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Rating Action:

MOODY'S DOWNGRADES RATINGS OF THE KELLWOOD COMPANY (SENIOR UNSECURED TO Ba1); OUTLOOK IS STABLE

28 Mar 2002
MOODY'S DOWNGRADES RATINGS OF THE KELLWOOD COMPANY (SENIOR UNSECURED TO Ba1); OUTLOOK IS STABLE

Approximately $275 Million of Debt Securities Affected.

New York, March 28, 2002 -- Moody's Investors Service has downgraded the ratings of the Kellwood Company based on the decline in sales and earnings that has occurred as a result of a difficult operating environment, as well as changes in the market position and strategy of the company's customers and the risk that performance will be more volatile going forward because of these industry changes. In addition, debt protection measures, while improved over the prior year, still lag behind historical levels and improved more slowly than expected following acquisition and share repurchase activity in 2000. The outlook for Kellwood is stable reflecting the steps that management has taken to strengthen its balance sheet and to focus on cash generation, as well as its position as a leading supplier of moderate priced women's apparel. This rating action concludes the review for downgrade that began in January 24, 2002.

The ratings downgraded are:

Senior notes and senior debentures to Ba1 from Baa3

Ratings established are:

Senior implied and issuer rating at Ba1.

In the second half of the fiscal year that recently ended, Kellwood experienced a 14.7% drop in sales and a 19.7% decline in EBITDA. While the weak apparel environment contributed to the decline, fundamental changes in where and how apparel is sold is a contributing factor to the volatility of the company's recent earnings. Over the past several years, market share shifts have occurred which have resulted in a declining share for traditional department stores and national chains like Penney's and Sears. This has also resulted in apparel deflation which has pushed down the price points on many product categories. Smaller, regional retailers and specialty stores have been particularly challenged by this tough operating environment. As a result, the mix of Kellwood's business has shifted with a higher percentage of goods being sold by the company to retailers such as Wal-Mart, Target and Kohl's. While this is a positive for the company, the increased volume to these retailers was not sufficient to offset the declining level of apparel sales that have been experienced by weaker industry participants.

Due to the continuing shift in market share and structural challenges to traditional department stores, many retailers are rethinking apparel assortments in order to develop a product mix that resonates with customers and provides an offset to competitive challenges and industry changes. In some cases, Kellwood has benefitted from this assortment change with increased product penetration at several key accounts. However, those increases have been offset by declines in sales volume to other key accounts. For the near term, apparel retailers are likely to continue to rethink their assortments as they look for a successful competitive formula. For Kellwood, this trend, and the continued loss of business to the bottom tier of the industry, could result in periods where sales gains to better performing retailers are offset by declines in volumes to weaker participants and the loss of floor space to retailers who are reallocating their assortments.

Kellwood's debt protection measures have shown some improvement over the prior fiscal year due a focus on inventory management and cash flow generation. While some of the efficiency gains on inventory and working capital are likely to be permanent, due to strategic initiatives on the part of management, some of the improvement in cash-flow is a reciprocal benefit from sales reductions that lead to lower overall inventory and accounts receivable levels. In the future, should sales stabilize or improve modestly, working capital efficiencies will provide fewer opportunities to significantly improve overall cash flow. Given that fact, we believe it may be difficult, in the near term, for debt protection measures to return the levels achieved prior to the 2000 time frame when acquisitions and share repurchases led to increased levels of debt. Given the increased volatility in the business, a fixed charge coverage of 2.7x and a Debt/EBITDA level of 2.6x are weak for the previous rating category.

Moody's recognizes the effort of Kellwood's management to strengthen its balance sheet and to focus on working capital management, cash flow generation, and debt reduction. Given the current state of the industry, we view these as prudent measures to ensure that the balance sheet will provide a level of cushion against very difficult market conditions and disruptions in the retail arena. In addition, we view the company's strong cash position and the level of availability under its bank facilities, as providing financial flexibility should market conditions or Kellwood's earnings performance decline further.

Kellwood Company, based in St. Louis, Missouri, is an international designer, manufacturer and marketer of apparel and camping soft goods.

New York
Angela Jameson
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Philip Emma
Vice President - Senior Analyst
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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