Moody's Ratings placed all Foot Locker, Inc.'s debt ratings on review with direction uncertain following the announcement that Dick's Sporting Goods, Inc. has entered into a definitive agreement to acquire Foot Locker for an enterprise value of approximately $2.5 billion.
Moody's said the uncertain review direction reflects its expectation that if the transaction closes, Foot Locker's ratings will likely be upgraded. However, it also reflects that if the transaction does not close, Foot Locker's ratings could be downgraded given the rating agency's expectation that revenue and earnings will weaken in 2025 as a result of higher expected product costs due to tariffs and weak discretionary spending particularly among Foot Locker's core demographic, which has below average household income.
"Foot Locker's transformation efforts continue to face challenges from increasing strains on its core customers," said Moody's Vice President Raya Sokolyanska. "While the company is making progress with its Reimagine store format, investing in technology, and strengthening the NIKE relationship while expanding with other sportswear brands, revenues have continued to decline and operating margin remains low."
Foot Locker's ratings under review include Ba3 corporate family rating (CFR), Ba3-PD probability of default rating (PDR) and B1 senior unsecured notes rating. The outlook was changed to ratings on review from stable. The speculative grade liquidity (SGL) rating remains unchanged at SGL-2.
The transaction is subject to regulatory and Foot Locker shareholder approvals and is expected to close in the second half of 2025.
Moody's said in its analysis, "The review will focus on the likelihood and timing of the transaction, as well as Dick's plans for the existing debt at Foot Locker, including whether Foot Locker's notes will be repaid, guaranteed or legally assumed by Dick's. The review will also consider Foot Locker's financial performance and ability to mitigate revenue and cost pressures in an uncertain retail environment.
"We could upgrade Foot Locker's ratings if the acquisition by Dick's closes, based on the acquirer's higher creditworthiness. Absent the acquisition, the ratings could be upgraded if the company demonstrates significant earnings recovery and strong positive free cash flow generation. An upgrade would also require continued progress in the implementation of the company's Lace Up plan and a return to growth with its key vendor NIKE. Quantitatively, the ratings could be upgraded if Moody's-adjusted EBIT/interest expense is maintained above 2.75x.
"In the absence of the expected transaction, the ratings could be downgraded if Foot Locker's comparable sales and operating income do not improve or if liquidity weakens for any reason, including negative free cash flow or a reduced cash balance. More aggressive financial strategies including a return to dividend distributions before material improvement in earnings could also lead to a downgrade. A reduction in Foot Locker's access to key traffic-driving products from major vendors, persistent underperformance relative to industry peers or a material lasting shift in consumer preference away from premium athletic shoes could also result in a downgrade. Quantitatively, the ratings could be downgraded should Moody's-adjusted EBIT/interest expense be sustained below 2.0x.