Kohl's Corp. Ratings Raised To 'BBB' From 'BBB-' On Improved Operating Performance And Debt Repayment; Outlook Stable

Rating Action Summary:

Trust metric by Artificial Intelligence: 88 out of 100 with 200 metrics

  • We expect that department store operator Kohl's Corp. will maintain positive operating trends, following consistently good performance in the past six quarters and its recent voluntary repayment of $900 million in debt.
  • We are raising our issuer credit rating on Kohl's Corp. to 'BBB' from 'BBB-'.
  • We are also raising our issue-level ratings to 'BBB' from 'BBB-'.
  • The stable outlook reflects our expectation that the company will continue to make steady progress executing on its key initiatives while sustaining sales growth and stable margins. We also expect the company to maintain adjusted debt to EBITDA in the high 1x area over the next two years.
NEW YORK (S&P Global Ratings) April 22, 2019--S&P Global Ratings today took the rating actions listed above. The upgrade reflects Kohl's consistent operating improvement in recent quarters, and our expectation that the company will continue to see revenue growth and sustain margins with its key operating initiatives. With leverage metrics improving to less than 2x after it voluntarily repaid about $900 million in debt in fiscal 2018, the company has demonstrated a conservative financial policy and built in additional headroom for future industry challenges or unforeseen performance volatility.
The stable outlook reflects our view that operating performance will continue to benefit from modest sales and EBITDA growth, driven by key initiatives including merchandize strategy, inventory management, fleet optimization and omni-channel expansion. The stable outlook also reflects our expectation that the company will maintain a financial policy consistent with its current credit metrics, including maintaining debt to EBITDA of less than 2x.
We could lower the ratings over the next 12 to 24 months if sales and profitability underperform our base-case such that debt to EBITDA is sustained at 2.5x or more. This could happen if the company experiences meaningful execution missteps, declines in consumer traffic and/or heightened industry competition, causing adjusted EBITDA margin to decline by about 300 basis points.
Although less likely given the ongoing industry headwinds, we could raise the ratings if Kohl's successfully executes on its strategies and consistently shows meaningful improvement in revenues and profits. This would likely cause us to view Kohl's competitive standing more favorably, as it would entail the company having an expanded market share and a sustained track record of successfully growing sales and profitability amid continuous secular changes. In addition, we would expect the company to maintain debt to EBITDA of about 2x or less and its financial policy to support credit metrics at such levels.
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