Dive Brief:
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S&P Global Ratings on Friday lowered Kohl’s issuer credit rating and rating on unsecured debt one notch each to BB, citing missed expectations for fiscal 2022, “with lower margins due to heightened clearance activity and muted demand.”
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Last year, Kohl’s operating cash flow declined to negative $639 million from positive $591 million in 2021, with its Q4 performance “particularly weak,” including a 7% revenue drop, according to an emailed S&P Global press release.
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A litany of challenges — including high management turnover, Kohl’s department store model and a slowing economy — could be partly offset by its strengths. Those include its mostly off-mall location and partnership with Sephora, per S&P Global analysts.
Dive Insight:
Kohl’s has much to prove, and it’s not yet clear what initiatives its new management team will undertake to turn its performance around.
Several executives left the company last year, before and after the retailer rejected a takeover bid. For years activist investors had been advocating for dramatic change, including a possible sale of its operations or real estate and personnel changes on the board and the C-suite, including the chief executive. CEO Michelle Gass ultimately left at the end of the year to become president of Levi’s.
With a new permanent CEO at the helm and its inventory under better control, the department store is exploring ways to steady its operations, including major pricing changes. But its trajectory remains unclear, according to S&P Global analysts Diya Iyer and Lauren Slade.
“We remain cautious on the company's several management changes over the past 12 months, including the appointment of its new CEO,” they said. “Considering this turnover and the weaker recent operational execution relative to some apparel peers, we have an incrementally less favorable view of the company's strategic planning process and its management depth and breadth. As a result, we are revising our management and governance score to fair from satisfactory.”
Kohl’s plan to roll out Sephora to all stores “could successfully offset some of these pressures,” they also said. Kohl’s executives have credited its tie-ups with Sephora and Amazon with bringing in new customers, including younger ones.
However, last year J.C. Penney’s chief executive said the beauty retailer’s concessions weren’t that effective during their partnership because customers didn’t shop much elsewhere in the store. LVMH-owned Sephora switched its partnership from Penney to Kohl’s in 2020.
