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Kohl’s Corp. / (KSS-NYSE) / $41.17Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.
Reason for Report: FLASH UPDATE: 3Q17 Earnings Release
Prev. Ed.: Sep 22, 2017; 2Q17 Earnings Update
Flash Update [Earnings update in progress; to follow]
On November 9, 2017 Kohl’s announced third-quarter fiscal 2017 results, wherein adjusted earnings of 70 cents per share missed the Zacks Consensus Estimate of 72 cents. Earnings slumped 12.5% from the prior-year quarter, due to lower gross margin stemming from higher cost of sales and a moderate rise in selling, general and administrative (SG&A) expenses. The disappointing bottom-line performance came after five successive quarters of positive earnings surprises.
Sales and Margins
Net sales were $4,332 million, which beat the Zacks Consensus Estimate of $4,296 million and improved 0.1% from the prior-year quarter. The top line mainly gained from increased comps and improved performance during the back-to-school season. The positives were offset by soft sales trends owing to unfavorable weather conditions during the middle of the third quarter.
We note that the company’s store traffic continued to rise since the first half of 2017. Encouragingly, the 0.1% rise in comps during the quarter under review compared favorably with the year-ago decline of 1.7%. This signifies that the company’s strategic initiative — Greatness Agenda — has started yielding results. The initiative, which commenced in first-quarter 2014, was designed to drive transactions per store and sales.
Gross margin declined 30 basis points to 36.8% in the reported quarter. Selling, general and administrative expenses increased 1.4% to $1,095 million in the quarter.
Other Financial Details
As of Oct 28, Kohl’s had $736 million of cash and cash equivalents, $2,796 million of long-term debt and $5,029 million of shareholders’ equity. Cash flow from operations amounted to $869 million.
On Nov 8, Kohl's board of directors declared a quarterly cash dividend of 55 cents per share, which will be paid on Dec 20, to shareholders of record as of Dec 6.
Kohl’s ended the quarter with 1,156 stores, 12 FILA Outlet stores and four Off/Aisle clearance centers in 49 states.
Updated Guidance
Kohl’s expects adjusted earnings for fiscal 2017 in the range of $3.60-$3.80 per share, compared with the previous range of $3.50-$3.80. We note that despite the weak bottom-line results, the company raised the low end of the fiscal 2017 earnings view on a gradual improvement in comps.
MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON KSS
Portfolio Manager Executive Summary [Note: only highlighted material has been changed]
Kohl's Corporation is a specialty department store that offers apparel, home goods and other items. The company was built on the concept of emphasizing on national brands with quality and value, which have wide consumer appeal.
Of the 13 firms rating the stock, eight firms provided a neutral rating and three rendered positive ratings. Two firms had a negative outlook on the stock.
The outlook of the firms on Kohl’s has been dealt with in the following paragraphs:
Neutral and negative or equivalent (10/13 firms): Despite Kohl’s continuous efforts to improve its base business, these firms believe lower spending on apparel and accessories and a general slowdown in consumer spending is hurting sales at department stores. Further, competition from discount retailers is hurting sales at department stores. Notably, U.S. department stores including Kohl’s have been struggling to gain market share in the face of increased competition by online rivals including Amazon.com. Moreover, firms are of the opinion that the company’s e-commerce revenue growth has not been adequate enough to offset the increased shipping costs, thereby pulling down profits. Kohl’s turnaround initiative named “Greatness Agenda” is also showing weakness of late. This raises concerns for the company over the near term.
Positive or equivalent (3/13 firms): These firms have a positive stance based on Kohl’s attractive brand name, focus on launching new products, growing e-commerce business, store enhancements and solid financial position. Firms are giving credit to the company’s efforts of renewing merchandise, new loyalty program and improved marketing efforts. The company’s initiatives to replace larger stores into smaller formats are also praised by the firms and are expected to induce greater efficiency. Moreover, these firms believe the company’s ‘The Greatness Agenda’ initiative will generate results over the long term.
Also, the company has been focusing on enhancing the capabilities of e-commerce by developing fulfillment centers. Firms also remain optimistic regarding the company’s recent partnership with Amazon to sell smart home devices and products. The deal is expected to increase footfall in stores and thereby improve comps. Most importantly, the partnership puts Kohl’s ahead of its peers in the department store arena, who focus less on electronics. Kohl’s has also recently announced that it will start accepting returns for Amazon customers on selected products in 82 of its U.S. store locations from October 2017. Additionally, the retailer will provide free service of packing and shipping the merchandises to Amazon’s fulfillment centers. This extended partnership is further likely to benefit both the companies.
It also aids the company to focus on improving the capabilities of its brick-and-mortar stores in addition to expanding e-commerce, thereby developing an improved omni-channel platform.
Sep 22, 2017
Overview [Note: only highlighted material has been changed]
Headquartered in Menomonee Falls, WI, Kohl’s Corp. is a U.S. based department store chain that operates specialty department stores and an e-commerce site in the U.S. At the end of second-quarter fiscal 2017, Kohl’s operated 1,154 family-focused, value-oriented department stores, 12 FILA Outlet stores and four Off/Aisle clearance centers and a website (www.Kohls.com) that sells moderately-priced apparel, footwear and accessories for women, men and children; soft home products such as sheets and pillows; and house ware. The department store appeals to middle-class consumers as it sells discounted branded and private label clothing and home goods.
The company's merchandise includes products from branded manufacturers such as Nike and others, in addition to exclusive and private label brands. Private label brands are produced by wholesalers but sold under the brand name of the retailer, whereas exclusive brands are marketed under the wholesaler's name and are sold only in a particular chain.
The company’s national brands include Dockers, Levi’s, Columbia Sportswear, Reebok, Champion, Oshkosh, Pfaltzgraff, Krups and KitchenAid.
In addition, Kohl’s also offers online shopping. Its website features a selection of items and categories beyond what is available in stores, with a primary focus on extended sizes, product line extensions and web-exclusive product lines.
The firms identified the following factors for evaluating the investment merits of Kohl’s:
Key Positive Arguments / Key Negative ArgumentsKohl’s has a strong brand portfolio and offers moderately priced, exclusive and national brands characteristic of a traditional department store. Kohl’s also focuses on innovation to drive customer traffic to its stores and website. / Kohl’s has been grappling with numerous headwinds since the past many quarters due to difficult sales environment and cautious consumer spending. Change in spending patterns of consumers is also hurting sales.
The company is growing its e-commerce business to gain market share in the face of increased competition by online rivals. / Kohl's does not have international exposure. Hence, the company has to depend solely on the U.S. market, which is recovering slowly from the recent recession.
Kohl’s regularly returns value to its shareholders through dividends and share buybacks. / Kohl’s initiative ‘The Greatness Agenda’, which was designed to help increase sales, is showing weakness. In fact, comps declined for the sixth straight quarter, including the recently reported second quarter fiscal 2017.
Kohl’s website address is: http://www.kohls.com/. Its fiscal year ends on Feb 2.
Sep 22, 2017
Long-Term Growth [Note: only highlighted material has been changed]
Kohl’s offers moderately priced exclusive and national brand apparel, shoes, accessories, and beauty and home products. The company has established a strong brand portfolio with national brands such as Dockers, Levi’s, Columbia Sportswear, Reebok, Champion, Oshkosh, Pfatzgraff, Krups and KitchenAid. Exclusive brands such as Simply Vera by fashion designer Vera Wang and the Chaps line by Polo Ralph Lauren helped draw customers to Kohl's stores in the past as the products can only be found at Kohl's. Private and exclusive brands like Jennifer Lopez, Marc Anthony, Rock & Republic, and Van Heusen brands have been doing well in sportswear, dresses and other apparel categories since 2011.
Kohl’s regularly introduces new brands in order to keep the inventory assortment fresh and drive customer traffic to its stores and website. Popular launches like Fit Bed under its active and wellness business; the Jumping Beans collection featuring Disney characters; IZOD branded menswear and the Juicy Couture brand for women and girls, Gaiam Yoga product, Stride Rite branded kids’ footwear collection and many more. Kohl’s has also partnered with designer Reed Krakoff and launched its exclusive, limited-edition collection called REED exclusively at Kohl’s and Kohls.com in Apr 2016. It has recently also announced plans to sell Amazon’s smart home devices in its sores. This new “store-in-store” concept will initiate in October. Additionally Kohl’s has extended its partnership with Amazon by announcing that it will begin accepting returns for Amazon customers on selected products in 82 of its U.S. store locations from October 2017. Kohl’s will also provide free service of packing and shipping the merchandises to Amazon’s fulfillment centers.
Kohl’s, under its concept DesigNation, showcases clothes from premier U.S. designers. The limited-period collection is inspired by various international destinations, with a different designer for every new collection launched. The collection is showcased exclusively at Kohl’s stores and the company’s website Kohls.com.
The company began an initiative, known as "the Greatness Agenda" during the first quarter of 2014, to increase transactions per store and sales. Though the plan has helped the company to deliver positive comps in all the four quarters of fiscal 2015, the quarterly growth rates moderated gradually, thus posing a concern. In fact, comps started declining since the first quarter of fiscal 2016 and plummeted consecutively for the next six quarters.
As part of this initiative, the company focuses on providing the right merchandise mix and tailoring products for every customer across channels. To execute this, the company expects to put more emphasis on five pillars, which are amazing product, easy experience, personalized connections, incredible savings and winning teams.
Encouragingly, the company is focusing on growing its e-commerce business. We note that Kohl’s e-commerce sales have almost doubled since 2011 and increased at a compound annual growth rate of almost 40% over the last five years. In order to facilitate online sales, Kohl’s has been opening distribution centers. Kohl’s has also made significant technology investments to support its online business. The company remains optimistic on its e-commerce business over the long term.
Remodeling of stores also remains a critical component of the company’s long-term strategy. Going forward, management expects to remodel approximately 100 stores per year, which will result in each store being remodeled every 9 to 10 years. Of late, the company has been focusing more on converting their larger stores into smaller formats. Such rightsizing initiatives are expected to induce greater efficiency.
Sep 22, 2017
Target Price/Valuation [Note: only highlighted material has been changed]
Rating DistributionPositive / 23.1%
Neutral / 61.5%¯
Negative / 15.4%
Avg. Target Price / $40.91
Digest High / $50.00
Digest Low / $32.00
No. of Firms with Target Price/ Total / 11/13¯
Risks to the stock price primarily include reduction in consumer spending, high raw material cost, adverse market conditions and price competition with other retailers.
Recent Events [Note: only highlighted material has been changed]
On Sep 6, Kohl’s announced its partnership with e-commerce giant Amazon.com, Inc to provide a new Amazon smart home experience for customers in 10 selected stores in Los Angeles and Chicago. The “store-in-store” concept will initiate in October.
On Aug 22, Kohl’s announced plans to commence shipping operations from its fifth e-Commerce fulfillment center in Plainfield, IN. The company also announced its plans to open four new small format stores and focus on optimizing and rightsizing store space across a number of Kohl's outlets.
On Aug 10, Kohl’s released 2Q17 results, wherein the company reported adjusted earnings of $1.24 per share, beating the Zacks Consensus Estimate of $1.19 by 4.2%. Earnings also grew 2% from the prior-year quarter. Net sales of $4.144 billion marginally beat the Zacks Consensus Estimate of $4.138 billion. However, it dipped 0.9% from the prior-year quarter.
On Jun 27, Kohl’s Corporation appointed Bruce H. Besanko in the position of chief financial officer, effective from Jul 10. Basanko joins Kohl’s after spending 4 years with SUPERVALU as chief operating officer and chief financial officer.
Revenues [Note: only highlighted material has been changed]
As per the Zacks Digest, net sales of $4.1billion declined 0.9% from the prior-year quarter due to a challenging sales environment and lower comparable store sales (comps). This signals that the company’s strategic initiative Greatness Agenda is failing to deliver results.
Under the initiative – "the Greatness Agenda" – the company aims to increase transactions per store and sales, by focusing on providing the right merchandise mix and tailoring products for every customer across channels. To execute this, the company expects to put more emphasis on five pillars, which are amazing product, easy experience, personalized connections, incredible savings and winning teams.
However, Kohl’s turnaround initiative is showing weakness of late. Though the plan has helped the company to deliver positive comps in all the four quarters of fiscal 2015, the quarterly growth rates moderated gradually, thus posing a concern. Moreover, comps started declining since first-quarter fiscal 2016 and plummeted consecutively for the next six quarters. This is raising concerns over the near term. The company is also witnessing lower spending on apparel and accessories, dwindling store traffic, competition from discount retailers and cautious consumer spending are hurting sales at department stores.
Encouragingly, comps dropped 0.4% in the first quarter, narrower than the preceding quarter’s decline of 2.7% and prior-year quarter’s decline of 1.8%, owing to increased traffic momentum witnessed in the second quarter. Though transactions for the quarter were lower than last year, they increased in the month of July, which also benefited the quarter.