Nine West Deal to Buy Liquidity Still Leaves Debt Too Highby
Kasper adds cash and time but no new fans among analysts
Obstacles extend beyond balance sheet to business fundamentals
Nine West Holdings Inc.’s purchase of a women’s clothing maker looks like a Band-Aid on a bullet hole to credit analysts who follow the cash-strapped shoe company.
It isn’t that spending to acquire Kasper Group makes things worse for Nine West. Indeed, the deal announced Jan. 17 for an undisclosed price could actually boost liquidity and cut leverage in half, according to the company. But that still leaves debt far above Nine West’s peers at 18 times adjusted earnings, Moody’s Investors Service said. Despite the potential benefits, it downgraded Nine West two days later.
“Out of the blue, if I just told you there’s a high-yield company with a leverage of 18 times, that’s unsustainable,” Moody’s analyst Mike Zuccaro said in an interview. “It’s a positive transaction, because you’re bringing in a stronger business, some cash flow and additional liquidity improvement. But it’s just not enough.”
Michael Freitag, a spokesman for New York-based Nine West and Sycamore Partners LLC, its private-equity owner, declined to comment. Kasper and Nine West were separate portfolio companies of Sycamore, according to the statement, which said the combination would be completed this month.
Nine West, led by interim Chief Executive Officer Ralph Schipani, is seeking to reverse a sales slump and rework about $1.5 billion of debt following Sycamore’s 2014 buyout. Kasper, also based in New York, would add a line of affordable suits, dresses and sportswear to Nine West, whose brand has lost some cachet in women’s shoes and handbags. But apparel retailers also have been struggling as shoppers shifted their spending toward experiences.
“It’s no game-changer at all,” S&P Global Ratings analyst Jerry Phelan said, referring to the Kasper purchase. “They’ve got bigger problems to deal with.”
The company faces a daunting maturity wall in 2019. Debt coming due that year includes a term loan, asset-backed revolver, and unsecured bonds.
Smaller and slower apparel companies that loaded up on debt during leveraged buyouts are struggling to keep up with new competitors online and in fast fashion. Companies like Nine West are short on cash and long on obligations, leaving them unable to make the frequent investments needed to keep their offerings and business models up to date.
Still, the acquisition could help Nine West in the short term. The company’s 2019 bonds rose to their best level since April after the Kasper deal was disclosed and traded this week at 26.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s up from a record low of less than 15 cents in October.
The purchase was financed with proceeds from Nine West’s December sale of the Easy Spirit wholesale business, which Nine West called an underperformer. The company said that if it had owned Kasper as of Sept. 30 and without Easy Spirit, its adjusted 12-month earnings before interest, taxes, depreciation and amortization would have been about double the $46 million it reported, and liquidity would have been about $125 million instead of $94 million.
“They’ve bought themselves some time,” said S&P analyst Suyun Qu. “But I don’t think it’s a fundamental improvement.”
Schipani, who has served as interim CEO for more than a year, is a turnaround and restructuring expert at Alvarez & Marsal Inc., a consulting firm that specializes in troubled companies. He previously led reorganizations at Vertis Communications and Chemtura Corp., according to the Alvarez & Marsal website.
Earlier this month, Schipani brought in Joel Oblonsky as CEO of the Nine West and Bandolino division. Oblonsky has more than 20 years of experience in footwear and accessories, according to a statement, most recently as president of Ralph Lauren Corp.’s Polo and Lauren footwear brands.
Obstacles they face include the company’s high reliance on sales through moderate-price department stores, according to the Moody’s report. Those chains are also being hurt by changes in shopper habits, with major chains such as Macy’s closing stores to cope with sluggish mall traffic. Kasper’s clothing is sold at specialty and department stores and mass merchandisers, according to Nine West’s statement.
More than 10 percent of U.S. retail space, or almost 1 billion square feet, may need to be closed, converted to other uses or renegotiated for lower rent in coming years, according to data provided to Bloomberg by CoStar Group. That kind of environment makes it harder for Nine West to market its way out of trouble.
“We just don’t think they’re going to make it over the long term without some sort of restructuring,” Phelan said.