It’s unusual to gain 5% on a day when the market sheds 225 points, on a day when there were only 17 new 52-week highs and 392 new lows on the NYSE. It takes even more cheekiness to buck the struggling retail sector when larger bellwethers like Walmart (WMT) and Macy’s (M) both reported earnings misses last week and dropped their guidance for the remainder of the year. Yet Kohl’s (KSS) managed to do just that on August 15.
Is this an indication that KSS is poised to outperform its peers? Or will the lighter retail traffic and increased pocketbook hesitancy among American consumers soon weigh on the stock as well? We expect the latter.
WMT saw an earnings miss of a cent for Q2, but more importantly, WMT guided lower for the remaining year, pointing to a “challenging sales and operating environment” – code words, perhaps, for a weakening consumer and possibly a weaker overall economy. When the world’s largest retailer is feeling challenged, it is difficult to see how GDP expectations, consumer confidence, or wage growth – let alone other companies in the retail sector – will be riding high, especially when mid-tier and upscale retailers Macy’s and Nordstrom (JWN) are also lowering expectations.
Similarly, KSS missed expectations by a penny. They reported $1.04 against expectations of $1.05. Revenue was in line with expectations at $4.29 billion but profits are down almost 4% from a year ago and the company pared back its top line guidance for the rest of the year. Yet the stock climbed over 5% during the first session after this report. What was the reason for the jump higher?
KSS saw total sales increase by 2% and their gross margins expanded over the prior year. More importantly, their same store sales increased by 0.9%, a small rise but a departure from the negative same store trends emerging in the industry. Another hint may come from digging a little deeper in JWN’s numbers. While comps at JWN’s full line stores declined by -0.7%, their Rack stores – the retailer’s off-brand chain – increased same store sales by 2.4%, indicating a trend towards bargain shopping, cost sensitivity, and tighter purse strings among consumers. KSS may have been a beneficiary of this trend (although WMT, as the low price giant in retailing, appears to have had their struggles nonetheless).
But these tailwinds for KSS may turn out to be short-lived – as may the rally from its earnings announcement. Industry data points are suggesting little department store top line potential for growth. At the beginning of Q2, many Wall Street analysts expected a stronger second half for 2013 because of an improving macro outlook and a corresponding lift to consumer sentiment. However, heading into late summer, and with the back-to-school season shaping up to be lackluster, analysts are questioning the health of the retailing sector, especially in apparel.
Near Term Momentum
A look at the last 12 months in KSS shows that the stock has oscillated between $42 and $55, suffering a 10% setback last November and then spending much of the next nine months recovering that loss. So it has not really been doing anything exciting for long term bulls.
However, if we back out and look at a weekly chart, we see a pattern emerge. The stock has been locked, and in a notably consistent way, in a slight downtrending channel since mid-2010. It again recently traded to the top end of this channel and despite the 5% jump on the day of its earnings report, it is showing signs that it will be unable to break through that resistance.
On the day of the gap up, the stock traded as high as $54.50 (after closing the previous day near $51) but faded off somewhat, closing near $53.50. Since then the stock has given back most of those Q2 earnings report gains.
If KSS rallies again it would take significant buying pressure to push through its overhead resistance that it was unable to trespass with the help of an earnings release. While its current upside consists of about $1-2 to the top of its range, the downside to the lower end of the channel is $10 – 12. The stock is not terribly volatile so a move down to this lower range may take some time to pan out – although the stock’s history shows that selloffs tend to happen more quickly than its uptrends. Any negative consumer/retailing news, or possible Fed tapering, would certainly accelerate things.
Recommendation:We recommend short positions at current prices with a target by the end of the fourth quarter of $41 per share. Traders may want to move a progressive stop down to $50 if the stock starts to consolidate in the $47 range.
Options Alternative: We recommend the January 2014 $45 puts for $1.00 per share or less.
InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.