MOODY'S LOWERS SR NOTE RATING OF LEVITZ FURNITURE CORPORATION TO B2 AND SR SUBORDINATED RATING TO B3
New York, 08-09-95 -- Moody's Investors Service lowered the rating on Levitz, Inc.'s $97.6 million issue of senior notes to B2 from B1 and on its $100 million senior subordinated notes to B3 from B2, stating that the outlook for the ratings remains negative.
The downgrade was prompted by an ongoing decline in same store sales and a need to refinance a substantial amount of indebtedness that becomes due in fiscal 1998. The ratings also reflect increased leverage as a result of higher borrowings and reduced cash flow from earnings; the cyclical nature of the furniture industry; and intensifying competition in some of the company's markets and its weak balance sheet. The new ratings continue to reflect the company's position as a leading nationwide specialty retailer of furniture and its long-standing relationships with national brand name furniture manufacturers.
Last year's interest rate hikes by the Federal Reserve continue to have a negative impact on Levitz's furniture sales. For the fiscal year ended March 31, 1995, the company had a decline in same store sales of 2.3% and has experienced a further decline of 10% during the first four months of fiscal 1996. The company's efforts to grow same store sales have been hampered by an ongoing decline in the real disposable income of its target customer group, a reallocation of available purchasing power by consumers towards the computer and multimedia industries, increased competition in some of its core markets, and a continued weak economic environment in California and in the North East, where Levitz has a high concentration of its stores.
Total indebtedness increased $59 million to $455.4 million (excluding receivables) during the fiscal year ended March 31, 1995, as a result of Levitz's acquisition of the John M. Smyth. The acquisition, which allowed Levitz to enter the Chicago market with six stores and the roll-out of eight new stores, was financed through borrowings under the company's bank credit facility. The combination of higher borrowings and a decline in the company's cash flow resulted in a deterioration in the company's leverage and coverage ratios. Total debt over EBITDA (excluding $628.7 million outstanding under the company's account receivables purchase agreement) increased to 4.9 times from 3.5 times for the fiscal year ended March 31, 1995. When adjusted for its lease expenses, book leverage remains high at 96%. Fixed charge coverage also remains very weak at 1.12 times. Moody's expects continued pressure on the company's debt-protection measurements amid a lackluster sales environment.
Lower capital expenditures for 1995, proceeds from the sale-leaseback of four stores and the benefits from a realignment of its workforce, have improved the company's financial flexibility. The potential for additional sale-leaseback transactions as well as contemplated insurance settlements should provide additional flexibility. As of March 31, 1995, Levitz had $11.2 million available under its bank credit facility. Nevertheless, Moody's remains concerned about the company's ability to refinance $124 million of indebtedness maturing during fiscal 1998 given its weak balance sheet and poor sales performance. Tangible net worth, adjusted for goodwill and leasehold interests, remains a negative 95 million.
While some major department stores continue to make inroads in the company's markets, Levitz has seen increased competition in its core Florida markets. Rooms to Go, a specialty retailer controlled by the Seaman's family, has targeted Levitz's customer base through an aggressive advertising and marketing campaign. As part of its efforts to kindle its lackluster sales performance and target a somewhat more upscale customer, Levitz recently decided to embark on a new advertising campaign, which will include increased television advertising.
Levitz Furniture Incorporated, through its wholly owned subsidiary Levitz Furniture Corporation, is 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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