Kohl's Corporation (KSS): A Comprehensive Credit Analysis and Bond Safety Assessment

Executive Summary & Investment Thesis

This report provides a comprehensive financial analysis of Kohl's Corporation (NYSE: KSS) with a specific focus on assessing the safety and creditworthiness of its outstanding bonds. The core investment thesis is that Kohl's bonds, particularly its unsecured issues, represent a highly speculative investment with a significant and increasing risk of principal impairment. This conclusion is predicated on a confluence of severe, interconnected headwinds: a multi-year deterioration in financial performance, a highly leveraged balance sheet, acute governance failures manifested in extreme management instability, and a challenged competitive position within the retail sector.

The analysis reveals a company in a state of profound distress. Financially, Kohl's is grappling with persistent revenue and comparable sales declines that have compressed margins and severely weakened its capacity to generate cash flow sufficient to service its substantial debt burden. This decay is reflected in the actions of all major credit rating agencies—Moody's, S&P Global Ratings, and Fitch Ratings—which have successively downgraded Kohl's deep into speculative-grade territory, citing deteriorating credit metrics and a weakened business profile.

A critical negative credit event for existing unsecured debtholders has been the company's recent issuance of senior secured notes. This move has structurally subordinated the existing unsecured bonds, materially reducing their recovery prospects in a distress scenario and signaling a defensive posture by a management team concerned with liquidity.

Strategically, while the partnership with Sephora provides a partial offset, it has failed to reverse the decline in the company's much larger core business. The broader turnaround strategy is fraught with execution risk and has been critically undermined by a lack of consistent leadership. This leads to the most pressing concern: a crisis of governance. The unprecedented termination of a Chief Executive Officer for cause after only four months on the job signals a profound breakdown in board oversight and strategic direction, creating a leadership vacuum at a critical juncture.

Consequently, Kohl's unsecured bonds are deemed unsafe for risk-averse investors. Their risk profile is more aligned with that of a distressed security, where potential returns may not adequately compensate for the high probability of further credit deterioration and potential loss of principal.

II. Financial Health Analysis: A Portrait of a Stressed Retailer

A meticulous review of Kohl's financial statements reveals a company whose foundations are eroding. The quantitative evidence points not to a temporary or cyclical downturn, but to a systemic decline across its core operations, balance sheet strength, and cash-generating capabilities.

Profitability Under Pressure: The Eroding Top and Bottom Lines

The primary driver of Kohl's credit deterioration is the persistent contraction of its business. Net sales have been in a multi-year decline, falling from a pre-pandemic level of over $19.9 billion in fiscal 2020 to $18.1 billion in fiscal 2022, and plummeting further to $15.4 billion in fiscal 2024. The company's own outlook projects this trend will continue, with an expected net sales decrease of 5% to 7% for fiscal 2025.

This is not an issue of an inefficiently expanding store base; rather, the core of the business is weakening. Comparable sales, a key metric that measures the performance of existing stores, fell 6.5% in fiscal 2024, with management forecasting another decline of 4% to 6% in fiscal 2025. This sustained negative trend, which S&P Global Ratings notes has now spanned 14 consecutive quarters, indicates that the existing store fleet is losing customer traffic and productivity.

This top-line decay has inevitably led to severe margin compression. While gross margin has shown some resilience due to inventory management, the operating margin has collapsed from healthier pre-pandemic levels to just 2.7% in fiscal 2024. The forecast for fiscal 2025 is even more grim, with an expected operating margin between 2.2% and 2.6%. This demonstrates a fundamental inability to translate sales into operating profit. The result has been a collapse in the bottom line, with net income falling a staggering 65%, from $317 million in fiscal 2023 to just $109 million in fiscal 2024. This directly impacts the company's ability to organically build its equity base and service its debt. The significant and relatively fixed nature of the company's interest expense, which stood at $319 million in fiscal 2024, consumes an increasingly large portion of this shrinking operating income, further accelerating the decline in profitability.

Balance Sheet Deterioration: A Shrinking Cushion for Creditors

The operational weakness has translated directly into a more fragile balance sheet. The company's total asset base has contracted from $15.3 billion in fiscal 2021 to $13.6 billion as of February 2025, reflecting the shrinking scale of the business. More critically for creditors, the shareholders' equity—the ultimate buffer to absorb losses—has eroded significantly, falling from nearly $5.2 billion in fiscal 2021 to $3.8 billion as of February 2025.

This erosion is not only due to recent losses but also to past capital allocation decisions that now appear imprudent. In 2022, the company executed $700 million in share repurchases, including a $500 million accelerated program, despite experiencing negative free cash flow. That action transferred a significant capital cushion from the company's balance sheet to equity holders, leaving creditors more exposed to the current downturn. The direct consequence is the company's current precarious liquidity position. Cash and equivalents have plummeted from a healthy peak of $2.27 billion in fiscal 2021 to a mere $134 million as of February 2025, severely limiting financial flexibility. While total debt has been managed down slightly, it remains elevated at over $7.1 billion, resulting in a high debt-to-equity ratio for a company with such volatile earnings. The company's quick ratio, which measures its ability to meet short-term obligations without selling inventory, is an alarmingly low 0.19, indicating a heavy and risky reliance on continuous inventory liquidation.

Cash Flow Dynamics: The Engine is Sputtering

A company's ability to generate cash is the lifeblood of its creditworthiness. At Kohl's, this engine is sputtering. While operating cash flow was positive at $648 million in fiscal 2024, this figure is volatile and down substantially from prior years. After accounting for capital expenditures, which are projected to be around $400 million in fiscal 2025, the remaining free cash flow is thin. This meager surplus must cover dividends and any substantive debt reduction. The recent 75% reduction in the dividend is a clear and unambiguous signal of severe cash flow stress. Furthermore, the company's financing activities tell a story of increasing distress, shifting from share repurchases (a sign of health) to drawing on credit facilities and issuing new, more restrictive secured debt to manage liquidity.

III. Credit Profile and Debt Structure: Gauging the Risk to Bondholders

The deterioration in Kohl's financial health has led to a commensurate decline in its credit profile. Key metrics have breached levels typically associated with distressed companies, and recent financing decisions have fundamentally altered the risk landscape for existing unsecured bondholders.

Key Credit Metrics: Quantifying the Default Risk

The company's debt burden relative to its diminished earnings capacity has reached dangerous levels. Moody's calculated that Kohl's Debt-to-EBITDA ratio ballooned from a manageable 2.4x in fiscal 2021 to a high 5.7x by the end of fiscal 2022, a level substantially above the 4.75x downgrade threshold the agency had previously articulated.

More concerning is the company's shrinking ability to cover its interest payments. With fiscal 2024 operating income (EBIT) of $433 million and interest expense of $319 million, the EBIT-to-Interest Expense coverage ratio stands at a razor-thin 1.36x. This is well below Moody's downgrade trigger of 2.25x and indicates that even a modest further decline in earnings could jeopardize the company's ability to meet its interest obligations in a timely manner. This thin margin for error places bondholders in a precarious position.

Debt Structure and the Peril of Subordination

A watershed event for Kohl's unsecured bondholders occurred with the recent issuance of new senior secured first lien notes. To secure this financing, the company pledged its most valuable operational assets: its distribution and e-commerce fulfillment centers. This is not a routine financing decision. It is a move typically made by companies facing significant liquidity constraints and a loss of access to the unsecured debt markets.

The implication of this action is severe and direct: it subordinates the claim of all existing unsecured bonds. In a bankruptcy or restructuring scenario, the proceeds from the sale of these critical assets would flow first to the new secured lenders. Unsecured bondholders would be relegated to a junior position, left to recover value from a pool of remaining, likely less valuable, assets. This has fundamentally increased the "loss given default" for the unsecured notes, making them significantly riskier than they were prior to this financing. While the move helped address near-term maturities, it did so at the direct expense of the existing unsecured creditors' position in the capital structure.

The Verdict from Rating Agencies: A Chorus of Concern

• Moody's Investors Service has lowered Kohl's corporate family rating multiple times, from Ba1 down to a highly speculative B2. The agency's rationale consistently points to the deterioration in credit metrics, the erosion of Kohl's market position, and significant execution risk in its turnaround plan.
• S&P Global Ratings has also aggressively downgraded the company, taking the issuer credit rating down to 'B+' with a negative outlook. S&P's analysis highlights a weaker business risk profile, the persistent 14-quarter revenue decline, and, critically, deep concerns over management instability and erratic strategy shifts.
• Fitch Ratings downgraded Kohl's to 'BB-' with a negative outlook, citing ongoing operational challenges, uncertainty about the company's ability to stabilize its market share, the disruptive CEO transition, and a 50% collapse in EBITDA since 2019.

The consistent theme across all three agencies is that Kohl's problems are not merely cyclical but are rooted in company-specific failures of strategy and execution.

IV. Strategic Crossroads: Can the Turnaround Succeed?

With its financial and credit profiles under severe strain, the safety of Kohl's bonds ultimately depends on the viability of its strategic turnaround plan. An analysis of its key initiatives reveals a company with a flawed strategy, significant execution challenges, and a deteriorating competitive position.

The Sephora Partnership: Savior or Sideshow?

The shop-in-shop partnership with beauty retailer Sephora is the brightest spot in Kohl's strategy. It is a proven traffic driver, attracting new and younger customers, and is on a trajectory to become a $2 billion business by 2025. The high-margin beauty products are accretive to Kohl's overall profitability, and the division delivered positive growth in the second quarter of fiscal 2025.

However, the partnership's success is a double-edged sword. It is masking an even more precipitous decline in the core Kohl's business. Analysts calculate that without the contribution from Sephora, Kohl's comparable sales would have been down a disastrous 9% in the fourth quarter of fiscal 2024. This indicates that the new traffic is not translating into significant cross-shopping for Kohl's own merchandise. Furthermore, data suggests that the positive sales impact may be diminishing as the rollout matures and the initial lift from new store openings fades. For bondholders, the conclusion is clear: while a positive initiative, Sephora is insufficient to offset the decay in the much larger core business and cannot, on its own, stabilize the entire enterprise.

The Private Label Gamble: A Path to Higher Margins or Deeper Problems?

In response to declining sales of national brands, management has pinned its recovery hopes on expanding its portfolio of private and proprietary brands, such as Tek Gear, Sonoma, and FLX. The strategic rationale is sound in theory: private labels can offer higher margins, provide product differentiation, and deliver value to price-sensitive consumers.

However, this strategy is fraught with execution risk. Success requires excellence in design, sourcing, and inventory management—areas where Kohl's has demonstrated weakness. Analysts and observers have criticized poor in-store merchandising of these new brands, with descriptions like "atrocious" and "massive gaps on shelves," alongside a confusing proliferation of labels that creates customer confusion rather than clarity. This pivot is a tacit admission that Kohl's is losing the battle on the national brands that once defined its appeal, and if the new private brands fail to resonate with customers, sales could decline even more rapidly.

Competitive Positioning: Squeezed in the Middle

Kohl's occupies a precarious position in the retail landscape, caught in a pincer movement between department stores like Macy's, discounters like Target and Walmart, and off-price retailers like TJX Companies. The company is demonstrably losing this battle, with financial data showing its revenue declining while most of its competitors have grown, a clear sign of market share loss.

The company appears to be suffering from a strategic identity crisis. It is simultaneously trying to be a premium beauty destination (Sephora), a value-driven private-label apparel retailer, and a promotional department store for national brands. This lack of focus leads to a muddled and inconsistent customer experience. The company's once-famous couponing strategy has become confusing and frustrating for its loyal customers, and the in-store experience is often subpar. Without a clear and compelling value proposition, Kohl's gives customers little reason to choose its stores over more focused and better-executing competitors.

V. Governance in Crisis: The Leadership Vacuum

A Revolving Door in the C-Suite

Kohl's has been plagued by an astonishing rate of leadership turnover. The company has seen a rapid succession of CEOs: Michelle Gass (2018-2022), Tom Kingsbury (2022-2025), Ashley Buchanan (January 2025 – May 2025), and now Michael Bender serving in an interim capacity. As noted by S&P Global Ratings, this chronic instability has led to a series of diverging and ultimately ineffective strategies, preventing any coherent plan from being fully implemented. This creates a vicious cycle: poor performance leads to leadership changes, which lead to strategic shifts, which lead to inconsistent execution, which in turn leads to further poor performance.

The Buchanan Incident: A Governance Meltdown

The leadership crisis reached a nadir in May 2025 with the termination of CEO Ashley Buchanan "for cause" after just four months in the role—a rare and shocking event for a major public company. An internal investigation found that Buchanan had violated company policies by directing Kohl's to engage in vendor transactions that involved undisclosed personal conflicts of interest.

This incident represents a catastrophic failure of the Board of Directors. It raises severe questions about the board's vetting process, its ability to oversee senior management, and its overall stewardship of the company. These concerns were validated by the subsequent resignation of board director Christine McCormick Day, who explicitly cited her dissatisfaction with the company's governance practices, lack of transparency, and accountability in her departure communications. This scandal has inflicted massive reputational damage, making it significantly more difficult to attract a high-caliber permanent CEO to undertake the necessary turnaround.

The Challenge for Interim Leadership

With the company now led by an interim CEO, it is effectively in a holding pattern at the worst possible time. While Interim CEO Michael Bender provides a steady hand, major strategic shifts are unlikely until a permanent leader is found. The search for that leader is critical, but the combination of a failing business, a dysfunctional board, and a recent scandal makes the CEO position at Kohl's highly unattractive to top-tier retail talent. Until this leadership vacuum is filled with a credible, long-term executive, the company's ability to execute any meaningful recovery is severely compromised.

VI. Conclusion: Final Verdict on Kohl's Bond Safety

Integrated Risk Assessment: A Perfect Storm for Creditors

The operational decline has destroyed financial flexibility, forcing the company into defensive actions like issuing secured debt, which directly harms the position of existing unsecured creditors. These financial pressures are exacerbated by a muddled strategy that has failed to stabilize the core business and a complete breakdown in corporate governance that has left the company without credible, permanent leadership at a time when it is most needed.

The Bull & Bear Case for Creditors

• Bull Case (Extremely Low Probability): The bull case rests on a series of unlikely events: the swift hiring of a world-class CEO who can immediately stabilize the business and articulate a winning strategy; an acceleration of the Sephora partnership that begins to meaningfully lift the core business; and a flawless execution of the private-label pivot that drives margin and sales recovery. This scenario is considered a remote possibility.
• Bear Case (High Probability): The more probable scenario is that the leadership vacuum persists, and sales and margins continue to erode. Cash flow will remain under pressure, forcing further reliance on the company's revolving credit facility. As debt maturities approach in the coming years, Kohl's will face a difficult and expensive refinancing environment, potentially leading to a distressed debt exchange or, in a worst-case scenario, a Chapter 11 filing. In such a filing, unsecured bondholders would face very low recovery prospects, given that key assets have now been pledged to secure other debt.

Recommendation: Unsecured Bonds Deemed Unsafe

Based on the overwhelming weight of evidence, Kohl's unsecured bonds are not safe. They carry a highly speculative risk profile with a significant probability of further credit rating downgrades and a material risk of capital loss. The combination of severe operational stress, a highly leveraged balance sheet, the structural subordination of the unsecured debt, and a profound governance crisis makes these instruments unsuitable for any investor whose mandate does not include distressed or special situations investing. The risk of default in the medium-term is significant and is not adequately compensated by the current yield.

Works Cited

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2. 10-K - SEC.gov, accessed October 3, 2025, https://www.sec.gov/Archives/edgar/data/885639/000095017025042662/kss-20250201.htm
3. Rating Action: Moody's downgrades Kohl's CFR to Ba2, outlook negative, accessed October 3, 2025, https://www.megabank.com.tw/-/media/mega/files/bank/about/announcement/public/trust/kohls-corp-downgraded-report_20230420.pdf?la=zh-tw
4. Kohl's Corp. Downgraded To 'B+' From 'BB-'; Outlook ... - S&P Global, accessed October 3, 2025, https://www.spglobal.com/ratings/en/regulatory/article/-/view/type/HTML/id/3436297
5. Kohl`s Downgraded to BB- by Fitch - BondbloX, accessed October 3, 2025, https://bondblox.com/news/kohls-downgraded-to-bb-by-fitch
6. Kohl's ratings downgraded by Moody's; secured notes rated Ba3 By ..., accessed October 3, 2025, https://www.investing.com/news/stock-market-news/kohls-ratings-downgraded-by-moodys-secured-notes-rated-ba3-93CH-4042465
7. Kohl's Caught in Controversy: Rapid Exits of CEO, Board Member - Farient Advisors, accessed October 3, 2025, https://farient.com/2025/05/30/kohls-controversy-board-member-ceo-exit/
8. Kohl's CEO fired over conflicts of interest | Retail Dive, accessed October 3, 2025, https://www.retaildive.com/news/kohls-ceo-ashley-buchanan-fired-conflicts-of-interest-vendor-transactions/746843/

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