It was not a very good Friday for Kohl’s.

Standard & Poor’s downgraded the Menomonee Falls, Wisconsin-based Kohl’s Corp. to “BB” from “BB+” citing its weaker-than-expected fourth-quarter results, lower margins, heightened clearance activity and “muted” demand.

BB is taken into account a junk rating. It suggests an elevated vulnerability to default risk if there are significant changes within the business or the economy, though an organization maintains flexibility to satisfy financial commitments.

However it’s not all bad.

In its report on Kohl’s issued Friday, S&P said it expects higher metrics in 2023 as the corporate improves merchandising execution with lower inventory levels, freight costs ease and continues the rollout of Sephora shops inside its stores.

S&P also cited reduced capital expenditures, which should help profitability, after outsized spending in the previous few seasons as a result of the rapid rollout of Sephora shops. S&P sees favorable market trends in beauty and said Sephora has a powerful market position.

As well as, S&P cited the likelihood that Kohl’s starts to accumulate revenue again in 2024, after declines in 2023, and said the retailer’s off-mall locations, which account for about 95 percent of the overall fleet of stores, are “a profit as they contribute to the corporate’s lower cost structure and supply higher accessibility and convenience for purchasers.”

“Still, we consider operating margins will remain below historic levels and stay at about 4 percent,” S&P reported. “We also note macroeconomic risks because the economy slows, which could impair consumer spending and pressure sales greater than the low-single-digit percent decline we anticipate in our base case for fiscal 2023.”

The rankings agency said the downgrade reflects “the numerous deterioration of Kohl’s free operating money flow and leverage.”

“We consider inventory levels at the top of 2022 appeared appropriate following clearance activity, up roughly 4 percent compared with the prior yr,” S&P stated. “Nonetheless, given the mixed recent track record, we see risks of markdowns that might proceed to pressure profitability over the approaching yr. We assume initiatives will step by step improve profitability over the subsequent several years, with revenue declining in 2023 and slowly constructing back from that time. Consequently, S&P lease adjusted leverage stays above 3x through 2024. Because of the corporate’s anticipated weaker credit measures and volatile operating results, we revised our financial risk profile assessment to ‘significant’ from ‘intermediate.’”

S&P expressed some caution regarding recent management changes, including the appointment last February of Kohl’s recent chief executive officer Tom Kingsbury, although he has a powerful popularity in retailing considering his successful transformation of Burlington Stores. Kingsbury succeeded Michelle Gass, who left Kohl’s to became president and CEO-elect of Levi’s. In one other key executive change just per week after Kingsbury’s appointment, Nick Jones, a 25-year retail veteran, was named chief merchandising and digital officer, succeeding Doug Howe.

“Considering this turnover and the weaker recent operational execution relative to some apparel peers, we have now an incrementally less favorable view of the corporate’s strategic planning process and its management depth and breadth,” S&P indicated. “Consequently, we’re revising our management and governance rating to ‘fair’ from ‘satisfactory.’

“We consider malls proceed to face mounting competitive pressures and ongoing execution risk to keep up market share. Declining physical store traffic, shifting category preferences, and online price transparency are persistent longer-term risks for Kohl’s business, in our view.”