What: While 2023 looks promising for Kohl’s, its past quarter performances led to a S&P downgrade.

Why it is important: For now, financial ratings are still based on financial performance. It is highly probable that, in the future, environmental efforts will also become a standard way of gauging businesses.

Standard & Poor's (S&P) downgraded Kohl's Corp. to a junk rating of "BB" from "BB+" due to weaker-than-expected Q4 results, lower margins, increased clearance activity, and muted demand. The downgrade suggests heightened vulnerability to default risk amid business or economic changes.

However, S&P expects improved metrics in 2023 as Kohl's enhances merchandising execution, reduces inventory levels, experiences lower freight costs, and continues its Sephora shop rollouts. S&P also noted reduced capital expenditures and favourable market trends in beauty, as well as the potential for revenue growth in 2024. Kohl's off-mall locations are considered advantageous for their lower cost structure and customer accessibility.

Despite these positives, S&P believes Kohl's operating margins will remain below historic levels at around 4%. The ratings agency expressed concerns about the company's free operating cash flow, leverage, recent management changes, and the competitive pressures faced by department stores.

Kohl’s downgraded from BB+ to BB by Standard & Poor’s