Kohl's creditors take lumps as sales fizzle
The risk of owning Kohl's Corp. debt is climbing the most of any U.S. department store chain as the company embarks on $3.5 billion of stock buybacks after failing to meet its sales targets during the holiday season.
Credit-default swaps linked to Kohl's have surged 96 basis points since Nov. 28, making obligations of the Menomonee Falls, Wisconsin-based firm the riskiest ever relative to Macy's Inc. and Target Corp. Kohl's cut its fourth-quarter earnings expectations on Jan. 3 after selling products at deeper discounts than planned in December.
Kohl's attempt to build up inventory "as a proverbial 'Hail Mary' to drive sales" hasn't worked, and its new approach to limiting stock will probably hinder sales, according to Nomura Securities International Inc. Investors have shunned Kohl's bonds since it reported a $3.2 billion increase to its share-repurchase program in November, sending its debt down 4.3 percent, the most of any department store.
"Their same-store sales have been fairly inconsistent," Ana Lai, an analyst at Standard & Poor's who cut Kohl's credit outlook to negative in December, said in a telephone interview. After borrowing $350 million in September, "there isn't as much cushion as there used to be" to fund stock buybacks with debt, she said.
The company's $350 million of 3.25 percent debt due in 2023, which Kohl's said may fund buybacks, fell 2.5 cents last week to a record low 95.3 cents on the dollar. Chief Executive Officer Kevin Mansell said in a statement Jan. 3 that December sales "were lower than planned."
Kristen Cunningham, a spokeswoman at Kohl's, didn't respond to telephone and email messages seeking comment about the company's finances.
The extra yield investors demand to hold the retailer's bonds rather than government debt has widened 30 basis points to 1.82 percentage points since Nov. 8, when Kohl's boosted authorized buybacks that it expects to conduct over the next three years, according to Bank of America Merrill Lynch index data. That compares with an extra yield of 106 basis points for non-food and drug retailers, which has narrowed from 112.
While same-store sales increased 3.4 percent last month from a year earlier after a 5.6 percent plunge in November, the growth "came with an expensive margin price tag," Paul Lejuez, an analyst at Nomura, wrote in a Jan. 4 report. An operating margin of 11.5 percent in 2011 will probably decline to 9.8 percent for 2012 and 8.6 percent in 2013, he wrote.
Kohl's last week reduced its expected earnings per share to a range of $1.60 to $1.62 in the fourth quarter from an earlier estimate of as much as $2.08. Its November sales decline, announced Nov. 29, marked the biggest drop in a year, Bloomberg data show.
"This top-line drop, combined with an aggressive shareholder policy, was probably the trigger that caused the market to re-evaluate the overall risk of the company," said Alan Shepard, an analyst at Madison Investment Advisors Inc., which oversees about $16 billion in Madison, Wisconsin. If performance doesn't improve, "they could face headwinds in pricing any new debt," he said.