NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on Kohl's Corporation's (Kohl's) Issuer Default Rating (IDR), $900 million revolver and $1.9 billion of senior notes and debentures at 'BBB+'. The Rating Outlook is Stable. A full list of rating actions is shown below.
The ratings reflect Kohl's above-industry-average operating margins and leading market share gains, its convenient off-mall store format, strong inventory management and increased penetration of higher-margined private and exclusive brands.
Kohl's has displaced J.C. Penney as the third largest department store retailer in the U.S., with 2010 revenues of $18.9 billion. An ambitious organic store growth program has made Kohl's a rare growth story in the mature department store industry as the company has expanded its footprint to 1,089 stores located in 49 states from 732 units in 2005 and 320 units in 2000. Its share of total department store sales (using NAICS codes for industry sales) has grown annually to approximately 9.9% in 2010 from 6.1% in 2005 and 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 on a 2000 base of $6 billion in a sector that has shrunk about 20%. This is a sharp contrast to its closest competitor, J.C. Penney, whose sales volume is down 5% over the same timeframe. A significant contributor to Kohl's share gains is its relatively new store base, with over 90% of its stores located in convenient off-mall locations (strip centers and free-standing units) in a sector that is predominantly mall based. Over the last three years, the company has pulled back on its store opening program, opening 31 units in 2010, 56 units in 2009 and 75 units in 2008 versus an original target of 100 units annually pre-recession. Kohl's expects to open 40 units in 2011 and 30-40 units thereafter for square footage growth in the 3% range, and potentially add units through opportunistic fill-in acquisitions.
Kohl's reported strong comparable (comp) store sales of 4.4% in 2010 after being the only department store retailer that reported positive comp store sales in 2009 (+0.4%). Its two-year stacked comps of 4.8% is the best among Fitch rated department stores. Comp store sales for Fitch rated department stores (on a sales weighted basis) are up an estimated 2.7% for 2010 after a decline of 6.1% in 2009. Kohl's outperformance reflects the company's strong price image in the moderate department store space, particularly evidenced by the strong growth in exclusive and private brands, and well-managed inventories. Fitch expects same-store sales for 2011-2012 to be in the 2%-3% range, and overall sales growth, including contribution from new stores, should be in the mid-single-digit range. This should enable Kohl's to continue to drive market share gains, as Fitch expects industry sales to grow at plus/minus 1% over the next two years. Fitch comparable store sales estimates do not consider any benefit from being able to pass along product cost inflation to consumers.
Kohl's gross margins have remained strong over the last three years, particularly in comparison to its peers, with gross margin up an estimated 40 basis points (bps) in 2010, on top of an approximately 90 bp improvement in 2009 and 45 bp increase in 2008. The company's gross margin is being sustained by the introduction of updated and contemporary styles, strong inventory management and lower clearance activity. Kohl's has placed particular emphasis on upgrading its private and exclusive national brands since 2004, which have seen strong growth in the last few years and currently account for 48% of sales versus 44.3% in 2008 and 26% in 2004. Most of the growth has resulted from the introduction of exclusive brands. Fitch estimates that private and exclusive brand sales grew by 16% to $8.8 billion in 2010, on top of 11% in 2009 and almost 7% in 2008. This is in comparison to flat growth in national branded sales over the last two years. Kohl's gross margins should continue to benefit from the mix shift to higher margin private and exclusive brands over the next couple of years. However, given the sourcing cost pressures in apparel, Fitch expects Kohl's gross margin to come under some pressure and be flat to down modestly in 2011 versus previous expectation of 10-30 bp growth.
Adjusted debt/EBITDAR at the end of 2010 is expected to improve to 2.0 times (x) from 2.2x at the end of 2009 on estimated EBITDA growth of 12%-13%, offset somewhat by 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.
Free cash flow for 2010 is expected to be in the $850 million to $900 million range and ending cash is therefore expected to be similar to 2009 ending levels, given an accelerated $1 billion share buyback program announced in the fourth quarter. Fitch expects Kohl's can continue to generate strong free cash flow in the range of $700 million-$900 million annually over the next two years. This contemplates a step up in capital expenditures to $1 billion-$1.1 billion range versus $900 million in 2010. Assumptions for free cash flow do not reflect the institution of a dividend; should Kohl's put in place a dividend, a 1%-2% dividend yield annually at current stock price levels would cost $150 million-$300 million.
Kohl's has resumed share buybacks through a $1 billion accelerated share repurchase program that it announced in the fourth quarter. These shares are being repurchased under the $2.5 billion share repurchase program announced in September 2007, and $1.9 billion of authorization remains. Given Fitch's expectation for free cash flow and the company's desire to maintain $1.5 billion in year-end cash to fund seasonal working capital needs, Kohl's is expected to have the ability to return approximately $1 billion annually to its shareholders in the form of share buybacks and support a dividend (with a yield comparable to its major retail peers) with excess cash.
Besides anticipated cash of $2.2 billion-$2.3 billion at the end of 2010, Kohl's liquidity is also supported by a $900 million senior unsecured revolving bank credit facility that is scheduled to mature in October 2011. In terms of debt covenant compliance for its credit facility - under which Kohl's total indebtedness (including 8 times rent) over net worth cannot be not more than 0.70:1.00 at each fiscal quarter end, the company's leverage ratio was 0.42 on Oct. 30, 2010. Fitch expects Kohl's to renew its credit facility and refinance upcoming debt maturities of $400 million in unsecured notes due 2011. Thereafter, the next debt maturity is in 2017. 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+';
--$900 million bank credit facility at 'BBB+;
--$1.9 billion senior unsecured notes and debentures at 'BBB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 16, 2010;
--'2011 Outlook: U.S. Retailers to See Continued Slow Growth' (Nov. 17, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
2011 Outlook: U.S. Retailers to See Continued Slow Growth
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=575965
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