S&P Global Ratings raised the debt ratings on Caleres, Inc. as the parent of Famous Footwear has sustained adjusted leverage in the low- to the mid-2x area, supported by moderating margin pressures and debt paydown under its asset-based lending (ABL) facility.
S&P said that while it expects weaker top-line growth in 2023 due to lower consumer discretionary spending, it believes improved freight costs and streamlining initiatives will help offset margin pressures. As a result, S&P raised its issuer credit rating on Caleres to ‘BB-‘ from ‘B+’ and revised its rating outlook on the company to stable from positive.
The stable outlook reflects its expectation that the company will maintain steady operating trends over the next 12 months despite top-line pressure from weakened consumer demand trends, leading to S&P Global Ratings-adjusted leverage to remain in the low- to the mid-2x range.
Famous Footwear operated 866 stores at the quarter’s end. The Branded Portfolio wholesale segment includes Allen Edmonds, Blowfish Malibu, Bzees, Circus NY, Dr. Scholl’s Shoes, Famous Footwear, Franco Sarto, LifeStride, Naturalizer, Rykä, Sam Edelman, Veronica Beard, Vince, Vionic, and Zodiac.
S&P said in its analysis, “The upgrade reflects our view that the company’s S&P Global Ratings-adjusted leverage will sustain at about mid-2x this year, moderating toward low-2x in 2024. We expect Caleres’ adjusted leverage to tick up modestly toward mid-2x in 2023, compared with 2.1x at year-end 2022 as EBITDA margins remain pressured from a moderating yet still volatile operating environment. We project adjusted EBITDA margins to contract toward low-13 percent in 2023 (compared to high-14 percent year over year) driven by item markdowns, elevated cost pressures, and negative customer traffic trends in the footwear space. However, improving freight costs and supply chain headwinds, coupled with management initiatives to optimize costs by streamlining cost efficiencies through its business segments, should ease margin pressures going into 2024, leading to adjusted EBITDA margin improvement toward high-13 percent. During its first quarter ended April 29, 2023, Caleres paid down $16 million under its ABL facility, reducing the amount outstanding to $292 million. We believe Caleres will likely use part of its cash balance to prioritize paying down more debt, leading to adjusted leverage improving toward low-2x in 2024. Given our expectation for sustained credit protection measures and positive cash flow generation, we revised our financial risk profile assessment to intermediate from significant.
“We expect Caleres’ sales growth to remain pressured through the remainder of the year, although inventory levels have improved following elevated clearance activity. During the first quarter, Caleres’ total revenues decreased 9.8 percent, consisting of an 11 percent decline in its brand portfolio segment and a 9.2 percent decline in its famous footwear segment. We attribute this to weaker customer discretionary spending and lower demand from wholesale customers amid an uncertain macroeconomic environment. We anticipate revenue to decline modestly in the mid-single-digit percent area in 2023, driven primarily by weak customer traffic trends in the footwear space. However, we view Caleres’ inventory levels more favorably relative to peers, resulting in less reliance on promotional activity or aggressive markdowns to reduce excess inventory. Caleres’ year-over-year inventory levels were down roughly 13 percent to $560 million from $644 million as supply chain levels normalized and the company reduced inventory purchases.
“Caleres has adequate liquidity, attributable to positive free operating cash flow (FOCF) generation, limited debt, and a moderate financial policy. As of April 29, 2023, Caleres had $32 million of cash and cash equivalents, with $198 million available under its ABL facility after paying down $16 million during the quarter. We project Caleres will generate positive FOCF of roughly $30 million-$40 million after capital expenditure (capex) spending of roughly $65 million for new store developments, remodels, maintenance, and technology upgrades in the year. We expect management to maintain dividend payments of $10 million-$15 million annually but expect the company will limit share repurchases to conserve cash through an uncertain operating environment. Caleres operates with limited funded debt and has no immediate maturity, with its $500 million ABL facility maturing in 2026. We continue to apply a negative comparable rating analysis modifier, which is a holistic view of the stand-alone credit profile, given inherent industry volatility and Caleres’ smaller operating scale relative to larger-rated peers in the retail sector.
“The stable outlook reflects our expectation that Caleres will maintain steady operating trends over the next 12 months, despite top-line pressure from weaker consumer demand trends, leading to S&P Global Ratings-adjusted leverage of low- to mid-2x.”
