Research Update: Harbor Freight Tools USA Inc. 'BB-' Rating Affirmed; Outlook Negative On Tariff Uncertainty

Discount tool and equipment retailer Harbor Freight Tools USA Inc.'s credit measures have weakened in fiscal 2019 (ended July 31) with reduced profit margins and leverage at 4.1x as of July 31, 2019, because of U.S. tariffs on certain imports from China, where the company sources a majority of its private-label products. At the same time, Harbor Freight has reported positive operating trends, including continued positive comparable-store sales year-to-date, and we expect these to continue. Although we expect tariffs will lead to lower EBITDA and leverage sustained above 4x in fiscal 2020, we don't expect immediate retail demand declines for the company's products. In our view, Harbor Freight will moderate its financial policy as it continues to operate in a

...- Discount tool and equipment retailer Harbor Freight Tools USA Inc.'s credit measures have weakened in fiscal 2019 (ended July 31) with reduced profit margins and leverage at 4.1x as of July 31, 2019, because of U.S. tariffs on certain imports from China, where the company sources a majority of its private-label products. - At the same time, Harbor Freight has reported positive operating trends, including continued positive comparable-store sales year-to-date, and we expect these to continue. Although we expect tariffs will lead to lower EBITDA and leverage sustained above 4x in fiscal 2020, we don't expect immediate retail demand declines for the company's products. In our view, Harbor Freight will moderate its financial policy as it continues to operate in a tariff-challenged environment and not fund nontax distributions over the next 12 months. - As a result, we have affirmed our '##-' issuer credit rating and '##-' issue-level rating (with a '3' recovery rating) on Harbor Freight....

Research Update