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28 Jul 2005
MOODY'S DOWNGRADES KELLWOOD'S RATINGS to Ba2
Approximately $270 Million of Debt Rated
New York, July 28, 2005 -- Moody's Investors Service has downgraded Kellwood Company's ("Kellwood")
corporate family rating and senior unsecured rating to Ba2 from Ba1,
and revised the outlook to negative from stable. The downgrades
reflect Kellwood's repeated difficulties experienced in launching
new products, ongoing weakness in its key dress business,
and expectation of continued weakness in operating results indicated by
repeated restructuring charges and earnings surprises. The ratings
continue to be supported by the company's diversified brands and extensive
The following ratings were downgraded:
Corporate Family rating (formerly senior implied rating) to Ba2 from Ba1,
$270 million senior unsecured notes to Ba2 from Ba1,
The outlook is negative.
In addition to ongoing weakness in the dress business, two key product
lines have performed below expectations. Kellwood has indicated
that spring sell-through of the Calvin Klein and the Oscar de la
Renta women's sportswear lines were below expectations. Significant
discounting was required in the Calvin Klein business and the performance
of the line is not expected to improve until the spring of 2006,
at the earliest. The Oscar de la Renta women's line,
launched in the spring of 2005 at higher price points in the moderate
category, has also been a disappointment and has been pulled from
the market. The brand will not be relaunched until the fall of
Kellwood has announced a significant restructuring program to eliminate
weak business units and write down the intangible assets associated with
its dress business. The restructuring is expected to generate primarily
non-cash after-tax charges of approximately $155
million. As part of the proposed restructuring, the company
is expecting to shut down or sell its private label menswear, Kellwood
New England, and Kellwood Intimate Apparel segments. At the
same time Kellwood is working to reposition the Oscar de la Renta line,
improve the performance of its Calvin Klein women's sportswear,
and revitalize its overall dress business. The company is also
planning to use up to $75 million of cash to repurchase a portion
of its outstanding common equity.
The restructuring will not consume significant levels of cash or increase
debt balances, but sales levels, profit margins and debt metrics
are expected to remain depressed at levels which are inappropriate for
the prior rating levels. Moody's projects that fiscal 2005
interest coverage, as measured by EBIT/interest, will be approximately
three times, debt will be approximately four times EBITDA,
and free cash flow (cash flow from operations minus capex and dividends)
will be approximately 25% of the outstanding debt balance.
Ratings will continue to be supported by the expectation that Kellwood
will continue to generate satisfactory free cash flow despite the announced
restructuring and operating difficulties, and by its diverse product
offering and customer base. The ratings are constrained by the
continued sales decline in the dress business, the continued weakness
in popular to moderate apparel, and the increased fashion risk as
the company increases its reliance on better apparel.
Kellwood's ample liquidity will be boosted by the announced repatriation
of approximately $150 million in cash from its Asian subsidiary.
To implement the planned repatriation of cash, Kellwood is expected
to borrow approximately $50 million at its Kellwood Asia subsidiary.
Pursuant to Moody's methodology for evaluating subsidiary borrowings
to execute repatriations, we do not expect the additional borrowing
to have a material impact on its corporate family rating or the notching
of its rated debt. Kellwood is expected to use the repatriated
cash for various corporate purposes. Liquidity will be high through
the end of the 2005 fiscal year as working capital will be released from
the discontinued operations. Moody's expects that free cash
flow will fall to levels that reflect Kellwood's smaller scale in
the 2006 fiscal year.
The negative outlook reflects Moody's concern that the company's
operating margin may remain below 5% for a prolonged period,
that the dress business may deteriorate at a faster than expected rate,
and that Kellwood will continue to find its entry into the better women's
sportswear market to be difficult. The negative outlook also reflects
Moody's concern that excess free cash flow will be applied towards
dividends and stock repurchases that go beyond the planned $75
million buyback announced as part of the restructuring.
The outlook could be stabilized if Kellwood's sales level out or
show growth, if operating margins improve and are sustained at levels
above 5.5% (which would indicate improved levels of full-priced
sales), or if debt/EBITDA falls below 3.5x. Negative
rating action could result from a continued deterioration in Kellwood's
ongoing operations that results in a significant loss of sales or further
erosion in operating margin. The ratings may also be cut if debt/EBITDA
exceeds 4.0x for a sustained period, if interest coverage
falls below 2.75x, or if FFO/debt falls below 10%
for a sustained period.
Kellwood designs, sources, distributes, and markets
women's and men's apparel. The company is the largest marketer
of women's dresses in the United States and its Smart Shirts subsidiary
is a leading manufacturer of shirts and blouses at a number of facilities
in the Far East. Fiscal 2004 sales of $2.56 billion
generated approximately $172.2 million in operating income
for a 5.2% reported EBIT margin. Sales grew 8.9%
in 2004 as the company acquired additional brands and launch its Calvin
Klein womenswear line. The Calvin Klein careerwear, launched
in the fall of 2004 posted disappointing results due to its pricing and
styling. The casual collection, launched in the spring of
2005 was also priced too aggressively and required significant markdowns
Kellwood, based in St. Louis, Missouri, designs,
sources, and markets women's sportswear and dresses under
a multitude of brand names including Calvin Klein, Sag Harbor,
and XOXO. The company's menswear division is a major manufacturer
of both private label and branded woven and knit shirts. Fiscal
2004 sales were $2.56 billion and reported operating income
was $132.5 million.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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