After a weaker-than-expected holiday season caused specialty department store Kohl’s to lower 2016 full-year guidance, Standard & Poor’s cut the company’s credit rating to ‘BBB-” and said it could lower the rating again in 12 to 24 months.
This year’s declines in same-store sales and EBITDA margins at Kohl’s continued into the fourth quarter, with consolidated same-store sales falling 2.1%, S&P said on Thursday. “We believe meaningful industry secular and cyclical headwinds have more than offset the company’s various operating initiatives and hurt the company’s competitive standing on a sustained basis,” the credit ratings agency noted.
The secular trends weakening the business include a change in consumer spending habits, led by millennials shifting their purchases online. “Kohl’s continues to enhance its omni-channel capabilities and narrow the e-commerce gap with industry leaders, but its physical stores still represent the vast majority of the company’s retail revenue,” S&P said.
Further, Kohl’s efforts to combat traffic, margin, and sales declines won’t make much of a difference in 2017, said S&P. “We believe the company’s tighter inventory management and cost control will help stabilize margins; however, we also believe slowing customer traffic and the highly promotional and competitive environment will outweigh the benefits from these initiatives,” S&P said.
S&P gave Kohl’s a negative outlook and could lower Kohl’s credit rating another notch — to “junk” status — if Kohl’s credit metrics deteriorate, “including adjusted leverage increasing to about 3x and above on a sustained basis.” That could happen “if comparable sales decline 5% or greater and gross margin contracts 100 bps in fiscal 2017 due to continued declines in customer traffic and increased promotional activities,” S&P said.
S&P isn’t totally down on Kohl’s. The ratings agency did say that it “continues to think Kohl’s has a good market position in the highly competitive department store sector, positioned as a mid-tier department store with largely off-mall locations.” The company’s operating metrics (which include EBITDA margins, sales per sq. ft., and inventory turnover) “still compare favorably with most peers because of a higher mix of private/exclusive brands and a relatively low-cost store development strategy,” S&P said.
But department store apparel retailers like Kohl’s face stiff competition from “online, fast-fashion, and off-price retailers … that have consistently taken market share as they offer customers speed and convenience, fresh and on-trend merchandise, and compelling value,” S&P said.