Before the arrival of the novel coronavirus, retailer Kohl's Corporation (KSS -2.73%) was looking pretty healthy. With $691 million in profit earned last year, and free cash flow an even more robust $802 million, according to data from S&P Global Market Intelligence, Kohl's seemed well able to service its $6.1 billion in total debt, despite having only $723 million in cash on hand.
But the coronavirus is threatening this rosy scenario, warns credit rating agency Fitch Ratings.
This morning, Fitch downgraded Kohl's Corporation debt one notch from BBB to BBB-. The rater also assigned a negative outlook to Kohl's debt.
As Fitch explains, its move "reflects the significant business interruption from coronavirus and the implications of a downturn in discretionary spending that Fitch expects could extend well into 2021."
Looking forward over the next year, Fitch worries that Kohl's is on a path to nearly triple its financial leverage, from 2.3 times in 2019 to over 6 times in 2020. This year, Fitch predicts Kohl's sales could drop 20% to less than $16 billion, and earnings before interest, taxes, depreciation, and amortization (EBITDA) will shrink 72.5% to just $550 million.
Things could improve in 2021, with sales projected to be about 85% of 2019 levels, and EBITDA about 60%, helping to reduce leverage at the retailer. That being said, "a more protracted or severe downturn could lead to further actions," Fitch said.
In standard ratings language, more letters are better than fewer (so Kohl's BBB- rating is better than the BB rating Fitch assigned Levi Strauss earlier today). That said, a minus sign means exactly what you think it does -- a worse rating than no minus.
At BBB-, Kohl's debt is now rated just one notch above junk bond status. One more downgrade is all it would take to make Kohl's debt "non-investment grade."