Moody’s Investors Service changed Wolverine World Wide, Inc.’s debt-ratings outlook to negative from stable. The change in outlook to negative from stable reflects the risk that leverage may remain elevated for a prolonged period given the more promotional retail environment, lower consumer discretionary spending, and unfavorable foreign currency trends.
Moody’s noted that in Q3 2022, Wolverine’s leverage increased to 5.9x Moody’s-adjusted debt/EBITDA, as the company borrowed on its revolving credit facility to fund an increase in inventory. Supply chain challenges, distribution center congestion and a curtailing of retailer orders resulted in inventory levels more than doubling over the prior year and a revision in 2022 earnings guidance to reflect promotional activity. Moody’s said while revolver borrowings will decrease as the company sells through excess inventory and reduces orders in upcoming quarters, deleveraging could be delayed amid an uncertain consumer spending environment.
Concurrently, Moody’s affirmed all of the company ratings, including the Ba2 corporate family rating (CFR), Ba2-PD probability of default rating, and Ba3 senior unsecured notes rating. The SGL-2 speculative grade liquidity rating remains unchanged.
Moody’s wrote, “Wolverine’s Ba2 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 growing 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. While cash flow is highly negative for the Q3 2022 year-to-date period driven by a sizable working capital use, Moody’s expects positive free cash flow over the next 12-18 months, increasing revolver availability and good covenant cushion.
“At the same time, the rating is constrained by Wolverine’s relatively small revenue scale, narrow product focus primarily in the footwear segment, and fashion risk. Financial leverage is high, with debt/EBITDA at 5.9x for the twelve months ended October 1, 2022, reflecting the debt from the Q3 2021 Sweaty Betty acquisition, share repurchases executed in Q4 2021-Q2 2022, and elevated inventory levels. Moody’s projects debt/EBITDA to decline to high-4x over the next 12 months mainly driven by revolver paydown. Moody’s expects earnings to decline in Q4 2022 and Q1 2023 but recover modestly in the second half of 2023, driven by lower freight costs and reduced clearance activity. While Wolverine’s overall financial policies are balanced, its growth strategy has included acquisitions, which introduce event, execution and financing risk. As a footwear company, Wolverine is also subject to social and environmental risks related to responsible sourcing, waste and pollution, the treatment of workforce, natural capital and customer relations.”
Wolverine World Wide’s brands include Bates, Cat Footwear, Chaco, Harley-Davidson Footwear, Hush Puppies, HYTEST, Keds, Merrell, Saucony, Sperry, Stride Rite, Sweaty Betty and Wolverine.
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