Kohl’s Stock Bucks the Negative Trend in Retail

by Jonathan Berr | August 14, 2014 3:22 pm

Shares of Kohl’s (KSS[1]), a specialty retailer with 1,160 stores in 49 states, rose in early trading after the company reported earnings that were less godawful than Wall Street expected.

kohl's stock, kssNet income was $232 million, or $1.13 per share — little changed from $231 million, or $1.04 per share, a year earlier. Revenue fell 1% to $4.24 billion.

The results beat Wall Street expectations of $1.07 per-share profits, though KSS lagged the $4.28 billion analysts’ had forecast. Comparable sales at KSS also had a steeper-than-expected fall, dropping 1.3%.

Chief Executive Kevin Mansall, though, gave investors some reason for optimism when he noted that comparable sales improved in July. KSS also did a good job[2] controlling costs. Selling, general and administrative expenses fell 1% to $981 million in the three months ended Aug. 2. The cost of merchandise sold also dropped 1% to $2.59 billion.

Speaking on the company’s earnings conference call, Mansell said he was especially pleased by the “renewed momentum” in its e-commerce business and was confident that the addition of Izod and Juicy Couture will bolster its back-to-school business. Kohl’s is also adding beauty departments and expects improvements in its juniors and home businesses. Like other retailers, KSS is expecting a jump in e-commerce sales.

“The start of back-to-school…was exceptionally strong,” he said, adding that the company saw strong results across the board.

Even with today’s run-up, Kohl’s stock is worth buying. KSS trades at a price-to-earnings multiple of 14, which is a discount to peers such as Walmart (WMT)[3], Target (TGT[4]) and TJX (TJX[5]). Though analysts expect flat revenue growth for the year, that forecast may be conservative given how well the company has managed expenses and the growth it’s seeing in many of its businesses.

The average 52-week price target on Kohl’s stock is $57.33, about where it trades now. That target will probably be raised in the coming weeks once analysts are convinces that KSS will deliver on its promises.

Kohl’s Stock in  Better Shape Than Most Retailers

The optimism for Kohl’s stock contrasts with the pessimism seen at WMT and TJX, which for months have complained that consumer uncertainty has been hurting their results. Today, Walmart reported lackluster results yet again and slashed its earnings outlook. Even Macy’s (M[6]), which had long been a Wall Street favorite, reported earnings that lagged analysts’ expectations. Though its tempting to blame “the consumer,” for the retailers’ woes, that explanation doesn’t tell the whole story.

Consumer confidence as measured by the closely watched Conference Board [7]index, rose to 90.9 in July — the highest reading since October 2007, before the Great Recession. Though much attention has been paid to the flat July retail sales figures[8], many economists remain optimistic that the second half of the year will be better than the first. Indeed, often when retailers speak about the worries of consumers, they often neglect to mention their roles in causing the stress.

Take Walmart, for instance. The company has ranked poorly in customer satisfaction surveys for years and ranks last on the American Customer Satisfaction Index’s rankings on retailers with a score of 71. Media reports have noted that some Walmart stores are so poorly staffed that they have trouble keeping their shelves stocked.

Target, the second-largest retailer, fared better than Wal-Mart, earning a rating of about 77. Unfortunately, Target also is reeling from the negative publicity surrounding a data breach earlier this year, which has tarnished the company’s brand.

Kohl’s, for its part, earned a rating of 81[9], ranking second behind Nordstrom in the Department and Discount Stores category. When consumers were feeling pinched during the Great Recession,  they were attracted to Walmart’s every day low prices. When they are less concerned about making ends meet, they will go to stores where they are treated well, such as Kohl’s.

If Kohl’s continues on its current trajectory, it should be able to gain share on some rivals. That means that KSS stock won’t remain on the discount rack for long.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

  1. KSS: /stock-quotes/KSS-stock-quote/
  2. also did a good job: http://www.reuters.com/article/2014/08/14/kohls-results-idUSL4N0QK4IW20140814
  3. WMT): /stock-quotes/WMT)-stock-quote/
  4. TGT: /stock-quotes/TGT-stock-quote/
  5. TJX: /stock-quotes/TJX-stock-quote/
  6. M: /stock-quotes/M-stock-quote/
  7. Conference Board : http://online.wsj.com/articles/u-s-consumer-confidence-rises-1406647261
  8. July retail sales figures: http://www.usatoday.com/story/money/business/2014/08/13/july-retail-sales/13991621/
  9. earned a rating of 81: //www.theacsi.org/news-and-resources/customer-satisfaction-reports/customer-satisfaction-reports-2013/acsi-retail-report-2013/acsi-retail-report-2013-download

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