Moody’s downgraded the debt ratings on Wolverine World Wide, Inc. due to the footwear maker’s updated Q4 2022 guidance, which was lower than previously projected by Moody’s, as well as Moody’s expectation that leverage will remain high over the next 12-18 months.
Lowered ratings include the corporate family rating (CFR) to Ba3 from Ba2, probability of default rating (PDR) to Ba3-PD from Ba2-PD, and senior unsecured notes rating to B1 from Ba3. The outlook remains negative and the SGL-2 speculative grade liquidity rating remains unchanged.
Moody’s said that as a result of the updated guidance, it now projects adjusted debt/EBITDA increasing to 6.1x in Q4 2022 from 5.9x as of Q3 2022 (including standard adjustments for the accounts receivable securitization program). However, Moody’s expects this spike in leverage to be temporary and that leverage is likely to decline in 2023 to the high-4x range, driven by revolver paydown with free cash flow and potential proceeds from the planned sales of the Keds and Wolverine Leather businesses. In addition, earnings are likely to recover in the second half of 2023, reflecting lower freight costs, reduced clearance activity and cost reduction. However, free cash flow excluding working capital will remain modest because of increased interest expenses and ongoing costs for environmental remediation and litigation.
The outlook remains negative, reflecting the risk to earnings and cash flow prompted by the highly uncertain consumer spending environment, which may prevent Wolverine from improving credit metrics to a level that is appropriate for the Ba3 corporate family rating.
Moody’s said in its analysis, “Wolverine’s Ba3 CFR benefits from its diversified distribution in the global footwear industry and the dependable replenishment demand cycle of the footwear category due to normal product wear and tear. The company’s product portfolio appeals to a broad range of consumer needs and demographics, further mitigating earnings volatility. Wolverine’s credit profile is also supported by the strength of its global brands Merrell and Saucony, which represent about 45 percent of sales. The ratings also benefit from the company’s balanced overall financial strategies and good liquidity.
“At the same time, the rating is constrained by Wolverine’s high leverage, relatively small revenue scale, narrow product focus primarily in the footwear segment, and fashion risk. While Wolverine’s overall financial policies are balanced, the company made relatively aggressive decisions to finance the Sweaty Betty acquisition with revolver borrowings in Q3 2021 and continue share repurchases through Q2 2022, rather than reduce debt levels. Wolverine is also subject to social and environmental risks related to responsible sourcing, waste and pollution including PFAS remediation and litigation, the treatment of workforce, natural capital and customer relations.
“The company’s overall liquidity profile for the next 12-18 months is good, as indicated by the SGL-2 liquidity rating. Moody’s expects positive free cash flow driven by inventory reduction, good excess revolver capacity, and adequate covenant cushion.”
Wolverine’s portfolio of brands includes Merrell, Saucony, Sperry, Sweaty Betty, Hush Puppies, Wolverine, Keds, Chaco, Bates, Hyteset, and Stride Rite. The company also is the global footwear licensee of the Cat and Harley-Davidson brands.
