Standard & Poor's Ratings Services said today it raised its corporate credit rating on St. Louis, Mo.-based Brown Shoe Co. Inc. (NYSE: BWS) to 'B+' from 'B'. The outlook is stable. At the same time, we raised our issue-level rating on the company's unsecured debt to 'B+' from 'B', and maintained our recovery rating of '3', indicating our expectation for meaningful (50% to 70%) recovery in the event of a payment default.

"The upgrade reflects relatively steady performance coupled with meaningful debt repayment over the past year. The company used proceeds from the sale of two divisions as well as cash from operations to reduce borrowings outstanding under its revolving credit facility," said credit analyst David Kuntz. "As a result, leverage declined to the mid-2x area, and we forecast further
improvements over the next year."

The stable outlook reflects our view that a more productive store base and positive operating leverage will result in modest performance gains over the next year. As a result, we forecast that the company will modestly strengthen its credit protection profile during that time, with leverage in the low-2x area, interest coverage in the low-6x area, and FFO to total debt in the mid-30% area.

Downside scenario

We could lower the rating if merchandise missteps or meaningful performance erosion lead to weaker credit protection measures. Under this scenario, we could reassess the financial risk profile as "aggressive" as performance declines so that leverage reaches the mid-3x area. Additionally, any meaningful debt-financed acquisitions that increases leverage to this point could also have a negative impact on the rating.

Upside scenario

We could raise the rating on Brown Shoe if the company is able to demonstrate moderate operational growth over the next year, which could improve our assessment of the company's volatility of profitability. Under this scenario, revenues would be in the mid-single digits and EBITDA margins would be in the mid-12% area. At that time, we could change our assessment of the company's business risk profile to "weak" from "vulnerable." However, any ratings upside would also be predicated on the company maintaining credit protection measures consistent with a "significant" financial risk profile.