Charlotte Russe’s senior secured loans due 2019 were downgraded by Moody’s Investors Services to B3 from B2 and the outlook was changed to negative.
The probability of default was also downgraded by one notch to B3-PD. A B3 rating is the last level for speculative and high-risk ratings. One more notch lower places Charlotte Russe debt into the poor quality category.
Over the year, Charlotte Russe has seen same-stores sales decline close to 10 percent due to declining mall traffic and product acceptance issues. The company has had to take higher markdowns to get rid of the unwanted inventory and that combined with fixed costs has pushed margins significantly lower.
According to Moody’s analyst Dan Altieri, “given the competitive operating environment and declining mall traffic trends, it will take some time for the company to reestablish itself with its core customers.”
Moody’s negative outlook believes that any improvement will be gradual. On a positive note, Moody’s said that the current management team has delivered a solid operating performance by delivering same-store sales growth and developing the omnichannel model with a growing e-commerce and mobile business.
Moody’s doesn’t think Charlotte Russe will trigger its debt covenants; but they did forecast that there was minimal to no cushion on the covenant over the next 12 to 18 months. There is also a limited amount of liquidity because of the fast-moving inventory and no meaningful real estate holdings since the company leases most of its locations.
The ratings could be upgraded if Charlotte Russe is able to reverse recent operating trends, driving same-store sales growth and improving margins.
Charlotte Russe is headquartered in San Francisco and has over 500 stores across the U.S. and Puerto Rico. It is owned by private equity firm Advent International, which also owns 13 percent of Lululemon’s stock. The company did not respond to a request for a comment.