The Outlook for Kohl's as the Economy Rebounds
Kohl's Corp. (NYSE:KSS) reported blowout earnings for the third quarter, sending its shares soaring to new highs in November before the company shed more than 25% of its market value due to broad market negativity over the last several weeks.
Headquartered in Menomonee Falls, Wisconsin, Kohls is a department store chain that operates specialty stores and an e-commerce site in the United States. The company offers moderately priced apparel, footwear and accessories for women, men and children, as well as beauty and home products through its 1,100-store network that is spread across 49 states. The companys merchandise includes both national brands and private and exclusive brands that are available only at Kohls.
Earnings recap
Kohls posted spectacular third-quarter financial results, beating both revenue and earnings estimates of Wall Street analysts. Adjusted earnings increased substantially from just 1 cent per share in the year-ago quarter to $1.65 per share in the third quarter. Total revenue came in at $4.6 billion, up 15.6% from the prior-year quater. The gross margin expanded from 35.8% to 39.9% as well, while selling, general and administrative expenses declined to 30% as a percentage of total revenue from 32.7% last year. This suggests the company is on the right track to report higher operating margins in the future, which is a good sign for long-term-oriented shareholders.
Staying true to the companys commitment to rewarding shareholders, Kohls repurchased shares worth $506 million in the last quarter and declared a quarterly cash dividend of 25 cents per share, which is payable on Dec. 22 to shareholders of record as of Dec. 8.
Partnerships to boost sales
The strong financial performance was a result of higher sales in its stores as customer traffic improved. Much of Kohls stellar performance in recent quarters can be attributed to the effectiveness of the strategic framework introduced in October 2020 focused on four key areas, such as driving top-line growth, expanding operating margins, implementing disciplined capital management and undertaking an agile, accountable and inclusive business culture.
Actions taken to drive top-line growth include revamping the womens business and building a meaningful beauty business on the back of partnerships with key players in this industry such as Sephora. With the positive feedback received from customers, Kohl's expects to expand Sephora shops to at least 850 stores, with 400 locations projected to open in 2022.
The partnership with Eddie Bauer is strengthening Kohls athleisure business through the launch of FLX, and the company is already seeing strong demand for activewear, which is a business segment that could grow exponentially in the coming years as Americans focus on embracing healthy lifestyle choices.
The company also benefited from its partnership with Amazon.com Inc. (NASDAQ:AMZN) to drive traffic to its online store, where Kohls stores accept free, unpackaged, and easy returns for customers coming through Amazon. One of the prime objectives of this program is to convert more customers into loyal Kohls shoppers.
The outlook remains positive despite short-term challenges
Kohls raised its guidance for the year once again. Management now expects revenue to grow in the mid-20s percentage range in 2021. The company expects operating margins to improve at a much higher rate than previously expected as well, which sends a strong signal that the company is moving in the right direction by focusing on cost reductions and high-margin businesses.
The company has encountered supply chain headwinds, which paint a challenging outlook for the short run. Even in the third quarter, Kohls experienced delays related to inventory receipt across several business areas due to temporary supply chain disruptions. Rising labor costs in the industry have also exerted pressure on the company, and these challenges are likely to persist for a few more quarters until labor market conditions improve further.
On the positive side, Kohl's is expanding into new business verticals while focusing on improving its digital presence. These initiatives are likely to help revenue grow for many years to come. The company has strategically positioned itself to grow in tandem with Amazon, which comes as a brilliant move that negates some of the risks faced by the company as a result of the e-commerce giant's rise to dominance.
Takeaway
Kohls performed well during the global lockdown last year, and the company seems to be carrying this momentum forward. The company is transforming itself from a legacy retailer to a digital-friendly retail company with a strong physical footprint in the United States, and its new business model is already delivering the desired results. At a forward price to earnings multiple of just 7, Kohls appears to be a good bet for value investors focused on the long term.
This article first appeared on GuruFocus.
