KSS – Base Case CDS 465bps, Base Case iCDS 234bps, Negative Case iCDS 304bps, 2031 3.375% Bond YTW of 8.623%, iYTW of 6.652%, Ba2 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need

February 20, 2024

  • Credit markets are materially overstating KSS’ credit risk with a YTW of 8.623% and CDS of 465bps, relative to an Intrinsic YTW of 6.652% and an Intrinsic CDS of 234bps. Furthermore, Moody’s is overstating the company’s fundamental credit risk, with its speculative Ba2 credit rating four notches lower than Valens’ IG4+ (Baa1) credit rating.
  • Incentives Dictate Behavior™ analysis highlights positive signals for credit holders. Management’s compensation framework should drive them to focus on all three value drivers: margin expansion, asset efficiency, and top-line growth, which should lead to Uniform ROA expansion and increased cash flows available for servicing obligations. In addition, most management are material owners of KSS’ equity relative to their annual compensation indicating they may be aligned with shareholders to pursue long-term value creation for the company. Furthermore, management has low change-in-control compensation relative to their average annual compensation indicating they may not be incentivized to pursue a takeover or accept a sale of the company, decreasing event risk for creditors.
  • Earnings Call Forensics™ of KSS’s Q3 2023 (11/21/2023) earnings call highlights that management is confident beauty sales in their shops is up 30% and that their pet business grew by 40% in Q3. In addition, they are confident customers will allocate more spend at Kohl’s due to their initiatives, that they are scaling account purchases more meaningfully, and that they are making sure their stores have a gifting presentation for the holidays. Lastly, management is confident they have reduced digital-related costs of shipping and that SG&A cost increases were lower than expected.

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