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Kohl’s Fiscal 2016 Outlook Reflects Tough Retail Environment

Sharon Bailey

Kohl’s Issues Weak Fiscal 2016 Outlook after 4Q15 Earnings Fall

(Continued from Prior Part)

Sales outlook

Kohl’s (KSS) expects same-store sales to be flat or rise by 1% in fiscal 2016. The company expects overall fiscal 2016 sales growth to be between a 50-basis-point decrease and a 50-basis-point increase. Kohl’s subdued sales expectations for fiscal 2016 reflect retail uncertainty as well as cautious spending by US consumers. Kohl’s same-store sales grew by 0.7% in fiscal 2015 and overall sales increased by 1%.

Profitability expectations

Kohl’s expects its fiscal 2016 diluted earnings per share in the $4.05–$4.25 range based on the aforementioned sales outlook. Kohl’s sales outlook takes into account the planned store closures that we have discussed in part three of this series. However, the company expects some of the sales associated with the store closures to be retained by nearby stores and through the digital channel.

The company expects its gross margin in fiscal 2016 to be flat or grow by 20 basis points compared to fiscal 2015. Kohl’s expects markdowns to have a significant adverse impact on the gross margin in the first quarter of fiscal 2016. This is because the company plans to aggressively clear excessive merchandise that resulted from lower-than-expected 4Q15 sales.

Kohl’s fiscal 2016 selling, general, and administrative (or SG&A) expenses are expected to rise by 1% to 2%. The SG&A expenses in the first quarter of fiscal 2016 are expected to rise by 3% to 4%. This increase is mainly expected due to higher advertising expenses. The iShares Global Consumer Discretionary ETF (RXI) has 0.3% exposure to Kohl’s.

Valuation

As of February 29, Kohl’s was trading at a 12-month forward PE (price-to-earnings) ratio of 11.3x. Peers Macy’s (M), Nordstrom (JWN), and Dillard’s (DDS) were trading at forward PEs of 11.3x, 15.8x, and 11.7x, respectively, as of February 29. As of February 29, Kohl’s was trading at a lower valuation multiple compared to the S&P 500 Consumer Discretionary Index with a forward PE of 17.2x and the S&P 500 Index with a forward PE of 16.1x.

Analysts expect Kohl’s adjusted EPS to rise by 3.5% in fiscal 2016 to $4.15. Fiscal 2016 adjusted EPS for Macy’s and Dillard’s are expected to rise by 1.3% and 4%, respectively. Fiscal 2016 adjusted EPS of Nordstrom is expected to decline by 1.8% as higher sales are likely to be offset by the company’s growth initiatives.

Kohl’s multiyear “Greatness Agenda” strategic plan aims to enhance the company’s sales through several initiatives including new store formats and focus on digital channels. However, intense competition and tepid consumer spending might adversely impact the company’s fiscal 2016 results.

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