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Why Kohl's Has Turnaround Potential

Kohl's Corp. (NYSE:KSS) could deliver a successful stock recovery following its 30% decline over the past year.

The department store chain is investing in its website, becoming more efficient and is differentiating itself versus sector peers.

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Online investment

Kohl's is investing in improving the online shopping experience for its customers. For example, in fiscal third-quarter 2020, it piloted a new website experience that included more product descriptions, increased personalization and improved search capabilities. This resulted in higher sales among its customers. This trend could continue as the company plans to roll out its refreshed website in fiscal 2021.

Additionally, Kohl's has invested in improving the speed of its "buy online, pickup in store" service. In the third quarter, it reported that 95% of its online orders were ready for collection within an hour. This could lead to the company experiencing higher repeat sales due to improving satisfaction levels among shoppers. The retailer will also increase the number of its stores that carry spare inventory from 10 to 135 to support peak online sales periods. This will lead to greater product availability for customers and could boost its sales performance.

Refreshed growth strategy

The retailer is seeking to differentiate itself from its sector peers. As part of this initiative, it completed the rollout of its Amazon (NASDAQ:AMZN) returns program in fiscal 2020. This enables consumers to return the goods they purchased from Amazon for free at Kohl's stores. This has resonated with Kohl's existing customers and has attracted consumers who would not normally shop at its stores.

Kohl's is also investing in improving the appearance and sales potential of its stores. For example, it plans to increase the rate at which it modernizes its current stores to strengthen its competitive position versus industry peers. It is also increasing the amount of floor space within its stores that is dedicated to displaying its most popular items. This could increase its sales performance without requiring significant upfront investment.

In addition, it is increasing the number of collaborations it has with popular designers and celebrities. For example, it launched with Ellen DeGeneres a range of pet products in the third quarter. This could differentiate Kohl's products versus those of sector peers and lead to an improvement in its sales performance.

Potential risks

The company's financial performance in the third quarter was mixed. For example, its gross margin declined 0.67% due to it offering discounts on its products in what was a competitive marketplace. Kohl's also reported a 3.2% increase in costs from the prior-year quarter due to rising store expenses and wage increases that could persist over the medium term.

In response, the company is investing in areas of its business that have historically delivered disappointing sales figures. For instance, it has stopped selling some underperforming brands in its women's segment, replacing them with new brands that provide a refreshed range of products for its customers.

In addition, it is investing in its marketing capabilities through using a greater amount of technology. This could deliver further efficiencies for the business following its cost reductions of over $250 million over the past three years.

Outlook

Market analysts project the retailer will increase earnings per share by 10% in the current fiscal year. Its price-earnings ratio of 10.8 suggests it offers good value for money as it delivers its revised growth strategy.

Disclosure: The author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.