KSS – Base Case CDS 487bps, Base Case iCDS 275bps, Negative Case iCDS 326bps, 2029 7.250% Bond YTW of 8.495%, iYTW of 6.404%, Ba2 Rating from Moody’s, IG4+ (equivalent to Baa1) Rating from Valens, Low Refinancing Need
August 28, 2024
- Credit markets are materially overstating KSS’ credit risk with a YTW of 8.495% and CDS of 487bps, relative to an Intrinsic YTW of 6.404% and an Intrinsic CDS of 275bps. 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 mostly 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, 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’ Q1 2025 (05/30/2024) earnings call highlights that management is confident they are repositioning the juniors offerings next to Sephora to better capitalize on cross-shopping opportunities.
