Moody’s: Caleres Stock Repurchases Could Inhibit Debt Repayment

Moody’s: Caleres Stock Repurchases Could Inhibit Debt Repayment

Moody’s Investors Service said that Caleres, Inc.’s recent announcement that it had completed the repurchase of the remaining shares under its 2011 share repurchase program and put in place a new share repurchase authorization is modestly credit negative but does not impact the ratings.

The increased share repurchases are modestly credit negative because they slow down the repayment of ABL revolver borrowings and credit metric improvement following the October 2018 debt-financed Vionic acquisition for $360 million. Following the acquisition, Caleres had $350 million outstanding under its $600 million asset-based revolver as of November 3, 2018. At that time, Moody’s said it expected the company to deploy the vast majority of 4Q 2018 and 2019 free cash flow for repaying about half of the ABL outstanding amount by year-end 2019. Moody’s said it now expects a portion of the excess cash flow will be used instead for share repurchases. In addition, it views the new authorization as a modest change in financial policy given it shortly follows the debt-financed acquisition of Vionic and Caleres had previously only made modest share repurchases, mainly to offset dilution from share-based compensation awards.

Caleres’ Ba2 Corporate Family Rating and stable outlook are currently not impacted by the announcement as Moody’s said it continues to expect that Caleres’ will be able to bring leverage and coverage to levels in line with its rating in the next 12-18 months. Assuming that the new share repurchase program will be fully utilized over two years, Moody’s said it projects Caleres will be able to reduce Moody’s-adjusted debt/EBITDA to 3.2 times by the end of fiscal 2019 from 3.7 times (LTM Q3 2018 pro-forma) and improve EBITA/interest expense to 3.2 times from 2.8 times. Our current downgrade factors are leverage sustained above 3.25 times debt/EBITDA and interest coverage declining below 3 times. Our forecast assumes a timely extension of the December 2019 ABL expiration. However, should Caleres’ execute the share repurchases at a faster pace resulting in a delay in its ability to bring metrics to levels in line with the Ba2 rating, the ratings could be negatively impacted.

On December 14th, Caleres, Inc. announced the authorization of a stock buyback program, which will allow for the repurchase of up to 2.5 million shares, or about $70 million based on the December 14, 2018 share price. The program has no expiration date and shares can be repurchased at any time on the open market or in private transaction. In addition, during the fourth quarter of 2018 the company repurchased substantially all of the remaining 1.2 million authorized shares (an estimated $31 million based on the December 14, 2018 stock price) under its existing 2011 program, for a total of $34 million year-to-date December 2018. In recent years, the company has spent less than $10 million on buybacks annually (with the exception of $23 million in 2016).

Headquartered in St. Louis, MI, Caleres owns the Famous Footwear chain, which generates approximately 55 percent of total revenues. Through its Brand Portfolio segment, Caleres designs and markets owned and licensed footwear brands including Sam Edelman, Vionic, Allen Edmonds, Via Spiga, Franco Sarto, Vince, Fergie, Naturalizer, Dr. Scholl’s, LifeStride, DVF, Ryka, and Carlos. Pro-forma for the acquisition of Vionic, revenues for the twelve months ended November 3, 2018 were approximately $3 billion.