Fitch Ratings has affirmed its ratings on Key Rating Drivers
In a release on
The Negative Outlook reflects Fitch's concern around Kohl's soft comparable store sales (comps) trend and the resulting pressure on EBITDA since late 2011. Comps for 2013 are down approximately 1.3 percent, with sales trends weak throughout the year, including the 2 percent comps decline during the fourth quarter. Fitch attributes the deceleration to weak store traffic trends given the company's budget-constrained and value-focused customer base; increasing competition from alternative channels; and the slowdown in the growth of private and exclusive brands that have historically supported the company's top-line growth.
Fitch expects investment grade retailers to have strong comps trends and remain market share gainers. Looking at the overall domestic apparel, accessories, and home-related categories, Fitch expects a market consolidator would need to generate top-line growth of 2 percent or above to ward off competition from other channels such as specialty, discount, and online.
Given the modest contribution to sales from store growth expected for 2014/2015 (estimated at 50 bps annually assuming 10 new store openings), Kohl's could achieve 2 percent top-line growth by generating flat-to-modest comps growth at the store level and online sales growth in the mid-teens that would contribute roughly 150 bps to overall comps.
The company's store level comps have been under increasing pressure - declining approximately 1 percent, 1.8 percent and 2.6 percent, respectively, in 2011-2013. This has been somewhat offset by online revenue which has grown from approximately
Kohl's strong growth in private and exclusive brands (which currently account for 52 percent of sales) had offset the modestly negative growth in national brands. However, growth in private brands has decelerated to the low single digits (from the mid- single-digit range in 2011/2012) while national brands continue to remain under pressure. Given a more competitive market for national brands and the lack of any significant product launches on the exclusive side, overall comps could remain flat in 2014.
Fitch expects Kohl's gross margin to be relatively flat to 2012 levels in the mid-36 percent range in 2013 through 2015. Kohl's EBITDA margin is expected to be around 14 percent in 2013, relative to the 15.8 percent-15.9 percent range in 2010/2011, and be flat to modestly lower over the next two years. The decline reflects Kohl's investment in sharper pricing and inventory repositioning over the last several quarters. However, the current level is still on par with other industry leaders in the department store space such as
Fitch expects Kohl's EBITDA to hover around the
Free cash flow (FCF) generation has typically been strong for Kohl's and is expected to be in the
Kohl's liquidity is supported by its strong cash balance of around
For a Stable Outlook, the company would need to gain traction on comps growth to a level of 1.5 percent or above and sustain EBITDA margins at current levels.
A negative rating action could result in the event of one or more of the following:
--If retail store comps fail to stabilize and overall comps (including online sales) do not improve to a level of 1.5 percent or better in the next 12-24 months.
--A weakening profitability profile (where EBITDA drops to below
Fitch has affirmed Kohl's ratings as follows:
--Long-term IDR at 'BBB+';
--Senior unsecured notes and debentures at 'BBB+'.
The Rating Outlook is Negative.
Additional information is available at 'fitchratings.com'.
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--'Evaluating Corporate Governance' (
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Evaluating Corporate Governance
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Fitch Ratings has affirmed its ratings on
Key Rating Drivers