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Kohl's Stock Doubles in a Year: Will Comps Remain a Driver?

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Kohl's Stock Doubles in a Year: Will Comps Remain a Driver?

Kohl's (KSS) has been gaining from its sturdy comparable store sales trend, which is backed by its constant efforts to drive sales. However, high SG&A costs remain a hurdle.

Kohl's Corporation’s KSS shares have surged considerably and more than doubled in a year’s time, comfortably beating the industry’s growth of almost 75%. The company has been gaining from its sturdy comparable store sales (comps) trend, which is backed by its constant efforts to drive sales.



Kohl’s has been making robust efforts to draw shoppers and improve sales, which have helped the company deliver positive comps for four straight quarters now. Incidentally, comps registered an increase of 3.1% during the second quarter of fiscal 2018, preceded by 3.6% rise in first-quarter fiscal 2018, and 6.3% and 0.1% growth during the fourth and third quarters of fiscal 2017, respectively.

What’s Driving Kohl’s Comps?

Comps in the second quarter gained from strength in both store and digital channels, while proprietary and national brands also portrayed sturdy performances. Also, the company’s Men's and Women's apparel businesses along with Footwear witnessed growth. In fact, Kohl’s comps have been gaining from the company’s strategic initiative, Greatness Agenda, as well as its focus on boosting traffic and enhancing operational excellence. Notably, the Greatness Agenda initiative was commenced in first-quarter fiscal 2014, designed to drive transactions per store and sales.

Also, Kohl’s solid comps run reflects strength of its brand portfolio and positive impacts from its partnership with Amazon AMZN. Notably, the company has established a strong brand portfolio with national brands such as Dockers, Columbia Sportswear COLM, Reebok, Champion, Oshkosh and KitchenAid among others.  Exclusive brands such as Simply Vera by designer Vera Wang and Chaps by Polo Ralph Lauren have helped draw customers to Kohl's stores. Moreover, in the active category, brands like Adidas, Under Armour UAA and Nike NKE have particularly been doing well.

Talking of Amazon, Kohl’s has been strengthening its ties with this online giant to drive traffic. Incidentally, the company has started accepting returns for Amazon customers on select products. It will also provide free packing and shipping services for the merchandise to Amazon’s fulfillment centers. This move followed Kohl's decision to sell Amazon devices, accessories and smart home devices in select stores. Kohl’s believes that this store-within-store concept will boost store traffic, and expects this partnership to boost its business.

Will Strong Record Continue Amid Cost Woes?

Coming back to second-quarter fiscal 2018, the solid comps growth fueled a 4% rise in the top line, which along with enhanced gross margin and lower interest expenses helped Kohl’s post 42% bottom-line increase. Further, earnings and sales marked their third and fifth consecutive beats, respectively. However, Kohl’s has been experiencing rising selling, general and administrative (SG&A) expenses for a while now.

SG&A expenses increased 4% during the second quarter of fiscal 2018 due to higher IT expenses. This was preceded by 3.7% rise during first-quarter fiscal 2018, following increases of 7.3% and 1.4% during the fourth and third quarters of fiscal 2017, respectively. For this fiscal, management now expects the increase in SG&A expenses to be at the higher end of its previously guided range of 1-2%. The surging SG&A expenses may affect the company’s profitability.

Nonetheless, we expect Kohl’s strong sales and traffic drivers to offset these hurdles and help the this Zacks Rank #3 (Hold) company sustain its stellar past record. This is also reflected in management’s raised expectations for fiscal 2018. Management now expects adjusted earnings in a band of $5.15-$5.55 per share, up from the prior guidance of $5.05-$5.50.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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