Kirk Beauty One GmbH

The negative outlook on Kirk Beauty reflects our view of currently elevated levels of financial leverage and impaired cash flow generation following numerous acquisitions and an earnings shortfall in fiscal 2018, resulting in credit metrics that we see as temporarily out of line with the rating. This resulted in S&P Global Ratings-adjusted debt to EBITDA of nearly 8.0x, EBITDAR cover of about 1.2x, and reported negative free operating cash flow (FOCF) of €75 million in fiscal 2018. The negative outlook also reflects our view that the earnings shortfall was due mainly to nonrecurring items, and we therefore believe that the credit metrics will improve over the next 12 months. We think FOCF will turn to a positive €35 million-€55 million

...Strong competition from online retailers and drugstores to result in pressure on EBITDA margin.Kirk Beauty is exposed to competition from pure-play online retailers with meaningful size and drugstores that are aggressively expanding into the beauty segment. The growth of pure-online players in the German beauty market within recent years demonstrates high segment exposure to the e-commerce trend. These chains, with their established low-cost operations and low-priced products, have been chipping away consumers and increasing margin pressures on Kirk Beauty by offering large discounts, especially in Germany. We expect the group's reported EBITDA margin to remain below the 10%-11% seen in fiscal 2017 (ending Sept. 30, 2017), with additional pressure caused by the need for continuous investment in e-commerce, marketing, and promotions. Strategic repositioning of German business is proving fruitful.The group's main brand, Douglas, has found its position as a dominant player in the German beauty...

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