MOODY'S LOWERS RATINGS OF LEVITZ FURNITURE CORPORATION'S SENIOR NOTES TO B3 AND SUB. NOTES TO Caa, BUT CONFIRMS RATING OF BANK CREDIT FACILITY AT B1
New York, 11-07-95 -- Moody's Investors Service lowered the debt ratings of Levitz Furniture Corporation's $97.6 million senior notes to B3 from B2 and its $100 million senior subordinated notes to Caa from B3. At the same time, Moody's confirmed the B1 rating of the secured bank credit facilities of Levitz, a major U.S. furniture retailer. This concludes a rating review begun in response to Montgomery Ward's decision in October, 1995, not to acquire a stake in Levitz. The rating outlook is negative.
The downgrade was prompted by the ongoing deterioration of Levitz's financial performance and reduced financial flexibility due to the continuing weak U.S. retail environment as well as the company's inability to succesfully reach its target customer. During the first seven months of fiscal 1995, same store sales declined 9.6%. Another factor in the downgrade was Montgomery Ward's decision not to acquire a 19.6% stake in Levitz, since this investment would have improved Levitz' financial flexibility.
Levitz's EBITDA for the first six months of its fiscal 1996 which ended September 30, 1995, fell to $31.1million from $43.5 million the previous year. Interest coverage, meanwhile, declined to 1.2 times from 1.9 times for the same period last year. Given the soft retail environment and high levels of consumer debt, we do not expect the company to be profitable during fiscal 1996. Debt protection measurements should remain very weak. Although the company's third fiscal quarter typically generates its largest sales and largest earnings contributions, Levitz does not receive the same cash flow boost from Christmas sales as traditional retailers.
The company faces the challenge not only of improving cash flow and profitability, but also the refinancing of its $97.6 million senior notes which mature on April 15, 1997. Free cash flow and cash on hand will not be sufficient to redeem the notes.
The company has started a program to boost sales at its existing stores by targeting a somewhat more upscale customer. It also has a new pricing policy that moves it toward a more every day low price environment. These new initiatives will be supported by a nationwide televised advertising campaign as the company tries to bolster its image with consumers. Levitz had until now mostly relied on printed media. We expect Michael Bozic, the company's new chairman and CEO, to further develop the company's new strategy as it tries to regain its sales momentum.
Previously, the company also announced a plan to restructure its operations by consolidating regional offices, eliminating certain support functions and further reducing head count. This plan, which resulted in a $4 million pre-tax charge during its second fiscal quarter ended September 30, 1995, and reduced headcount by some 1000 people, should lower annual expenses by some $20 million according to the company. The company's decision not to open any new stores until it has regained its sales momentum should also positively impact cash flow.
Levitz Furniture Incorporated, through its wholly owned subsidiary Levitz Furniture Corporation, is a leading US specialty furniture retailer operating 72 warehouse-showrooms and 62 satellite stores located in 26 states. The company is based in Boca Raton, FL.
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