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Investing.com -- U.S. footwear retailer and wholesaler, Caleres (NYSE:CAL) Inc., has seen its credit rating downgraded to 'BB-' from 'BB' by S&P Global Ratings. The downgrade is due to elevated debt and weak operating performance in fiscal year 2024, which led to a rise in the company's leverage to 2.2x, exceeding expectations.
In 2024, Caleres generated a free operating cash flow (FOCF) of $53 million, a decrease from the $151 million reported the previous year. This was due to capital outflows and operating margin pressures. The company also increased its shareholder returns to $75 million, up from $27 million in the previous year. This was partially funded by borrowings from its revolving credit facility (RCF), resulting in an outstanding debt of $220 million at the end of fiscal year 2024.
S&P Global Ratings anticipates that the company's leverage will rise further to the mid-2x area in fiscal year 2025. This is due to weak demand, higher supply chain costs, and increased draws on its RCF to fund the acquisition of Stuart Weitzman. The company's outstanding debt is projected to rise to about $250 million by the end of fiscal year 2025.
Caleres' operating margins are expected to remain under pressure this year due to soft consumer demand, high promotional activity, and elevated supply chain costs. The company's EBITDA margin declined to 14.1% in 2024, from 14.9% in the previous year, due to higher payroll and benefit expenses. The company's inventory position also expanded by 4.5% in 2024, and it anticipates a revenue decline in the 5%-6% range in the first quarter of 2025.
The imposition of tariffs is expected to negatively impact the company's operating performance. Caleres sourced most of the footwear for its Brand Portfolio segment from manufacturers located in China and other countries in southeast Asia in 2024. While the company plans to limit its exposure to China to about 25% of its direct product by the second quarter of 2025, additional tariffs on other southeast Asian countries could negatively affect its supply chain and cost structure.
In terms of consumer demand, Caleres reported a revenue decline of 3.4% in 2024, with comparable sales in its Famous Footwear segment falling by 1.3%. The company is focusing on product innovation and implementing a new store concept to increase sales. Revenue is forecasted to expand by over 8% in 2025, primarily due to the Stuart Weitzman acquisition.
On February 19, 2025, Caleres announced a definitive agreement to acquire Stuart Weitzman from Tapestry (NYSE:TPR) Inc. for a total consideration of $105 million. The acquisition is expected to add about $230 million of revenue and increase the company's exposure to the premium luxury categories.
The stable outlook for Caleres reflects the expectation that its leverage will peak in the mid-2x area this year and remain above 2x in 2026, incorporating the repayment of its RCF borrowings. S&P Global Ratings could lower or raise its ratings on Caleres depending on the company's future leverage, financial policy, operating performance, and successful integration of new acquisitions.
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