On Jan 23, 2014, we issued an updated research report on Kohl’s Corp (KSS).
We note that Kohl’s has been facing lower traffic in its stores owing to a challenging retail/sales environment in the U.S. as consumers are now increasingly conscious about their spending habits and avoid any unnecessary expenses. Comps have declined for more than a year now. Higher inventory levels and higher operating expenses are also impacting company’s margins. In addition, higher-than-expected costs due to unanticipated expenses related to its e-commerce business also adds to the already higher input costs.
Soft sales in the first quarter of 2014 due to unfavorable weather had disrupted usual shopping trends and therefore resulted in higher inventory levels during the second quarter. The companies had to give high discounts in order to clear the piling stocks. This resulted in a highly promotional environment and exerted pressure on margins. The decline in footfall resulted in lower sales in the third quarter. The company stated that third-quarter revenues were impacted mainly by sluggish sales in October. In fact, the company lowered its earnings guidance for 2014 in October after witnessing sluggish sales toward the end of the third quarter. Based on the sales results so far this fiscal year, Kohl’s expects fiscal 2014 earnings per share to be at the lower end of the prior guidance of $4.05–$4.45.
Despite soft sales trends, we have faith in the company’s strong fundamentals. Kohl’s has a solid brand portfolio. Kohl’s initiative "the Greatness Agenda" helps the company to increase transactions per store and sales. In addition, Kohl's is working toward price management strategies to increase savings. The company has also made aggressive investments to develop and upgrade its e-commerce business, which is quite encouraging and has the potential to boost sales in the upcoming quarters.
However, a gloomy consumer spending environment and higher apparel costs will continue to remain headwinds going forward. Moreover, Kohl's lack of international exposure makes it vulnerable to a weak U.S. economy and sluggish consumer spending in the U.S. Kohl’s currently carries a Zacks Rank #3 (Hold).
However, retail stocks in the sector that are doing well include J.C. Penny, Inc. (JCP), Ingles Market, Inc. (IMKTA) and The Kroger Co. (KR).
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