Moody’s Investors Service changed Caleres Inc.’s (Caleres) outlook from negative to positive.
Concurrently, Moody’s affirmed all of the company’s ratings, including the B1 corporate family rating (CFR), B1-PD probability of default rating (PDR) and B2 senior unsecured notes rating. The speculative grade liquidity rating was upgraded to SGL-1 from SGL-3.
The change in outlook to positive from negative and reflects Caleres’ significant earnings recovery from the coronavirus pandemic and Moody’s view that credit metrics will continue to improve driven by debt repayment and further earnings normalization towards pre-pandemic levels over the next 12-18 months.
The SGL upgraded to SGL-1 from SGL-3 reflects Moody’s expectations for nearly $150 million in free cash flow in 2021 and over $300 million in excess availability under the $600 million asset-based revolving facility, following the repayment of a significant portion of 2020 revolver borrowings.
Moody’s wrote in its analysis, “Caleres’ B1 CFR reflects the company’s diversified portfolio of recognized footwear brands and solid recovery coming out of the disruption in apparel and footwear spending due to the coronavirus pandemic. Caleres’ Famous Footwear business, which predominantly sells casual and athletic shoes, returned to pre-pandemic levels of adjusted operating profit in Q3 2020 and Q1 2021 exceeded Q1 2019, supported by stronger footwear spending, a low level of markdowns across the sector, and government stimulus. Moody’s expects growth to continue, driven by ongoing consumer demand for casual footwear and a normalized back-to-school season in 2021. While the Brand Portfolio remains below pre-pandemic levels due to the pullback of orders by retail partners and the drag from the dress shoe-oriented Allen Edmonds, Moody’s expects the segment to recover as consumers update their office-appropriate and going out wardrobes. The credit profile also incorporates governance factors, specifically the company’s financial strategy, which balances debt-financed acquisitions and opportunistic share repurchases with maintaining moderate leverage levels. Caleres has reduced its outstanding debt below pre-pandemic levels, and Moody’s expects continued debt repayment to support deleveraging. Moody’s projects leverage to decline to 2.6x in 2021, and EBIT/interest expense to increase to 3.5x.
“The credit profile is constrained by the fashion risk and high level of competition in the apparel and footwear sector. The rating also reflects Caleres’ low margins relative to specialty retail peers, narrow product focus, and sensitivity to shifts in consumer discretionary spending. Despite an overall balanced financial policy, Caleres financed its sizeable Allen Edmonds and Vionic acquisitions with short-term debt, which Moody’s views as relatively aggressive. In addition, the acquisition of Allen Edmonds underperformed initial expectations. As a retailer, the company also needs to make ongoing investments in social and environmental drivers including responsible sourcing, product and supply sustainability, privacy and data protection.”
Caleres owns the Famous Footwear chain. Its brand segment includes Naturalizer, Vionic, Sam Edelman, Allen Edmonds, Dr. Scholl’s, Blowfish Malibu, LifeStride, Franco Sarto, Vince, Ryka, and Bzees.
Photo courtesy Caleres
