Harbor Freight Tools USA Inc.

The stable outlook reflects our belief that same-store sales trends will remain favorable despite some moderation and margin pressures will occur from cost increases. We expect adjusted leverage in the low-4x area. We could lower the rating if funds from operations (FFO) to debt falls below 12% or debt to EBITDA rises to 5x or more. This could result if: Harbor Freight can no longer manage tariffs and costs, or competitive pressures intensify such that EBITDA margin declines to 17.5% or lower. If this scenario unfolds, the company's comparable-store sales could turn negative and we could view its competitive standing as weaker. The company pays a large debt-funded distributions without offsetting growth in EBITDA, or if operating performance weakens and

...Following a strong performance in fiscal 2021, we expect Harbor Freight's performance to moderate in fiscal 2022 from cost pressures. Harbor Freight continues to benefit from the overall strength of the U.S. home repair and remodeling sector, as well as the robust demand for its products as consumer interest in do-it-yourself (DIY) tasks and home improvement projects has spiked since the pandemic. In fiscal 2021, adjusted EBITDA margins increased almost 300 basis points (bps) driven by fewer discounts, cost-cutting initiatives, and new store openings. The company also benefited from government paid stimulus relief and online demand from new customers in younger demographics. Strong EBITDA growth offset the increase in funded debt during the year, with S&P Global Ratings-adjusted debt to EBITDA remaining almost unchanged at 3.3x as of July 31, 2021. In fiscal 2022, we expect supply chain, freight, and labor cost inflation to be a headwind and contribute to EBITDA margins declining 300-400...

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