Fitch downgrades Kohl's rating amidst operational challenges

Investing.com -- Fitch Ratings has downgraded Kohl's Corporation (NYSE:KSS) from 'BB' to 'BB-' on Monday, April 7, 2025, citing ongoing operational challenges and concerns about the company's ability to stabilize its business in the medium term. The outlook for the company is negative.

The downgrade reflects the uncertainty around the company's ability to regain market share, particularly in the apparel sector, despite a recent change in CEO and adjustments to its operating strategy. Fitch acknowledges Kohl's resources for executing its turnaround, including a solid asset base and the capacity to invest $400 million in capital expenditure for growth initiatives.

Fitch predicts that Kohl's earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2025 could fall by 15% to 20% to the mid-$800 million range, due to a decline in revenue. If the company can improve its revenue trajectory and stabilize EBITDA around $800 million, Fitch may revise the outlook to stable.

Kohl's performance has been weak, with a 20% decline in revenue and a 50% drop in EBITDA from 2019 to 2024, despite growth in new categories like beauty through Sephora. The company's market share in core categories such as apparel has declined more than its peers in the department store industry, indicating specific execution challenges.

Kohl's is also facing near-term challenges including a weak 2025 guidance, a change in CEO, the closure of 27 stores, and a 75% cut in dividends. The new CEO's strategy focuses on improving the merchandise assortment, enhancing the company's value messaging, and optimizing its omnichannel model to provide a seamless shopping experience.

Fitch anticipates that Kohl's EBITDAR leverage could be in the low-4x range starting in 2025, with EBITDAR fixed charge coverage in the high-1x. To support its existing rating, the company would need to demonstrate stabilizing operations with leverage remaining below 4.5x.

Kohl's has a debt structure that includes $1.5 billion in unsecured notes with about $350 million due in July 2025. The company may need to issue secured debt to refinance upcoming maturities.

Despite the challenges, Kohl's generates positive cash flow, which gives the company some flexibility to invest in growth initiatives. It plans to invest about $400 million, or mid-2% of revenue, in 2025 capital expenditure. This could support the company's omnichannel model, including ecommerce and supply chain infrastructure, and store refreshes.

Fitch projects Kohl's 2025 revenue to decline by about 6%, to low-$15 billion from $16.2 billion in 2024 and well below the $20 billion recorded in 2019. Declines in 2025 are forecast to be driven by comparable store sales declines, particularly in the apparel and accessories categories.

Fitch rates Kohl's ABL 'BB+'/'RR1', notched up two ratings from the IDR given its security package; its unsecured notes are rated 'BB-'/'RR4'. A downgrade could result from EBITDAR leverage sustained above 4.5x, because of either weaker-than-expected operating performance or financial policy decisions. Conversely, an Outlook revision to Stable could result if revenue and EBITDA stabilize, yielding EBITDAR leverage sustained below 4.5x and EBITDAR fixed charge coverage close to 2x.

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