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Fitch Ratings weighed in on the department store sector ahead of the Q1 earnings season. The rating agency has a cautious view due to the secular challenges of operating in the space and its reduced confidence in the ability of key players to successfully execute an operating strategy to profitably defend share.
Fitch dropped the credit default rating on Kohl’s (NYSE:KSS) down a notch to BB+, while Nordstrom’s rating was lowered to BB. Both companies are seen as having an inability to support sales and margin stabilization despite some fundamental advantages such as scale and real estate positioning. Macy’s (NYSE:M) and Dillard’s (NYSE:DDS) were kept with a BBB- rating. In terms of financials, Fitch’s ratings assume Macy’s (M), Kohl’s (KSS), and Nordstrom (NYSE:JWN) can maintain EBITDAR leverage in the mid-2x, low-3x and high-3x ranges, respectively. Looking ahead, Fitch expects revenue and EBITDA to remain well below pre-pandemic levels and remain range-bound at best across the group, even assuming some progress with topline initiatives, given secular headwinds.
“Given ongoing secular headwinds, department stores are continuously refining strategies to defend market share. Initiatives include investments in omnichannel models, portfolio reshaping to reduce exposure to weaker indoor malls, and efforts to strengthen merchandise assortments and service levels.”
Notable developments in the department store sector include CEO changes at Macy’s (M) and Kohl’s (KSS), Macy’s (M) announcement of the closure of 150 locations, and Nordstrom’s (JWN) repositioning of its off-price Rack brand. Fitch said those dramatic moves all demonstrate the ongoing need to refresh strategies and reposition portfolios.
Dillard’s (DDS) has the highest Seeking Alpha Quant Rating within the department store sector and also has the best 52-week return with its 55% pop. Kohl’s (KSS) has the highest percentage of short interest outstanding of the group.