Moody’s Upgrades Caleres’ Debt Ratings

Moody’s Upgrades Caleres’ Debt Ratings

Moody’s Investors Service upgraded the Corporate Family Rating (CFR) of Caleres Inc., formerly known as Brown Shoe, to Ba3 from B1, the Probability of Default Rating to Ba3-PD from B1-PD, and the rating on the senior notes to B1 from B3.

The rating agency said these actions conclude the review for upgrade initiated on June 16, 2015 upon the adoption of Moody’s updated approach for standard adjustments for operating leases, which is explained in the cross-sector rating methodology Financial Statement Adjustments in the Analysis of Non-Financial Corporations, published on June 15, 2015. Moody’s also affirmed Caleres’ SGL-1 Speculative-Grade Liquidity rating. The rating outlook is stable.

The CFR upgrade reflects the approximately 1.3 times decline in lease-adjusted debt/EBITDA from 4.3 times to 3.0 times (as of May 2, 2015) due to changes in Moody’s approach for capitalizing operating leases. In addition, the upgrade incorporates the company’s good execution over the past several quarters, which has resulted in steady growth and margin expansion.

Moody’s took the following rating actions on Caleres, Inc.:

  • Corporate Family Rating, upgraded to Ba3 from B1
  • Probability of Default Rating, upgraded to Ba3-PD from B1-PD
  • $200 million senior unsecured notes due 2019, upgraded to B1 (LGD 5) from B3 (LGD 5)
  • Speculative-Grade Liquidity rating, affirmed at SGL-1
  • Outlook is stable

Ratings Rationale

Caleres’ Ba3 CFR reflects the company’s recognized brands, customer and geographic diversification, and very good liquidity. Caleres’ relatively good credit protection metrics, with debt/EBITDA of 3.0 times and EBITA/interest expense of 2.8 times (Moody’s-adjusted, as of May 2, 2015) position the CFR solidly in the Ba3 category. However, the rating is constrained by Caleres’ active interest in acquisitions, including relatively large and mostly debt-financed deals that could materially increase leverage. The rating also considers the company’s low margins relative to specialty retail peers, narrow product focus, and the sensitivity to shifts in fashion and consumer discretionary spending characteristic of an apparel retailer.

Caleres’ SGL-1 liquidity rating reflects the company’s very good liquidity position supported by existing cash of $66 million (as of 5/2/15), Moody’s projection for $50-70 million of free cash flow over the next 12 months, and a lack of meaningful debt maturities over the next two years. An undrawn $600 million asset-based revolver expiring in 2019 with a borrowing base expected to fluctuate in the $480-530 million range also supports liquidity. Moody’s does not expect net revolver availability to fall below the 10% of the borrowing base level that would trigger the springing 1.0x fixed charge coverage ratio, and believes there is ample headroom within the covenant.

The stable rating outlook reflects Moody’s expectations for modest revenue growth, sustained or improved profit margins, and a very good liquidity profile.

The ratings could be upgraded if the company sustains sales growth and expands EBITA margins towards 9%, while maintaining a very good liquidity profile. An upgrade would also require maintenance of balanced financial policies, including a commitment to maintain debt/EBITDA at or below 3.0 times and EBITA/interest expense at or above 3.0 times.

The ratings could be lowered if recent positive trends in revenues and EBITDA reverse, financial policy becomes more aggressive or liquidity deteriorates. Quantitatively, ratings could be lowered if leverage remains above 4.0 times for an extended period.

Headquartered in St. Louis, Missouri, Caleres, Inc. owns the Famous Footwear chain. Through its Brand Portfolio segment (approximately 40 percent of sales), Caleres designs and markets owned and licensed footwear brands including Sam Edelman, Via Spiga, Franco Sarto, Vince, Fergie, Naturalizer, Dr. Scholl’s, LifeStride, Ryka, and Carlos. The brand portfolio also includes about 170 specialty retail stores mostly under the Naturalizer brand.