hair care, with the majority of its
revenues derived from the United States. Revenues are also small in
relationship to its several large peers. Vogue may not have the scale or
resources to compete if a large competitor invested heavily in advertising and
trade spending for a protracted period of time.
EVENT RISK INCREASES
The Carlyle Group (Carlyle), a private equity firm, will own 49% of Vogue
after its $391 million investment. Carlyle is expected to exit its position in
its investment at some point which could increase event risk. Fitch does not
rate for the potential, but will review the implication to the ratings when
and if an event occurs.
DEBT STRUCTURE AND LIQUIDITY
Pro-forma leverage for the transaction is 4x. However, given mandatory excess
cash flow requirements in Vogue's credit agreement, Fitch expects debt
balances to decline meaningfully each year. Protection for creditors is
provided by a Net First Lien Leverage Ratio which steps down quickly from
5.25x at June 30, 2014 to 3.75x at March 31, 2016 and thereafter. It is
anticipated that the company should ably meet requirements with a solid
cushion. Debt maturities on the term loan are structured to be modest at
approximately $4.2 million per year.
FCF given modest fixed investments is ample. Vogue has moderate room for
discretionary activities given its strong FCF. Liquidity is adequate and
supported mainly by the FCF and the $30 million, five-year senior secured
What Could Trigger a Rating Action
--Given the company's small size and above average business risk given its
lack of product and geographic diversification, an upgrade is unlikely.
Future developments that may, individually or collectively, lead to a negative
rating action include:
--Event related increases in leverage of more than one turn from the day the
transaction is consummated, such as a dividend recapitalization.
--Protracted spending by a large well-funded competitor in the mass premium
segment that has the potential to negatively impact Vogue's business profile.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-term Ratings and Parent and
Subsidiary Linkage' (August 2013);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
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Grace Barnett, +1-212-908-0718
Fitch Ratings, Inc.
One State Street
New York, NY 10004
Wesley E. Moultrie, +1-312-368-3186
Michael Zbinovec, +1-312-368-3164
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