While Kohl’s Corp. has a fresh turnaround plan orchestrated by its new chief executive officer, persistent negative sales trends and debt levels remain concerns.
On Monday, TD Cowen, a leading global investment bank and financial services firm and division of TD Securities, put Kohl’s on a “liquidity watch” report evaluating cash flows and balance sheets of Kohl’s and other department and specialty stores.
“Kohl’s leverage has increased meaningfully over the past year given negativity profitability trends amidst a persistent declining sales backdrop,” TD Cowen reported.
“The adjusted debt-to-EBITDAR ratio increased from 3.6x in fiscal year 2023 to nearly 4x in fiscal year 2024.” (EBITDAR stands for earnings before interest, taxes, depreciation, amortization and rent.)
TD Cowen also noted that the Menomonee Falls, Wis.-based, value-oriented retailer has $353 million in debt due July 2025 that needs to be refinanced. “The current effective rate of the note is 4.25 percent, and we believe there is risk that any new debt would likely be issued at a higher rate. Kohl’s ended the fourth quarter with $134 million in cash.
“We’re watching leverage and debt maturities due at Kohl’s,” Cowen stated.
Kohl’s on March 11 issued a dour fourth-quarter report marked by a 74 percent drop in net income to $48 million from $186 million in the year-ago period. Net sales fell 9.4 percent to $5.2 billion. Comparable sales, which adjust for calendar changes, decreased 6.7 percent. For all of 2024, net sales decreased 7.2 percent to $15.4 billion.
But in January, Ashley Buchanan, formerly CEO of Michaels and earlier a senior executive at Walmart and Sam’s Club, took the reins, and in March disclosed key elements of his turnaround plan. “We have an opportunity to re-engage this customer by unlocking the full potential of our proprietary brands,” he said during a conference call with industry analysts and investors, citing Sonoma for apparel and FLX for activewear as two of the company’s best private brands. “Strengthening our proprietary brand offering is key to our success.” Restoring discontinued categories and deals on coupons is part of the program for private brands going forward. The company will also be refocusing its attention on fine jewelry and petites.
Buchanan wants to re-establish Kohl’s as a leader in value and elevating promotions and “great” prices. He will also continue to prioritize Sephora, home decor and impulse areas where growth opportunities are seen and simplify over-complex promotions and coupons by reducing the number of brands listed as excluded. Additionally, he wants Kohl’s to provide a more consistent experience at stores and online in part by keeping high-volume items in stock, and cost reductions will be implemented.
Regarding the department store sector, TD Cowen reported they “generally record high free cash flow and high free cash flow yields given the modest rent expenses as anchor tenants, although we are cautious on potential for negative sales this year driving margin deleverage across the sector.”
Regarding Nordstrom’s plan to go private, Cowen reported that the company needs to raise $250 million of debt for the transaction, which could be challenging given S&P’s downgrade of the retailer’s credit to BB in December. However, it is widely expected that the deal will go through. In December, the Seattle-based retailer signed a definitive agreement under which the Nordstrom family and Mexican retailer El Puerto de Liverpool will acquire all of the outstanding shares of Nordstrom not beneficially owned by the Nordstrom family and Liverpool. It’s an all-cash transaction with an enterprise value of about $6.25 billion. Nordstrom common shareholders will receive $24.25 in cash for each share of common stock they hold. The deal represents a premium of about 42 percent to the company’s unaffected closing stock price on March 18, which was the last trading day prior to media speculation about the potential transaction.
