For Immediate Release
Chicago, IL – April 12, 2019 – Zacks Equity Research Kohl’s Corporation KSS as the Bull of the Day, Shopify SHOP asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Netflix NFLX and Facebook FB.
Here is a synopsis of all four stocks:
Bull of the Day:
As Amazonhas decimated the traditional retail landscape with its popular online marketplace, we’ve been hearing about the imminent demise of brick and mortar retailers for years. Old habits are hard to break however, and especially in the apparel business, many customers continue to prefer an in-person shopping experience.
Savvy traditional retailers like Kohl’s Corporation are actually adapting quite well to this new environment, restyling and re-sizing store locations and engaging in innovative partnership opportunities. Recent changes at Kohl’s allow the company to continue offering a wide variety of desirable brands in retail locations, and at prices that are competitive with online sellers.
Kohl’s calls the strategy to optimize retail locations “rightsizing” which means matching the square footage of stores to customer foot traffic and inventory needs. In some cases this means making the stores smaller, and stores that remain the same physical size still get optimized with new interior layouts but become “operationally smaller” through reductions in inventory and improved displays and fixtures.
Kohl’s also started a pilot program in to share five retail locations with Aldi Supermarket stores and recently added a plan to co-locate with 10 Planet Fitness Gyms.
These partnerships appear to be win-win situations in that they reduce one of the most significant cost for physical stores – rent - for Aldi and Planet Fitness, while encouraging more foot traffic for Kohl’s stores by being located next to businesses that still attract customers to physical locations and are naturally resistant to online competition.
The Planet Fitness partnership is also a good fit for Kohl’s renewed focus on Active/Athletic apparel which includes expanding into new categories like golf and outerwear. Active/Athletic sales at Kohl’s have doubled over the past four years and now make up 20% of business.
Kohl’s is also operating 13 experimental “Small Format” stores which – at 35,000 square feet – have 60% less physical space and also 60% less inventory than the standard size stores. The spaces are designed to be flexible and efficient and also serve as locations where customers can pick up (and exchange or return) purchases that they have made online through the company’s website.
These smaller stores will likely be key to Kohl’s partnership with the online giant itself – Amazon – in which Kohl’s will sell the Amazon Echo and other devices in 200 of their stores and also allow in person returns of products purchased on Amazon.
Returns and exchanges have remained a challenge for online retailers and many customers continue to prefer executing them in in person, rather than using the mail or shipping services. Kohl’s CEO, Michelle Gass describes the Amazon partnership (and specifically the returns initiative) as an opportunity for the two companies to “leverage each other’s strengths.”
After a difficult end to 2018 – along with the rest of the equity markets - a series of recent earnings beats has Kohl’s shares rising again, and future estimates continue to rise. All 10 of the analysts who’s coverage is included in the Zacks rank for Kohl’s have raised their expectations for the current fiscal year in the past 60 days, earning the innovative retailer a Zacks Rank #1 (Strong Buy).
Bear of the Day:
On paper, Shopify looks like an ingenious business idea – to create and maintain tools that allow smaller businesses to compete with the giants, particularly Amazon, in online sales.
The burden of developing and maintaining a dedicated platform for online sales is an onerous task for small businesses, prohibiting them from taking on the proverbial “800 pound gorilla” in the space.
Shopify counts more than 800,000 merchants as customers who collectively sold over $40 billion worth of products and services last year. Shopify’s customers can also access applications for electronic advertising, shipping and data collection.
These cloud-based services are a lifeline for small businesses who simply don’t have the scale to handle all the aspects of the online marketplace on their own, and the tools that Shopify provides prevent a great deal of effort that would have been redundant - instead offering economies of scale to even the smallest merchants.
So what’s the problem? How can Shopify possibly be “Bear of the Day?”
Because they just don’t make very much money.
With net earnings of less than $0.05/share in three of the past four quarters, estimates of $0.41/share for 2019 and a stock price that’s seen rapid appreciation over the past two years, Shopify is trading at a sky-high level of valuation. It’s current 12M forward P/E ratio is just shy of 500X!
While it’s certainly possible for a young and growing company to thrive without producing net earnings – Amazon itself famously avoided worrying about the net number for more than a decade, furiously reinvesting revenues into expansion on it’s rise to becoming one of the biggest companies in the history of the world – it’s not clear that Shopify is on the same sort of trajectory.
Notable short sellers have targeted the company’s shares, citing the recent runup and questioning how many of Shopify’s customers are unique, active and profitable. The company doesn’t break out that data (though 800,000 does sound like an awfully high number.)
Shopify shares have gained more than 75% since the Christmas Eve selling flush in 2018 even as earnings estimates have moved in the opposite direction. With 14 downward earnings estimate revisions in the past 60 days taking the Zacks Consensus Estimate from $0.67/share down to $0.41/share, Shopify gets a Zacks Rank #5 (Strong Sell).
Should You Buy Netflix (NFLX) Stock Ahead of Q1 Earnings?
Netflix is scheduled to release its first quarter fiscal 2019 financial results on Tuesday, April 16. Shares of Netflix have soared nearly 40% this year as the streaming TV power roars back, along with the likes of Facebook. But the question is should investors think about buying NFLX stock heading into Q1 earnings?
Netflix helped spark the streaming TV age that has seen Amazon spend billions on original content. The company’s success also encouraged Disney, Apple and others to dive into the streaming market. Despite the fact that Netflix will soon face a more competitive environment, the company looks poised to remain a powerful force in the space for years to come.
The Los Gatos, California-headquartered firm is currently the largest of the big U.S. streaming powers. The company closed Q4 with over 139 million paid memberships, up over 25% from the year-ago period’s 110.6 million. Meanwhile, Amazon boasts roughly 100 million Prime subscribers. However, a Reuters report suggests that only 26 million of those U.S. users watch content on Amazon Prime Video, which could be seen as either good or bad for the e-commerce giant. The other major player, Hulu, said its subscriber totals jumped 48% in 2018 to 25 million.
Looking ahead, Netflix’s international growth is set to play a bigger role as the U.S. market becomes increasingly saturated. The streaming service is already available in over 190 countries, with China the only major untapped market. Netflix has said that it “continues to explore options for providing the service” in China. Yet the firm will likely have a difficult time entering the market given the country’s censorship concerns.
Investors should also note that Netflix reported negative cash flows of $3 billion last year and executives expect to report similar levels in 2019. However, Netflix and CEO Reed Hastings expect that cash flows will improve going forward, even as it spends billions of dollars on new original TV shows and movies.
Q1 Outlook & Earnings Trends
Netflix’s Q1 revenue is projected to jump 21.4% to hit $4.49 billion, based on our current Zacks Consensus Estimate. This would represent a slowdown from last quarter's 27.4% revenue growth. More specially, our NFM estimates call for the company’s international streaming revenue to surge over 32% to hit $2.35 billion. As some might have expected, this would fall below last quarter’s 36% expansion.
NFLX’s domestic streaming revenue is expected to pop roughly 14% to hit $2.07 billion. Last quarter, U.S. streaming sales climbed over 22%. Meanwhile, Netflix itself expects to add 8.9 million paying subscribers in Q1 to reach 148.16 million. And the company’s ability to beat or surpass its own subscriber estimate could determine how NFLX stock trades in the near term.
Moving on, the company’s adjusted first-quarter earnings are projected to dip 10.9% to $0.57 per share. Despite the negative Q1 outlook, investors might be happy to see that the streaming firm’s full-year 2019 earnings are projected to soar 48.5% to reach $3.98 a share.
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