Fitch Ratings has affirmed its ratings on Kohl's Corporation's (Kohl's) IDR, $1 billion revolver and $2.15 billion of senior notes and debentures at 'BBB+'. The Rating Outlook is Stable. A full list of rating actions appears at the end of this release.
The ratings reflect Kohl's market share gains, best-in-class operating margins, convenient off-mall store format, strong inventory management and outpaced growth in higher-margined private and exclusive brands relative to national brands.
Kohl's has grown into the third largest department store retailer in the U.S. with revenues of approximately $19 billion through a strong organic store growth program and above-industry-average comparable store sales (comps) growth through 2010. Its share of total department store sales (using NAICS codes for industry sales) has grown annually to approximately 10% in 2011 from 2.6% in 2000, while market shares of its direct peers have largely been flat to down. Over the 10-year period, Kohl's has added about $13 billion in sales volume in a sector that has shrunk about 20%. 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 2 - 3 years. In addition, comp store sales growth going forward is expected to be in the low single digit range given a maturing store base.
Kohl's comps grew modestly in 2011 at 0.5% (vs. +4.4% in 2010) due to weaker than expected fourth quarter results. On a relative basis, Kohl's has underperformed the average of Fitch-rated nine department stores in 2011 after six years of out-performance, due to a particularly price-sensitive and budget-constrained customer base.
Fitch expects comps to grow by approximately 1% in 2012, with the first half remaining under pressure, and improve to 2% in 2013. Fitch expects the company's recently increased investments in pricing and abatement in cotton inflation starting in the second half of 2012 should help regain customer traffic.
Fitch expects Kohl's market position and margins to remain relatively stable. The Stable Outlook is supported by the company's strong price image in the moderate department store space, continued growth in higher margined private and exclusive brands, and well managed inventory. Kohl's has placed particular emphasis on upgrading its private and exclusive brands since 2004, which have seen strong growth in the last few years and currently account for 51% of sales versus 44% in 2009 and 25% in 2004. Fitch estimates that private and exclusive brand sales grew by over 8% to $9.6 billion in 2011, on top of 16% in 2010 and 11% in 2009. This is in comparison to flat to low-single-digit decline in national branded sales over the last three years.
Adjusted debt/EBITDAR at the end of 2011 is expected to remain in the low 2.0x range on estimated modest EBITDA growth of 3%, offset somewhat by a higher debt balance and increased rents. Fitch expects leverage ratios to remain stable over the next two years and the company is expected to manage its capital structure to its stated leverage target of 2.0x.
Fitch expects Kohl's to generate FCF (after dividend) of approximately $750 million in 2011 after accounting for $1 billion of capital expenditures (capex). FCF is expected to be in the range of $650 million-$700 million annually over the next two years, assuming capex remains in the $1 billion range. Cash balance at the end of 2011 is expected to be over $1 billion, significantly below the levels for the past two years, given an accelerated $2.3 billion share buybacks under its $3.5 billion repurchase program.
Kohl's liquidity is also supported by a $1 billion senior unsecured revolving bank credit facility due in June 2016. Kohl's has no debt maturities prior to 2017 and Fitch expects Kohl's will continue to be disciplined in managing its cash flow allocation, share repurchases and debt levels.
Fitch has affirmed Kohl's ratings as follows with a Stable Outlook:
--Long-term IDR at 'BBB+';
--$1 billion bank credit facility at 'BBB+;
--$2.15 billion senior unsecured notes and debentures at 'BBB+'.