Moody’s Ratings upgraded Varsity Brands, Inc.’s debt ratings due to improving EBITDA margin, stronger free cash flow generation, and declining leverage, supported by momentum in both its BSN and Varsity Spirit businesses.
Moody’s said Varsity Brands’ revenue and the EBITDA margin are expanding, supported by solid demand in both the BSN and Varsity Spirit businesses. Varsity continues to expand its customer base and increase its market penetration both organically and through acquisitions. Investment in its digital sales platforms are also promoting customer satisfaction and growth. Moody’s said the expansion of higher-margin private label products is contributing to EBITDA margin improvement. In addition, recently signed licensing arrangements with leading apparel brands are expected to further add to the EBITDA margin improvement starting late 2025.
Moody’s also said the divestiture of the underperforming Herff Jones business in 2023 has helped to reduce earnings and cash flow volatility. Legal expenses have also declined significantly as the company has resolved the majority of litigation filed since 2020. These factors are contributing to stronger cash flow generation and an improvement in Moody’s-adjusted debt-to-EBITDA that the rating agency expects will decline to below 5.5x by year-end 2025 from 6.2x as of March 2025.
Varsity Brands’ Corporate Family Rating (“CFR”) was upgraded to B2 from B3 and its Probability of Default Rating (“PDR”) to B2-PD from B3-PD. Also upgraded was the rating on the company’s senior secured first lien term loan to B2 from B3. The outlook is stable.
Ratings Rationale
Moody’s said, “Varsity Brands’ B2 CFR reflects its high financial leverage and aggressive financial policies expected under private equity ownership. Varsity’s ratings are supported by the company’s strong position within niche school uniform and team apparel, athletic and achievement markets and good diversification across its segments. The company’s extensive relationships with K-12 schools and growing penetration of private sports clubs, good design and customization capabilities, partnership with leading apparel brands, and mix of in-house and outsourced manufacturing support its strong market position. We expect BSN Sports and Varsity Spirit will generate mid-single digit revenue growth over the next 12 to 18 months because the company continues to expand distribution into new schools and organizations and shift its product mix towards higher margin products and cheer events. Tariffs on imported raw materials and goods will raise costs and could pressure margins. We nevertheless anticipate that revenue growth and realized efficiencies from supply chain investments will improve the EBITDA margin and help mitigate the impact of tariff and other cost pressures. The sale of the Herff Jones’ graduation business, which closed on October 2, 2023, reduced seasonality and improved the EBITDA margin by disposing of the discretionary and low profit jewelry and fine paper products business. Varsity retained the yearbook business. BSN Sports is resilient to changes in economic conditions due to the product utilization in sporting events. Because sales are reliant on school budgets and discretionary consumer spending, shifts in economic conditions and extracurricular activities can negatively affect sales. School sports and cheer are important to the school experience and participation tends to be relatively stable even during economic downturns. But schools and consumer may cut back on order size and frequencies when budgets are tighter. Operations remain somewhat seasonal related to the timing of specific sports activities and school calendars.
“Debt-to-EBITDA leverage is high but we project it will decline to below 5.5x (incorporating our adjustments) by year-end 2025 from a 6.2x level for the last 12 months ended March 2025. Liquidity is good including $57 million of cash as of March 2025 and our expectation that the company will generate free cash flow exceeding $100 million over the next 12 months. Liquidity is also supported by good unused capacity to manage business seasonality on its $400 million revolver, of which $95 million was drawn as of Q1 2025. The cash and revolver balance as of March 2025 already reflect the sizable litigation settlement payment made in the first quarter.”
KKR & Co. acquired Varsity Brands from Bain Capital in August 2024. The company reported revenue of roughly $2.6 billion for the 12 months ended March 2025.
Image courtesy Varsity Brands
