Fitch Rates Kohl's Proposed 10-Year Notes 'BBB+'
NEW YORK -- September 5, 2013
Fitch Ratings has assigned a rating of 'BBB+' to Kohl's Corporation's (Kohl's)
proposed issue of $300 million 10-year senior unsecured notes. The new notes
are expected to be used for general corporate purposes which may include share
repurchases. As of Aug. 3, 2013, Kohl's had $4.6 billion of debt outstanding,
including capital leases. A full list of ratings is provided at the end of
KEY RATING DRIVERS
Kohl's ratings reflect the company's stable market position as the
third-largest department store retailer in the U.S., industry-leading
operating margins, convenient off-mall store format, and good growth in
higher-margined private and exclusive brands.
While Kohl's market share has been stable for the past two to three years,
Fitch remains concerned on the softness in the company's comparable store
sales trends (comps) that have been weak since late 2011. At the current
rating level, Fitch would expect Kohl's to continue to gain market share which
would require the company to generate comps in the 1%-1.5% range. This would
require stabilization in store-level comps, assuming online sales to grow at
15%-20%. The inability to stabilize store-level comps to the extent to hinder
overall comps from growing at over 1% in the next 12-24 months could lead to
Fitch expects Kohl's comps to remain relatively flat in 2013 versus 2012
reflecting the weaker-than-expected sales performance in first quarter 2013
and lack of one-week of sales during the holiday season in 2013. Overall sales
are expected to grow in the 0.5% to 1.5% range in 2013-2014 as Kohl's square
footage growth has slowed down significantly since 2008 and is expected to
remain in the low single digit range in the next two to three years. This
assumes 12 store openings in 2013 compared with 21 in 2012 and 40 in 2011,
mostly in its small-box format.
Kohl's gross margin came out better than expected in first-half 2013 despite
the soft sales trend. As a result, Fitch expects Kohl's EBITDA margin to
remain flat at around mid-14% in 2013, which would still be strong for the
sector. Kohl's industry-leading operating margins have provided the company
some flexibility to invest in sharper pricing over the last several quarters.
Given an EBITDA expectation of approximately $2.8 billion for 2013 and pro
forma for the $300 million incremental debt issuance, Fitch expects adjusted
debt/EBITDAR could increase modestly to the 2.3x-2.4x range at the end of
2013, which is modestly above the company's currently stated leverage target
of 2.0x-2.25x, but consistent within Fitch's expectations.
Fitch expects working capital could turn neutral to somewhat positive source
of cash in 2013 as management continues to be focused on trimming down
inventory. Free cash flow (FCF) is expected to be approximately $800
million-$900 million in 2013-2014. This assumes working capital is neutral and
capital expenditures are in the $700 million-$750 million range to support
e-commerce growth and its store opening and remodelling program (30 expected
for 2013 versus 50 in 2012 and 100 in 2011). Fitch expects FCF to be directed
toward share buybacks.
Kohl's liquidity is supported by its strong cash balance and a $1 billion
senior unsecured revolving bank credit facility due in June 2018. Kohl's has
no debt maturities prior to 2017 and Fitch expects the company will continue
to be disciplined in managing its cash flow allocation, share repurchases, and
A negative rating action could result in the event of one or more of the
--If retail store comps fail to stabilize and overall comps (including online
sales) do not improve to a level of 1% or better in the next 12-24 months.
--A weakening profitability profile (where EBITDA drops to below $2.5 billion
from an expected $2.8 billion for 2013) and/or a more aggressive financial
posture that would take leverage above 2.5x.
A positive rating action is unlikely at this time as it would require Kohl's
to manage adjusted leverage to below its stated target of 2.0x-2.25x.
Fitch currently rates Kohl's as follows:
--Long-term Issuer Default Rating (IDR) 'BBB+';
--$1 billion bank credit facility 'BBB+;
--Senior unsecured notes and debentures 'BBB+'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited
and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Evaluating Corporate Governance' (Dec. 12, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Evaluating Corporate Governance
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Isabel Hu, CFA, +1-212-908-0672
Fitch Ratings, Inc.
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Monica Aggarwal, CFA, +1-212-908-0282
Michael Simonton, CFA, +1-312-368-3138
Brian Bertsch, +1-212-908-0549
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