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Can Kohl's (KSS) Stock Sustain its Splendid Momentum in 2021?

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Zacks Equity Research
·4 min read
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Kohl's Corporation KSS appears well-positioned on the back of its robust growth-oriented efforts. In this regard, the company’s solid e-commerce business and lucrative partnerships are yielding. Also, Kohl's new strategic framework is worth mentioning.

Such upsides have helped Kohl's shares surge 88.3% in the past six months compared with the industry’s growth of 81%. Let’s delve deeper into the factors, which are likely to continue aiding the company’s growth.

Factors Working in Favor of Kohl's

Kohl’s is benefiting from its growing digital business for a while now. Notably, digital revenues contributed 32% to total sales and increased 25% year over year during third-quarter fiscal 2020. The upside can be attributed to customers’ increased shift to online shopping amid the coronavirus outbreak. Given the need of the hour, management is ramping up its digital marketing and enhancing website to cater to customers’ needs. Certainly, the company’s investments toward boosting online capabilities and improving consumer engagement are yielding. Management expects to keep leveraging its strong online presence.


 

In October, Kohl’s introduced a new strategic framework that focuses on four key areas — driving top-line growth, expanding operating margin, implementing disciplined capital management as well as undertaking an agile accountable and inclusive culture. Under its driving top-line growth initiative, the company intends to become the most trusted retailer of choice for active and casual lifestyle. Also, Kohl’s is undertaking strategic efforts to create loyalty and value along with providing a differentiated omni-channel experience for customers.

Notably, Kohl’s intends to reach its operating margin goal of 7-8% with the help of modest level of growth, its ongoing transformational margin initiatives and focus on operational excellence. Further, management is committed toward disciplined capital management. Also, the company’s innovative and adaptive learning approach and focus on diversity and inclusion bodes well.

Kohl’s is strengthening its ties with retail giant Amazon AMZN to drive traffic. Incidentally, the company is benefiting from the rollout of its Amazon returns program nationwide. Recently, management announced its plans to open Sephora shops inside Kohl’s stores. Well, Kohl’s expansive customer reach and omnichannel presence combined with Sephora's prestige service, product selection and remarkable experience in the beauty space bodes well for their partnership.

Hurdles on The Way

Kohl’s has been seeing rising selling, general and administrative expenses, as a percentage of total revenues, for a while. In the third quarter of fiscal 2020, the metric increased to 32.7% from 30.7% reported in the prior-year quarter. Moreover, the company’s gross margin contracted 48 basis points in the fiscal third quarter thanks to escalated shipping costs, owing to higher digital sales penetration. Going into the fiscal fourth quarter, management expects gross margin to stay under pressure due to increased shipping costs, as it anticipates digital penetration to remain high along with incremental Sprite surcharges.

Nevertheless, we believe that the aforementioned upsides are likely to help this Zacks Rank #3 (Hold) company stay afloat amid such hurdles and sustain its momentum going into 2021.

Some Solid Retail Picks

DICK’S Sporting Goods DKS, which sports a Zacks Rank #1 (Strong Buy), has a long-term earnings growth rate of 5.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Target TGT, which carries a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 8.5%.

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