S&P Global Ratings changed Kohl's Corp. outlook to "stable" from "negative" and upgraded Dollar Tree Inc. to BBB- from BB+, in what rating analysts characterize as rare moves for the retail sector these days.
The rating analysts issued their changes in research on March 8 and hosted a webcast with analysts and investors the same day.
While the analysts increased Kohl's outlook, they affirmed the department store chain's BBB- rating. For Dollar Tree, the analysts assigned a "stable" outlook, withdrew all recovery ratings on the company's debt as the ratings are no longer speculative grade and raised the issue level rating on the company's senior unsecured debt to BBB- from BB+. The ratings analysts did not change their issue-level rating on Dollar Tree's senior secured debt, which stands at BBB-.
The analysts cited Kohl's "continuous improvements in its operating performance," and same-store sales growth of 6.9% during the holiday shopping season.
They also mentioned a number of Kohl's initiatives that have helped it stabilize and pull ahead in the competitive department store space, including a partnership with Amazon.com Inc. that allows customers to return purchases from the online giant in some Kohl's stores.
"Our expectation is for Kohl's to improve and stabilize," Helena Song, director of corporate retail ratings for S&P Global Ratings, said during the webcast.
While Song said she does not expect the overall malaise in the department store sector to ease any time soon as customers abandon bricks-and-mortar shopping in favor of online players like Amazon, there should be some incremental improvement as investments into omnichannel begins to pay off.
"Amazon is still here, we're seeing meaningful secular change in the retail space, especially the department store space," she said. "The big picture hasn't changed."
The analysts attributed Dollar Tree's ratings upgrade to a prepayment on March 1 of the $750 million of unsecured notes due 2020, reducing its debt gained from the leveraged purchase of Family Dollar in 2015. The company announced its prepayment in its March 7 fiscal fourth-quarter and fiscal 2017 full-year earnings release, where the company posted results that largely missed analyst expectations.
Since the purchase of Family Dollar, Dollar Tree has repaid around $2.4 billion in debt and reduced leverage to slightly below 3x, according to the note.
Dollar Store's profitability and rating is helped by e-commerce's lack of presence in the dollar store space, the analysts said in the note.
About half of dollar store transactions are in cash, and there is relatively low use of smartphones among the customer base, said Olya Naumova, an associate in corporate retail ratings, on the webcast. This, along with dollar stores' convenient land flexible locations, makes it difficult for e-commerce players to target this demographic.
"For most value shoppers, they find it hard to justify shipping costs and waiting for the package to arrive," Naumova said. "The store is also small in size, so they are easy to open, close and relocate if need be."
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.
