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I AGREE
23 Dec 2015
Approximately $150 million of debt affected
New York, December 23, 2015 -- Moody's Investors Service ("Moody's") downgraded
Charming Charlie LLC's ("Charming Charlie") Corporate
Family Rating ("CFR") and $150 million senior secured
term loan rating to B3 from B2 and changed the outlook to negative.
The Probability of Default Rating was also downgraded to B3-PD.
The downgrade was based on Charming Charlie's weak operating performance
over the YTD period, including accelerated declines in same store
sales in the double-digit range as well as lower gross and EBITDA
margins. The rating action also reflects Moody's expectation
that credit metrics will weaken over the near term as the company works
to correct these execution issues in a challenging operating environment.
The outlook change to negative reflects the potential for weaker than
anticipated operating performance and step downs to the financial covenants
in the company's credit agreement to pressure covenant compliance
over the next 12-18 months. The company's term loan
credit agreement contains a total leverage test which steps down to 2.0
times in October 2016, from 2.75 times for the LTM period
ending October 31, 2015, and an interest coverage test set
at 4.0 times for the remainder of the agreement. The company
had a cushion of less than 15% on both covenants as of October
31, 2015 (down from over 35% for the prior quarter) as a
result of recent operating trends.
Moody's took the following rating actions today:
..Issuer: Charming Charlie LLC
.... Corporate Family Rating, Downgraded
to B3 from B2
.... Probability of Default Rating,
Downgraded to B3-PD from B2-PD
....Senior Secured Bank Credit Facility,
Downgraded to B3 (LGD3) from B2 (LGD4)
Outlook Actions:
..Issuer: Charming Charlie LLC
....Outlook, Changed to Negative from
Stable
RATINGS RATIONALE
Charming Charlie's B3 CFR reflects the company's small scale and narrow
product focus in fashion jewelry and accessories. The fashion jewelry
and accessories market is highly fragmented, with many competitors
possessing greater overall scale, product diversity, and financial
resources than the company. The rating also reflects Charming Charlie's
weak liquidity profile driven by tightening cushion under its financial
covenants as a result of recent weak operating trends including negative
same store sales growth and worsening margins, combined with step
downs to the financial maintenance covenants in the company's credit
agreement.
While Charming Charlie has meaningfully grown its business over the last
two years, much of the revenue growth can be attributed to new store
expansion, with 79 new units added since fiscal year end 2013.
Moody's expects revenue growth over the near term will be challenged
as the company pulls back on new unit expansion and will need to rely
on same store sales which have struggled over the YTD period. Charming
Charlie's rating is supported by modestly positive annual free cash
flow and modest lease-adjusted leverage for the rating category,
which we estimate in the high 4 times range for the LTM period ending
October 31, 2015.
Charming Charlie's weak liquidity reflects Moody's expectation
that the company will be challenged to reverse recent operating trends
to a level sufficient to remain in compliance with its financial maintenance
covenants, which if breached would require an amendment or equity
contribution to cure. Moody's expects positive free cash
flow over the next 12-18 months will be aided by a slowdown in
new unit expansion and will allow the company to make modest pay downs
to its term loan, which should provide some benefit to the covenant
calculations. However, compliance will be highly dependent
on the company's ability to quickly reverse recent store traffic
trends and drive same store sales growth while reestablishing margins.
As of October 31, 2015 the company had about $6 million of
balance sheet cash and just over $13 million of availability under
its $60 million ABL revolver (not rated by Moody's). Moody's
anticipates that borrowings under the company's revolver will come
down in the fourth quarter, which has historically been the strongest
period for the company. Moody's expects balance sheet cash,
cash generated from operations, and revolver availability should
be sufficient to cover working capital, capital spending and modest
debt amortization over the next twelve months.
The B3 rating assigned to the company's $150 million senior secured
term loan reflects its first lien on substantially all of the company's
assets, except cash, inventory and receivables, against
which it has a second lien behind the $60 million asset-based
revolving credit facility. The term loan comprises the majority
of funded debt in the capital structure.
The negative outlook reflects the risk that bank covenant compliance could
be pressured over the next several quarters. Moody's believes
that a challenging operating environment combined with a prudent slowdown
in new unit expansion will weigh on credit metrics over the next 12-24
months.
Ratings could be downgraded if the company is unable to reverse current
operating trends which would make covenant compliance less likely.
Flat to negative same-store sales growth and operating margins
or a further weakening of the company's liquidity profile would
also pressure the rating.
Given the negative outlook, a ratings upgrade is unlikely over the
near term. However, over time ratings could be upgraded if
the company is able to reverse current operating trends and drive sustained
profitable growth with positive comparable store sales. An upgrade
would also require the company to maintain an adequate liquidity and a
conservative financial policy.
The principal methodology used in these ratings was Retail Industry published
in October 2015. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
Charming Charlie, based in Houston, TX, is a retailer
of value-priced fashion jewelry and accessories targeting women
between ages 22 to 54. As of October 31, 2015, the
company operated 357 stores with LTM revenue of approximately $530
million.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Daniel Altieri
Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Downgrades Charming Charlie's CFR and Term Loan to B3; Outlook changed to Negative
No Related Data.
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