Moody’s Ratings downgraded Fanatics Commerce’s debt ratings as second-quarter results for the online retailer of licensed sports merchandise showed EBITDA and free cash flow remained negative.
“The downgrade reflects the company’s very weak credit metrics and the risk that the difficult consumer environment will challenge Fanatics Commerce’s ability to achieve the appropriate level of returns on investments and achieve a sustainable recovery in earnings, margins, free cash flow and credit metrics, particularly interest coverage,” said Moody’s in a press release. “While reported second quarter June 2024 earnings and cash flow usage improved year-over-year, EBITDA and free cash flow remained negative.”
Including high revolver borrowings to support seasonal working capital needs, for the LTM (last-twelve month) period ended June 30, 2024, Moody’s-adjusted debt/EBITDA for Fanatics Commerce “remains very high at over 25x and EBITA to interest is negative, both at levels that are far outside the band of tolerance for the current rating.”
Moody’s lowered its corporate family rating (CFR) on Fanatics Commerce to B1 from Ba3, probability of default rating (PDR) to B1-PD from Ba3-PD and senior secured term loan B rating to B2 from B1. The outlook remains negative.
Going forward, Moody’s said it expects revenue growth to continue as new licensing rights come online. Coupled with cost-cutting efforts and improved inventory levels, a return to EBITDA growth and modest positive free cash flow, including full temporary repayment of outstanding seasonal revolver borrowing by year end, is expected. Because the company reduced its senior secured term loan B late last year as per its commitment to meet the upper end of its 3-4x company-calculated leverage target range, the rating agency expects year-end Moody’s-adjusted debt/EBITDA to significantly reduce to the mid-single-digit range . However, EBITA/interest coverage is expected to remain weak.
The negative outlook reflects Fanatics Commerce’s continued weaker-than-expected operating performance which has resulted in a higher reliance on its revolving credit facility and the challenges it faces to demonstrate that it can achieve the appropriate level of returns on investment and sustainably improve earnings, margins, free cash flow and credit metrics.
Moody’s wrote in its analysis, “Fanatics Commerce’s B1 CFR reflects its leading position as an online retailer of licensed sports merchandise and its long-term partnership agreements with major sports leagues and relationships with key suppliers. The company also benefits from a significant pipeline of potential new and exclusive licensing relationships which should support longer term growth. Fanatics Commerce’s credit profile is constrained by its narrow product focus on sports related apparel, reliance on its relationships with major sports leagues, teams and suppliers and current weak operating performance. The rating also reflects governance considerations, particularly our expectation that the company will maintain balanced financial strategies that will focus on improving earnings and credit metrics. It also reflects that we expect operating performance to materially recover such that leverage dramatically and sustainably improves to mid-single digit levels. Fanatics Holdings, Inc., its parent company, has a demonstrated willingness and ability to invest in its various subsidiaries to support growth and debt reduction.”
Moody’s noted that Fanatics Commerce’s revenue for the twelve-month period ended June 2024 exceeded $4.7 billion. Beyond its flagship Fanatics website, it operates partner sites such as NFLshop.com, NBAstore.com, MLBshop.com, NHLshop.com and MLSstore.com. The company also operates through venue storefronts primarily located in sports stadiums as well as wholesale to third-party retailers. Parent company, Fanatics Holdings, Inc., is privately owned by a consortium of investors including founder and CEO, Michael Rubin, who owns the majority of voting stock.
Image courtesy Fanatics
