S&P Global Ratings downgraded the debt ratings on Wolverine World Wide, Inc., citing the footwear company’s weakened operating performance over the past few quarters.
The rating agency said it expects adjusted leverage of high-5x at the end of 2022, meaningfully above its previous 4x downgrade trigger. S&P added that despite the company’s profit improvement initiatives, including an assumption of divesting underperforming businesses and cost savings to be realized this year, adjusted leverage is expected to remain above 4x by the end of 2023.
S&P lowered its issuer credit rating to ‘BB-‘ from ‘BB’. At the same time, S&P’s issue-level rating on the senior secured credit facilities, including the $1 billion revolver and $200 million term loan, was lowered to ‘BB’ from ‘BBB-‘. The recovery rating on the senior secured credit facility is revised to ‘2’ from ‘1’ due to the increase in priority debt.
S&P also lowered its issue-level rating on the $550 million senior unsecured notes to ‘B+’ from ‘BB-‘. The recovery rating is unchanged at ‘5’.
The stable outlook reflects S&P’s expectation that the company will improve its operating performance by prioritizing growth brands and focusing on profit improvement, such that adjusted leverage falls below 5x by the end of 2023.
S&P said in its analysis, “The downgrade reflects Wolverine’s weakening operating performance over the past few quarters and our revised forecast for leverage sustained above 4x.
“Wolverine’s operating performance for the past few quarters was considerably below our expectations due to deteriorating macroeconomic conditions, heightened promotional activities, and ongoing supply chain disruptions. Sales in U.S. wholesale, Wolverine’s largest channel, were below expectations as shipment delays due to logistics and warehouse congestion hurt the company’s brands, such as its namesake, Sperry, Keds, Sweaty Betty, and Saucony. Many of Wolverine’s wholesale customers are experiencing higher inventory levels and warehouse constraints, which led to order cancelations and additional discounting. In addition, challenging macroeconomic conditions in the U.K. put pressure on Sweaty Betty’s performance.
“Adjusted EBITDA declined more than 10 percent year over year for the last 12 months ended October 1, 2022, due to lower-than-expected revenue, higher promotions, and higher logistic expenses. Debt levels are currently elevated due to above-average seasonal borrowings on the revolver from increased inventory. These factors led to adjusted leverage of low-6x for the last 12 months ended October 1, 2022.
“The company is working to reduce its elevated inventory levels, including liquidating end-of-life inventory and reducing forward purchases with suppliers. We expect this liquidation to hurt margins in the near term, especially the fourth quarter of 2022. Additionally, we forecast modest demand but costs to remain elevated, leading to adjusted leverage of high-5x by the end of 2022, meaningfully above our previous downgrade trigger at 4x.
“Wolverine announced profit improvement initiatives and two potential asset sales to improve credit metrics, but we forecast leverage will be mid-4x by the end of 2023.
“As part of the company’s strategy to reduce organizational complexity and prioritize growth brands to improve profit, it started a formal process to divest or license the Keds brand and its Wolverine Leathers business, both of which are low-profit contributors. We expect the company to use the proceeds to pay down debt if it sells both businesses. In addition, we expect some cost savings from the workforce reduction in connection with these planned portfolio changes, organizational synergies and supply chain cost savings.
“However, even with all these initiatives, we expect adjusted leverage of mid-4x. We revised down our revenue and EBITDA forecast for 2023 and now expect flattish to a slight decline in revenue in 2023, excluding Keds, assuming the sale happens this year. We expect EBITDA margins to stay pressured in the first half of 2023 but gradually improve through the year as the company reduces its inventory. We expect Wolverine’s inventory to return to more normal levels by mid-2023.
“The company’s senior unsecured notes were trading at about $0.70 after the third-quarter earnings, modestly improving to $0.82 recently, compared with $0.90 at the beginning of 2022. Wolverine has not previously repurchased portions of its bonds, however, we are uncertain if that could be a possibility given where its notes are trading.
“The stable outlook reflects our expectation that over the next 12 months, the company will improve its operating performance by prioritizing growth brands and focusing on profit improvement such that adjusted leverage falls to and is sustained below 5x.”
