S&P Global Ratings reduced the debt ratings of Wolverine World Wide Inc. as the footwear manufacturer continues to underperform its expectations.
S&P said Wolverine’s adjusted leverage in the low-6x area for the 12 months ended July 1, 2023. The rating agency also expects “tough industry headwinds to continue to pressure the company’s operating performance over the next several quarters, which will delay credit metric improvement.” It now expects S&P Global Ratings-adjusted leverage to remain above 6x by the end of 2023 before improving to below 5x by the end of 2024.
Ratings affected include Wolverine’s issuer credit rating to ‘B+’ from ‘BB-‘. The issue-level rating on the senior secured credit facilities was reduced to ‘BB-‘ from ‘BB,’ and the issue-level rating on the senior unsecured notes was lowered to ‘B’ from ‘B+.’
The outlook is negative, reflecting the potential for a downgrade in the next 12 months if the company is unable to improve operating performance and it sustains adjusted leverage above 5x.
Wolverine’s portfolio includes Bates, Cat Footwear, Chaco, Harley-Davidson Footwear, Hush Puppies, Hytest, Merrell, Saucony, Sperry, Stride Rite, Sweaty Betty and Wolverine.
S&P said in its analysis, “The downgrade reflects Wolverine’s continued underperformance and our revised expectation for delayed credit ratio improvement.
“Wolverine’s operating performance continues to track below our prior expectations due to tough macro conditions and continued softness in the wholesale channel. The company saw increased order cancellations and lower new orders in the past 10 to 12 weeks as its wholesale customers cautiously managed inventory and lowered its guidance for 2023. S&P Global Ratings-adjusted leverage for the last 12 months ended July 1, 2023, was at 6.3x. Although order trends have improved in recent weeks, we expect ongoing pressure with the business and continued softness in the wholesale channel for the balance of calendar 2023, which is likely to continue into the first half of 2024. We revised down our revenue and EBITDA forecast for 2023 and now expect revenue to decline mid-teens percentage in 2023, excluding Keds, which were recently sold. We expect adjusted EBITDA to decline around 10 percent, reflecting the volume decline, partially offset by savings initiatives. We now expect adjusted leverage will remain above 6x for the remainder of 2023 before gradually improving to the high-4x area in 2024.
“We anticipate positive free operating cash flow (FOCF) around $80 million in 2023 mainly due to improvement in the company’s working capital position.
“Though net inventory for the ongoing business was still elevated at the end of the second quarter, up 7 percent compared to last year, it declined another $78 million sequentially from the end of the first quarter due to the company’s increasing focus on inventory management, including liquidating higher cost end-of-life inventory and reducing forward purchases with suppliers. We believe the company is on track to achieve its year-end inventory target of $520 million, though the holiday season will be crucial to achieving this. We expect the company to continue to reduce its inventory and expect a positive FOCF of around $80 million in 2023, including $50 million FOCF in the second half due to working capital improvement.
“Wolverine has taken steps to reposition the business, but profit improvement remains to be seen.
“The company appointed a new CEO, Chris Hufnagel, and new brand presidents for its growth brands, including Merrell, Saucony, and Sweaty Betty. The company is streamlining the business to align with a more focused portfolio and growth initiatives. It announced consolidating its U.S. office. It will continue to implement the profit improvement office initiatives to drive operating margin improvement and prioritize investment and resources for its growth brands. The company outlined incremental savings from its profit improvement initiatives, including rolling off transitory costs, supply chain and logistics savings, and reducing indirect spend. We believe Wolverine’s profit improvement target of $200 million is aggressive as it may incur potential disruption related to the cost-saving initiatives; we have baked in 220 basis points improvement in EBITDA margin in 2024 due to cost savings.
“The company is pursuing the sale of certain non-core assets and exploring strategic alternatives for Sperry, which could help improve its credit metrics.
“As part of the company’s strategy to reduce organizational complexity and prioritize growth brands to improve profits and permanently reduce debt, it is pursuing the sale of certain non-core assets. In addition, the company is exploring strategic alternatives for Sperry, which could include a sale, joint venture, or licensing opportunity. The company estimates at least $50 million in proceeds from the potential sale of certain non-core assets, which we have not reflected in our forecast but estimate a 0.2x deleveraging if realized. If the company is able to sell Sperry, it could help it de-lever the balance sheet faster; however, it could be tough for the company to get the right valuation under the current volatile market conditions.
“The negative outlook reflects Wolverine’s very high leverage and need to materially improve operating performance.”
Photo courtesy Sweaty Betty
