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I AGREE
27 Apr 2011
Approximately $150mm of debt securities rated
New York, April 27, 2011 -- Moody's Investors Service assigned a B3 rating to the proposed $150
million senior unsecured bonds of Brown Shoe Company, Inc.
(Brown Shoe). Moody's also affirmed Brown Shoe's B2
corporate family and probability of default ratings, its positive
outlook, and its SGL-2 speculative grade liquidity rating.
The rating outlook remains positive. Brown Shoe intends to use
proceeds of the bond offering to repay its existing $150 million
of senior unsecured bonds due May 2012.
RATINGS RATIONALE
Moody's considers the bond transaction leverage neutral because
it is a refinancing. The transaction is modestly positive for the
credit profile based on the extension of maturity and potential for some
(estimated at around $2 million annually) savings in interest expense.
However, the Loss Given Default (LGD) rate on the proposed bonds
worsened somewhat because of the recent increase in the amount of secured
debt that will have priority claims ahead of the unsecured bondholders.
Brown Shoe increased the capacity of its secured revolver (unrated) to
$530 million from $380 million in February 2011 in conjunction
with the acquisition of American Sporting Goods Corporation (ASG).
So, the LGD rate on the new bonds will be higher than the LGD rate
on the bonds due May 2012.
We view the acquisition of ASG as leverage neutral based on adjusted metrics
and believe the transaction could improve the operating profile of Brown
Shoe over time. The combination will expand Brown Shoe's wholesale
business and also brings athletic performance brands Avia, ryka
and AND1. Brown Shoe historically lacked a strong presence in this
product category. Also, the combined entity could enhance
its distribution channels given ASG's more significant presence in athletic
and sporting good stores relative to Brown Shoe.
A summary of today's actions follows.
Brown Shoe Company, Inc.
....Senior Unsecured Bonds, Assigned
B3, LGD5, 78%
.... Affirmed B2 Corporate Family Rating
.... Affirmed B2 Probability of Default Rating
.... Affirmed SGL-2 Speculative Grade
Liquidity Rating
Outlook, Positive
Brown Shoe's B2 corporate family rating continues to reflect its
weak credit metrics, with debt-to-EBITDA of approximately
5.7 times and negative free cash flow for the year ended January
31, 2011. The high leverage poses challenges for managing
a business sensitive to shifts in consumer spending and product preference.
Furthermore, Brown Shoe's EBITA margin has consistently lagged
peers. The company's credible market position with a national
footprint, enhanced by its wholesale business which expands its
distribution channels and coverage, supports the rating.
The positive outlook signals the potential for an upgrade if Brown Shoe
can demonstrate steady and improved operating performance compared to
the second half of calendar 2010, while also maintaining organic
sales growth. In the second half of 2010, the company had
challenges related to sourcing and the implementation of a new technology
system, which pressured margins and cash flow.
Moody's would consider an upgrade with expectations for EBITA margins
sustained in the mid 6% range and debt-to-EBITDA
sustained around 5 times. An upgrade would also require maintenance
of good liquidity.
The outlook would likely revert to stable with lack of improvement in
operating margins or expectations for leverage to remain in the mid 5
times range. Deterioration of the liquidity profile, leverage
in the high 5 times range, or challenges integrating ASG could pressure
the ratings down.
The principal methodology used in rating Brown Shoe Company, Inc.
was the Global Retail Industry Methodology, published December 2006.
Other methodologies used include Loss Given Default for Speculative Grade
Issuers in the US, Canada, and EMEA, published June
2009.
Headquartered in St. Louis, Missouri, Brown Shoe's
Retail division operates Famous Footwear, a family branded footwear
destination with over 1,100 stores nationwide and e-commerce
site FamousFootwear.com, approximately 260 specialty retail
stores in the U.S., Canada, and China primarily
under the Naturalizer brand name, and footwear e-tailer shoes.com.
Through its wholesale divisions, Brown Shoe designs and markets
footwear brands including Naturalizer, Dr. Scholl's,
Franco Sarto, LifeStride, Etienne Aigner, Sam Edelman,
Via Spiga, Vera Wang Lavender and Buster Brown. Its annual
revenue for the year ended January 31, 2011, was approximately
$2.5 billion. Pro forma for the acquisition of American
Sporting Goods Corporation, annual revenue is approximately $2.7
billion
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
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validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
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and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Karen Berckmann
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Robert Jankowitz
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's affirms Brown Shoe B2 CFR and positive outlook, assigns B3 rating to proposed bonds
No Related Data.
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