S&P snips Oak Holdings

S&P said it lowered its ratings for Oak Holdings LLC and its first-lien credit facilities to CCC+ from B-. The recovery rating remains 3, indicating meaningful (50%-70%; rounded estimate: 55%) recovery in default.

The company posted a free operating cash flow deficit of about $35 million through the 12 months ended Jun. 30, mostly caused by increased inventory spending from customer demand shifts and carryover inventory from late 2022, held for the 2023 fall and winter seasons. The company boosted its inventory in the first half of 2023 to support demand rebound after recovering from its Mexico fire, resulting in peak inventory levels of about $139 million as of Jun. 30, 2023, S&P said.

“The downgrade reflects the company's constrained liquidity and negative free operating cash flow stemming from higher inventory levels,” the agency said in a press release.

On the plus side, the company's production capacity is fully recovered from a fire at Oak's fabric warehouse and fulfillment areas in Champoton, Mexico, hurt its sublimation printing capacity and ability to produce football jerseys and wool varsity jackets back in April 2022, S&P noted.

“During this time, Oak had responded to this by sourcing higher-cost third-party manufacturing contractors, retaining skilled labor, using the rest of its Champoton building, and adding capacity to its Merida facility. With its production facilities now back at full capacity, the company's cost profile normalized in recent quarters, as it decreased its reliance on third-party contractors. The recovery in capacity has also enabled the company to fully return to normalized customer service levels to fulfill the recent demand surge for its products,” S&P said.

The outlook is negative.

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