S&P Global Ratings revised its rating on Caleres, Inc. to positive from stable. The rating agency noted that Caleres reported stronger than expected sales and margin expansion in the first quarter of fiscal 2022 across its two main brands, with sales returning to about pre-pandemic levels, reflecting the strengthening consumer demand.
S&P also noted that Caleres’ leverage improved, falling below its pre-pandemic level, and its improving operating trends are expected to continue in 2022 despite pent-up demand for apparel and footwear returning to normal and promotion levels continuing to normalize.
S&P also affirmed its ‘B+’ issuer credit rating on the company. The positive outlook reflects the possibility of an upgrade over the next 12 months if the company extends its good operating performance for both its segments and sustains leverage in the low-3x area.
S&P wrote in its analysis, “The positive outlook reflects continued strength at Caleres’ two operating segments, although we expect performance will moderate in 2022 as consumer savings normalize. In the first quarter of 2022, Caleres’ results continued to outperform our former base case, with consolidated revenue and consolidated gross margin up by 15 percent and 1.5 percent, respectively, compared to the same period last year, in part due to the lower promotional activity. In 2021, the company benefited from pent-up demand, with support from school reopenings, stimulus payments as well as the continued trend toward casual apparel. In 2022, we expect the operating performance of the company to moderate, given the higher inflation costs and our expectation for a more promotional retail environment as inventory levels return to normal. However, in line with the company’s recent upwardly revised guidance, we still expect Caleres’s revenue to grow in the low- to mid-single-digit-percent range in fiscal 2022, in part due to the continued recovery of the Brand Portfolio segment.
“Industry headwinds persist in the Footwear apparel retail segment, while the company remains prone to merchandise missteps. Our rating incorporates our view that the company remains vulnerable to changes in consumer discretionary spending and fashion risks. Given the fierce competition at the Famous Footwear apparel retail segment, including from new online players and the tough industry dynamics, execution misses on product assortments could pressure earnings and deteriorate credit metrics more than we envision. Our rating also reflects the company’s small scale and significant merchandise sourcing exposure to China (about 60 percent pre-pandemic). While the Famous Footwear segment benefited from the shift in consumer preferences toward wellness, comfort and sport categories, the company’s Brand Portfolio segment is expected to be a tailwind in 2022 as work footwear remains strong. This segment relies on wholesale partners and carries mostly dress and formal footwear.
“We believe the company’s limited funded debt, adequate liquidity, and stable cash flow should help somewhat offset negative macroeconomic trends. Following its strong free cash flow generation of about $140 million in fiscal 2021, Caleres paid down all its outstanding long-term debt in January 2022 and as of June 2022 had about $305 million of its revolving credit facility outstanding. While higher freight charges and inflationary costs in 2022 will likely affect margins, we expect higher sales volumes to lead to a steady cash flow of $90 million in free operating cash flow per year and leverage remaining in the low-3x area on a sustained basis. We expect the company will maintain its moderate financial policy using internally generated cash flow to fund capital expenditures and moderate share repurchases.
“The positive outlook reflects the possibility of an upgrade over the next 12 months if the company extends its good operating performance for both its segments and sustains leverage in the low-3x area.”
