Moody’s had previously lowered Wolverine’s debt ratings in August.
Debt ratings lowered include Wolverine’s corporate family rating (CFR) to B3 from B1, probability of default rating (PDR) to B3-PD from B1-PD, and senior unsecured global notes rating to Caa2 from B3. The outlook was changed to stable from negative. The SGL-3 speculative grade liquidity (SGL) rating is unchanged.
Moody’s said Wolverine’s operating results have been weak in both the wholesale and direct-to-consumer channels and across most brands, reflecting sector-wide elevated markdown activity and reduction in wholesale orders, as well as Wolverine’s-specific inventory liquidation activity and underinvestment in brands and operations. Moody’s-adjusted debt/EBITDA increased to 10.5x as of September 30, 2023 (including standard adjustments for operating leases, pensions, the accounts receivable securitization program and tax repatriation liability) and EBITA/interest expense was 1.0x.
Moody’s said, “While Wolverine is focused on its strategic transformation plan led by the company’s new leadership team, it faces significant execution risk due to the broad scope of investment needed to improve the business, weak consumer demand particularly in the key outdoor category, and a highly promotional environment.”
Nevertheless, Moody’s said it expects earnings recovery in 2024 from a low base in 2023, driven by corporate cost reduction, lower freight costs and reduced markdowns. Moody’s expects debt/EBITDA to decline to mid-5x at year-end 2024, and interest coverage to improve to high-1x, reflecting better-operating results and revolver paydown with cash flow from inventory reduction and net proceeds from approximately $60 million in expected asset sales in late 2023. Wolverine also plans to sell its Sperry brand, which is not included in these projections.
The SGL-3 speculative grade liquidity rating incorporates Moody’s projections for adequate liquidity over the next 12-18 months, supported by modestly positive free cash flow driven by working capital benefits as Wolverine continues to reduce inventory levels. Wolverine has no near-term debt maturities, good excess revolver capacity, and adequate covenant cushion.
The stable outlook reflects Moody’s expectations that Wolverine’s earnings will recover significantly in 2024 and the company will maintain adequate liquidity. Any additional asset sale proceeds are expected to facilitate deleveraging.
Wolverine’s portfolio includes Merrell, Saucony, Sperry, Sweaty Betty, Hush Puppies, Wolverine, Chaco, Bates, Hytest, and Stride Rite. It’s also the global footwear licensee of Cat and Harley-Davidson.
Moody’s said in its analysis, “Wolverine’s B3 CFR is constrained by the company’s high leverage and weak operating performance. The company has a narrow product focus primarily in the fashion-sensitive footwear segment. Many of its brands have relatively low direct-to-consumer penetration, which limits the company’s ability to leverage consumer insights. These brands also have a small revenue scale in highly competitive categories, which limits Wolverine’s capacity to invest in technology, marketing and product development to support long-term growth. The rating also incorporates governance considerations, including financial decisions that contributed to high leverage, including financing the Sweaty Betty acquisition with revolver borrowings in Q3 2021 and continuing share repurchases through Q2 2022, instead of paying down debt. Wolverine is also subject to social and environmental risks related to waste and pollution including per- and poly-fluoroalkyl substances (PFAS) remediation and litigation exposure for its former tannery facility, responsible sourcing, the treatment of workforce, natural capital and customer relations.
“At the same time, the rating benefits from Wolverine’s ownership of Merrell and Saucony, which are well-recognized and differentiated brands representing approximately half of the company’s sales. The company has diversified global distribution in the footwear industry and its product portfolio appeals to a broad range of consumer needs and demographics. Wolverine is enacting plans for streamlining costs, selling weaker brands and investing in its core brands to maximize their growth and margin potential.”
Photo courtesy Wolverine Worldwide
