Moody’s Investors Service upgraded Caleres, Inc.’s debt ratings, reflecting Caleres’ earnings growth coming out of the coronavirus pandemic as well as governance considerations, specifically recent debt repayment.
The upgrades include the corporate family rating (CFR) to Ba3 from B1, probability of default rating (PDR) to Ba3-PD from B1-PD and senior unsecured notes rating to B1 from B2. The speculative grade liquidity remains SGL-1 and the outlook was changed to stable from positive.
Moody’s said that during 2021, the company reduced its debt significantly below pre-pandemic levels. In August 2021, Caleres redeemed $100 million of its senior unsecured notes and it has also notified holders of its intent to redeem the remaining notes in full in January 2022. All ratings will be withdrawn upon redemption of the rated debt.
Ratings Rationale
Moody’s said, “Caleres’ Ba3 CFR reflects the company’s diversified portfolio of recognized footwear brands and strong recovery in operating performance. Caleres’ Famous Footwear business, which predominantly sells casual and athletic shoes, has been exceeding pre-pandemic levels of adjusted operating profit year-to-date in 2021, supported by a more normalized pattern of consumer spending on footwear, government stimulus, and a low level of markdowns across the sector. The Brand Portfolio business is also recovering as consumers update their office-appropriate and going out wardrobes. Moody’s expects solid earnings performance going forward, driven by continued strength in demand but offset by margin pressures from a likely return to more promotional activity in the sector. The credit profile also incorporates governance factors, specifically the company’s financial strategy, which balances maintenance of moderate debt levels with a return of capital to shareholders. Over the next 12-18 months, Moody’s projects leverage to decline to 2.3x from 2.4x as of October 30, 2021, and EBIT/interest expense to increase to 6.2x from 5.3x (including run-rate interest expense).
“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 viewed 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.
“The stable outlook reflects expectations for solid earnings performance and very good liquidity.”
