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Kohl's (KSS) Down 34% in 3 Months, Expenses a Concern

Zacks Equity Research

Kohl's Corporation KSS is in dire straits, thanks to rising expenses and soft store sales. Well, the stock plummeted 34.3% in the past three months compared with the industry’s decline of 24.9%. Let’s discuss the aspects that have pushed this well-known retail player to a tight spot, and efforts to offset the same.

High Expenses Make Matters Worse

Rising selling, general and administrative (SG&A) expenses is exerting pressure on Kohl’s performance. In the first quarter, SG&A expenses, as percentage of sales, expanded 130 basis points (bps) to 31.2% courtesy of increased marketing and IT expenses. Further, operating income amounted to $118 million, down from the prior-year quarter’s $210 million. For fiscal 2019, management expects SG&A expenses to increase 1.5-2.5% owing to higher store labor costs and logistic expenses.

Further, the raised tariffs (from 10-25%) on merchandise sourced from China are a concern. To counter the cost-related woes and address the competition, the company is undertaking aggressive pricing and promotional actions. These are likely to dent gross margin, which is expected to fall 20-30 bps in fiscal 2019.


Weak Sales Trend in Q1 & Slashed View

Kohl’s lack-luster performance in first-quarter fiscal 2019 is a downside for the Zacks Rank #4 (Sell) stock. The top and the bottom line declined during the first quarter and lagged their respective Zacks Consensus Estimate. Notably, this marked the company’s first earnings and revenue miss after five and seven straight beats, respectively.

Additionally, comparable store sales (comps) broke the strong growth trend owing to inclement weather conditions, weak sales at the home category and not-so-productive promotions amid intense competition. The company expects the softness to continue in the second quarter. Moreover, gross margin in the first quarter was affected by unfavorable mix and increased shipping costs.

Given these headwinds and the expected tariff impacts, management slashed earnings outlook for fiscal 2019. The company envisions earnings per share (EPS) in the range of $5.15-$5.45, down from the previous projection of $5.80-$6.15. Also, comps are likely to remain sluggish in the second quarter, while comps growth for fiscal 2019 is expected in the range of flat to slightly down.

Wrapping Up

Clearly, the aforementioned factors have put Kohl’s in a troubled spot.  Nevertheless, the company is striving to boost e-commerce business by expanding fulfilment centers and strengthening in-store pickups. Further, the company is on track with new product launches and bolstering ties with retail partners such as Amazon AMZN. That said, it is yet to be seen if such efforts can help the company revive lost sheen and make a comeback to investors’ good books.

Done with Kohl’s? Check These Solid Retail Bets

Target TGT, with long-term EPS growth rate of 7.1%, carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Walmart WMT, also with a Zacks Rank #2, has long-term EPS growth rate of 4.7%.

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