Moody's: 'Kohl's has the edge'

Dive Brief:

Despite ongoing struggles, Kohl’s enjoys a series of core strengths that bode well for its long-term viability; In fact, it enjoys an “edge,” according to a new report emailed to Retail Dive Tuesday, in which Moody’s Investors Services spotlighted the discount department store.
Among its strengths are its margins: “Kohl’s continues to increase speed to market from concept to floor, which will enhance merchandise margins, and the company has also demonstrated proficiency in tracking customer spending habits, focusing more on optimizing how it utilizes floor space to improve margins,” according to the report, which also anticipates that its Under Armour partnership will boost sales, drive traffic and “provide more negotiating leverage with other desired brands as it increases its national brand portfolio."
But one weakness is its lack of opportunity to whittle down its debt. “With no near-term maturities, deleveraging will be limited,” according to Moody’s analysts. “Despite its significant free cash flow, which we estimate exceeds $1 billion, we expect limited deleveraging at Kohl's because of limited EBITDA growth and the lack of required debt maturities until 2021. We expect leverage to remain around 3.0x, which compares to our 3.25x downward trigger. Any significant deterioration in the business from our expectations or addition of debt could have a negative impact to its Baa2 stable rating.”

Dive Insight:

Kohl’s has had difficulty making many of the right moves to get itself through a turnaround — yet the fruits of its efforts remain elusive. While Kohl’s still enjoys intense loyalty from many shoppers, the company has struggled mightily in recent quarters, closing 18 underperforming stores in 2016 after years of aggressive expansion. Kohl’s last month reported fourth quarter net income of $252 million, down 15% from the year-ago period; Q4 sales came in at $6.2 billion, slipping from $6.4 billion last year, with same-store sales declining 2.2% from the year-ago period. Full-year sales could decline as much as 1.3% or rise as much as 0.7%, while same-store sales are expected to remain flat or drop as much as 2%.

“Convenience and proximity are critical for us looking forward — that’s why so much of our investment is going into stores,” CEO Kevin Mansell said last month during a keynote interview at the Shoptalk 2017 conference. “We think the way we win with the footprint we have is not to shrink the number of stores, but stores themselves likely will get smaller — having much more of a physical presence is a much better path than less stores.”

Moody's appears to have taken those plans into account. "[W]e expect Kohl’s to continue building on a number of strengths, from its convenience and value advantage, new national brand relationships to faster inventory turnaround," according to the report, adding that the company isn't likely to close more stores. "Like its competitors, Kohl’s has also been looking at ways to better optimize its store footprint, which equals about 1,154 stores nationwide – but more by adapting store space to reflect demand trends than shrinking its physical presence – based on its learnings from closing 18 stores last year."

Moody's analysts also took note of strengths that have been described to Retail Dive in the past, including its strong relationship with name brands, in contrast to other big box retailers, like Target. Kohl's has also succeeded immensely with its loyalty program, which has moved onto mobile and which Shelley E. Kohan, VP of retail consulting at store analytics firm RetailNext, calls “brilliant.”

“There’s something about the ‘Kohl’s cash’ that drives the consumer to really plan their shopping around their Kohl’s cash,” Kohan told Retail Dive last year. “People are spending so much effort and time in converting, they have a strong bond with the customer and are known for that low price.” Moody's expects Kohl's to continue to build on those strengths, though analysts warned it will continue to need time.

"Over the next 12 months, we expect Kohl’s to continue to develop key initiatives, which include building new national brand relationships to drive more traffic and improving inventory management, which not only enhances merchandising margins but improves product freshness," analysts wrote. "However, the payoffs will take time, given our expectations for Kohl's to report an 8% decline in operating income in 2017. This compares to a 12% decline in 2016 and our forecast of an 8% decline for the overall department store space (excluding Sears)."