Brazil · Companies

A once-promising turnaround at the Brazilian cosmetics giant is stalling as the long shadow of Avon and a souring consumer climate erode hard-won financial gains.

Sao Paulo. (Photo internet reproduction)

What the rating action signals

S&P Global Ratings has kept Natura Cosméticos at its highest Brazil national-scale grade but darkened its view of the company’s near-term path. The shift to a negative outlook means the agency sees a meaningful chance of a downgrade if operating conditions do not improve over the next few quarters.

The ‘brAAA’ rating itself remains intact for now, along with a ‘br3’ recovery score that assumes unsecured lenders would get back roughly 60% of their money in a default. That cushion, however, is thinning as cash consumption and margin pressure mount.

The Avon legacy weighs on the turnaround

S&P pointed squarely to “the continuing difficulty of integrating the Natura and Avon brands” as a key driver of the gloomier outlook. The direct-selling beauty giant has struggled to extract the cost savings and sales synergies it promised when it brought the two iconic names under one roof.

Avon’s subdued performance has been a persistent drag on consolidated cash flows and margins for years. A consumption slowdown in Brazil and Argentina hit the Avon brand especially hard, delaying the margin uplift Natura needs to keep its debt comfortably in check.

Crucially, the legacy debt of Avon Products Inc.—the non-operational U.S. holding company—has been ring-fenced and is not the source of today’s rating pressure. S&P previously judged that Avon’s U.S. restructuring did not increase Natura’s consolidated obligations, so the current warning stems entirely from operational weakness, not a hidden debt bomb.

What Natura Cosmeticos does. Natura Cosméticos S.A. engages in the development, manufacture, distribution, and marketing of cosmetics, fragrances, and personal hygiene products in Brazil, Peru, Colombia, México, Chile, Argentina, Uruguay, and Ecuador. The company offers its products through retail markets, e-commerce, business-to-business, and franchise channels under the Avon and Natura brands. Natura Cosméticos S.A. was founded…

Margins buckle in a tough consumer climate

Natura’s home market is flashing warning signs. Revenue in Brazil fell 5.5% in the first quarter of 2026, while the local EBITDA margin collapsed by 8.6 percentage points to just 13.8%.

Rising selling, general and administrative expenses, severance costs, and a spike in medical claims all ate into profitability. The result was a net loss of R$445 million, exacerbated by financial expenses that included hedging losses on US dollar-denominated debt.

S&P now sees a real risk that deteriorating macroeconomic and consumption conditions across Latin America will prolong this cash burn. The negative outlook explicitly reflects the danger that these operating headwinds persist, keeping EBITDA margins depressed and leverage elevated.

Debt costs and the narrowing safety buffer

The outlook cut signals that Natura’s room to maneuver on its debt metrics has shrunk considerably. S&P’s base case still assumes leverage can be managed near or below 2.0 times net debt to EBITDA, but the agency warns that headroom has narrowed.

Net debt climbed to R$4.0 billion in early 2026, lifting the ex-IFRS 16 leverage ratio to 2.12 times—a sharp deterioration from the negative net leverage the group enjoyed in 2023 after selling the Aesop brand. S&P had previously expected adjusted debt to EBITDA to improve to between 1.0 and 1.5 times in 2026–2027, a trajectory now at risk.

If Natura cannot stabilize margins and cash generation, its borrowing costs could rise as credit markets price in a higher risk of a downgrade. The trigger for an actual rating cut would likely be debt to EBITDA staying materially above 2.0 times alongside persistently weak cash flow, rather than any single event.

How other agencies see the picture

S&P’s cautious stance contrasts with Fitch Ratings, which has affirmed Natura at BB+ with a stable outlook and expects leverage to remain below 2.0 times. Moody’s rates the group at Ba3, also with a negative outlook, citing exposure to volatile developing markets.

All three agencies are watching the same metric—leverage around the 2.0 times mark—but S&P is signaling the most immediate concern about short-term execution and macro risks. For international bondholders and investors, the split in views underscores how much now depends on Natura’s ability to deliver a credible margin recovery in the coming quarters.

Frequently Asked Questions

What did S&P change about Natura’s rating?
S&P affirmed Natura’s ‘brAAA’ Brazil national-scale issuer and issue ratings but revised the outlook to negative from stable, signaling a meaningful probability of a downgrade if operating performance does not improve.

Why is Avon dragging down Natura’s credit profile?
The integration of the Natura and Avon brands is taking longer than expected, and Avon’s weaker sales—especially in Brazil and Argentina—have depressed consolidated margins and cash flows, narrowing the buffer against S&P’s leverage thresholds.

Is legacy Avon debt from the U.S. entity causing this problem?
No. Avon Products Inc.’s legacy debt has been ring-fenced and its restructuring did not increase Natura’s consolidated obligations. The current rating pressure is driven by operating performance and integration challenges, not structural debt from the U.S. holding company.

What would trigger an actual downgrade from S&P?
A downgrade would most likely occur if Natura’s net debt-to-EBITDA ratio stays materially above 2.0 times with persistently weak EBITDA and cash generation, indicating the company cannot restore margins and reduce leverage as S&P currently projects.

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