Crocs, Inc. — Moody’s confirms Crocs’ Ba3 CFR; outlook stable

Rating Action: Moody’s confirms Crocs’ Ba3 CFR; outlook stableGlobal Credit Research – 07 Jan 2022New York, January 07, 2022 — Moody’s Investors Service, (“Moody’s”) confirmed Crocs, Inc.’s (“Crocs”) Ba3 corporate family rating (CFR) and Ba3-PD probability of default rating. Moody’s also downgraded Crocs’ senior unsecured notes rating to B2 from B1. At the same time, Moody’s assigned a Ba2 rating to Crocs’ new $2 billion senior secured term loan. The speculative grade liquidity rating of SGL-2 is unchanged. The outlook is changed to stable from rating under review. This concludes the review for downgrade initiated on December 23, 2021.The new $2 billion term loan along with a $152 million revolver draw and $450 million in equity will be used to complete the acquisition of HEYDUDE by Crocs as well as fees and expenses associated with the transaction. The transaction is expected to close in the first quarter of 2022.The Ba3 CFR confirmation reflects governance considerations including Crocs’ commitment to allocate free cash flow to debt repayment until leverage reaches management’s target of 2x (approximately 2.5x on a Moody’s adjusted basis). The downgrade to the unsecured notes rating reflects the $2 billion increase of term loan debt which is ranked ahead of the unsecured notes. The company also plans to utilize its revolver to partially fund the acquisition which is aggressive in Moody’s view. Crocs’ pro forma leverage post-acquisition is moderate with Moody’s adjusted debt/EBITDA of 3.4x for the LTM period ending September 30, 2021. Although pro forma leverage is moderate, debt levels will significantly increase and as such, it is a significant increase from its pre-transaction leverage of 1.3x as of September 30, 2021. Crocs’ operating performance has been very strong in 2021 and this strong performance is expected to continue in 2022.Offsetting the leverage increase is enhanced diversification of Crocs’ brand and product assortment within the casual shoe category as the majority of HEYDUDE’s sales are attributable to the loafer style. HEYDUDE’s margin and cash flow profile is similar to that of Crocs and the company has rapidly grown over the past few years. Global supply chain issues, inflation, freight costs and the discovery of new variants of the coronavirus increases the potential for earnings volatility but Moody’s expects the combined company’s free cash flow generation to remain strong and lead to deleveraging through debt repayment.Assignments:..Issuer: Crocs, Inc…..Senior Secured 1st Lien Term Loan B, Assigned Ba2 (LGD3)Confirmations:..Issuer: Crocs, Inc….. Corporate Family Rating, Confirmed at Ba3…. Probability of Default Rating, Confirmed at Ba3-PDDowngrades:..Issuer: Crocs, Inc…..Senior Unsecured Regular Bond/Debenture, Downgraded to B2 (LGD5) from B1 (LGD5) Outlook Actions: ..Issuer: Crocs, Inc. ….Outlook, Changed To Stable From Rating Under ReviewRATINGS RATIONALECrocs’ Ba3 CFR reflects its well-known brand, leading market position in the clog category and successful digital marketing strategies. The credit profile also reflects the company’s diversified sales channels with a good mix of wholesale, retail and digital, strong margins and good liquidity. Over the past several years, Crocs has been able to improve its margins as a result of strategies implemented to close unprofitable store locations, reduce it SKU offering to focus on its more profitable core products like the clog and a shift to digital marketing. However, prior to these management initiatives, Crocs has a history of erratic EBITDA performance.The rating is constrained by the company’s limited product diversification with over 50% of pro forma sales derived from the sale of the clog. As a footwear wholesaler/retailer, the company is subject high level of competition in the footwear sector. It is also subject to fashion risk which is heightened due to the company’s narrow product focus in casual footwear and significant exposure to the clog style. Although the HEYDUDE acquisition adds another brand to Crocs’ portfolio, the Crocs brand accounts for 80% of pro forma sales.The stable outlook reflects Moody’s expectation that the company will maintain good liquidity and allocate free cash flow to debt repayment leading to deleveraging. The stable outlook also assumes successful integration of the HEYDUDE acquisition including the enhancement of HEYDUDE’s long term brand and growth potential.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if the company continues to increase its scale and product diversity while maintaining strong operating performance, very good liquidity and sustaining EBITA/interest expense above 3.5x and debt/EBITDA below 2.25x or 2.75x following acquisitions. An upgrade would also require a demonstration of a successful integration of any potential acquisitions.The ratings could be downgraded if there is a shift to more aggressive financial strategies or if there is a deterioration in the company’s overall operating performance, brand relevance or liquidity profile. Quantitatively, the ratings could be downgraded if debt/EBITDA rises above 3.5x or EBITA/interest expense declines below 2.75x.Headquartered in Broomfield, Colorado, Crocs, Inc. is engaged in the design, development, marketing distribution and sale of casual footwear. The company’s products are sold through digital and wholesale channels as well as 361 company operated retail stores across the globe. Revenue for the twelve months ended September 30, 2021 was approximately $2.1 billion.The principal methodology used in these ratings was Apparel published in June 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276303. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.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. Joe Tringali Analyst Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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