TEXT-Fitch rates Kohl's new senior unsecured notes 'BBB+';outlook stable
Sept 19 - Fitch Ratings has assigned a rating of 'BBB+' to Kohl's Corporation's (Kohl's) $350 million 3.25% senior unsecured notes due February 2023. The Rating Outlook is Stable. Proceeds will be used for general corporate purposes, including share repurchases.
The ratings reflect Kohl's market position as the third-largest department store retailer in the U.S., 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 comps and gross margin have come under pressure since second-half 2011, as inflation-driven price increases hampered traffic given its highly price-sensitive and budget-constrained customer base. Fitch expects continued pressure on gross margin and EBITDA through third-quarter 2012, while in the longer term, Kohl's market position is expected to remain relatively stable, with comps improving gradually in 2013 as the company continues to invest in pricing and adjust inventory levels to regain customer traffic.
Adjusted debt/EBITDAR at the end of 2012 is expected to remain in the low 2.0x range on estimated EBITDA decline in the mid-single-digits. 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 - 2.25x.
Fitch expects Kohl's to continue to generate strong free cash flow (FCF) in the range of $700 million - $750 million annually over the next two years, assuming capital expenditures in the $825 million range to support e-commerce growth and its store opening and remodeling program. Fitch expects FCF to be directed toward share buybacks. Kohl's has no debt maturities prior to 2017 and Fitch expects the company will continue to be disciplined in managing its cash flow allocation, share repurchases, and debt levels.
What Could Trigger a Rating Action
A positive rating action is unlikely at this time as Fitch expects Kohl's to manage its capital structure to its stated leverage target of 2.0x - 2.25x, while the business continues to face strong macro headwinds in the near- to intermediate-term.
A negative rating action could result if a reversal in same-store sales trends and/or a more aggressive financial posture lead to reduced financial flexibility and liquidity that would take leverage above 2.5x.
Fitch has the following ratings on Kohl's:
--Long-term Issuer Default Rating at 'BBB+';
--Bank credit facility at 'BBB+';
--Senior unsecured notes and debentures at 'BBB+'.
The Rating Outlook is Stable.
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