Moody’s Investors Service changed the ratings outlook for Caleres, Inc. to negative from stable. Concurrently, Moody’s affirmed the company’s Ba2 corporate family rating (CFR), Ba2-PD probability of default rating (PDR) and Ba3 senior unsecured notes rating. The SGL-2 speculative grade liquidity rating remains unchanged.
The change in outlook to negative from stable reflects Caleres’ recent earnings performance below Moody’s expectations and the view that organic earnings growth will remain constrained by the highly competitive retail environment and the consumer shift to e-commerce. The negative outlook also reflects the risk that Caleres will be unable to reduce leverage to a level that is appropriate for the Ba2 rating category either due to weak EBITDA performance or further share repurchases.
The affirmations of the CFR, PDR and senior unsecured notes rating reflect Moody’s expectations for significant revolver repayment over the next 2-3 years and good liquidity.
Moody’s took the following rating actions for Caleres, Inc.:
… Corporate family rating, affirmed Ba2
… Probability of default rating, affirmed Ba2-PD
… $200 million senior unsecured notes due 2023, affirmed Ba3 (LGD5)
Speculative grade liquidity rating, unchanged at SGL-2
… Outlook, changed to negative from stable
Caleres’ Ba2 CFR reflects the company’s diversified portfolio of recognized brands and broad geographic presence. The company’s financial strategy balances debt-financed acquisitions and opportunistic share repurchases with maintaining moderate leverage levels. Caleres’ moderate level of funded debt relative to free cash flow also supports its credit profile. Moody’s expects that over the next 12-18 months, Moody’s-adjusted debt/EBITDA will improve to 3.3 times from 3.4 times (as of Q3 2019), and EBITA/interest expense will increase to 3.1 times from 3.0 times, driven by revolver paydown. The ratings also benefit from the company’s good liquidity profile.
The rating is constrained by Caleres’ low operating margin relative to specialty retail peers, narrow product focus, and fashion risk. As a footwear retailer and designer, the company is also subject to the challenging apparel and footwear retail environment, which has resulted in an estimated modest decline in organic EBITDA performance over the past several years. In order to maintain its consumer value proposition, Caleres needs to make ongoing investments in its brands and infrastructure, as well as in social and environmental drivers including responsible sourcing, product and supply sustainability, privacy and data protection.
The ratings could be downgraded if the company is unable to generate organic revenue and earnings growth on a sustained basis. The ratings could also be lowered if financial strategy becomes more aggressive or liquidity deteriorates. Quantitatively, the ratings could be downgraded if Moody’s-adjusted debt/EBITDA remains above 3.25 times or EBITA/interest expense remains below 3.0 times.
The ratings could be upgraded if the company maintains steady revenue and earnings growth and meaningfully expands its EBITA margins. An upgrade would also require improved liquidity and scale, as well as a more conservative financial policy, including financing of any future acquisitions with long-term capital. Quantitatively, the ratings could be upgraded if Moody’s-adjusted debt/EBITDA is sustained below 2.5 times and EBITA/interest expense above 4.0 times.
Caleres Inc. operates 960 Famous Footwear stores in the U.S. and Canada. Through its Brand Portfolio segment, Caleres designs and markets owned and licensed footwear brands including Naturalizer, Sam Edelman, Vionic, Allen Edmonds, Dr. Scholl’s, LifeStride, Franco Sarto, Vince, Ryka, Bzees, Fergie, Carlos, Via Spiga, and Blowfish Malibu. The Brand Portfolio segment also includes about 232 specialty retail stores mostly under the Naturalizer and Allen Edmonds brands in the U.S. and Canada. Revenues for the 12 months ended November 2, 2019 were approximately $3 billion.