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What Kohl's, Target latest earnings signal about the future of retail

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Jerry Storch, Storch Advisors Founder & CEO, joined Yahoo Finance Live to discuss the latest earnings numbers from Target, Kohl's, and Abercrombie and Fitch.

Video Transcript

- But let's get back to the discussion about retail investment and how the retailers are reporting their earnings. It was Seana's idea to invite Jerry Storch to join us today, and it was a darn good idea. Jerry Storch from Storch Advisors, he's the founder and CEO. A lot of us think of you as a retail giant because of your association with some of the biggest names in the business: Target, Toys "R" Us, Saks Fifth Avenue. I could go on and on, but what I want to ask you, Jerry, Target. We make a big deal about the digital number, the increase of 118% in sales year-over-year in the quarter. But they're making a huge investment in brick and mortar, what do you think of that?

- Well, I think they're doing both. The Target platform relies heavily on the bricks and mortar for fulfillment. So, while target digital overall was up 100%, you know, 118% for the quarter just reported, keep in mind that the same-day delivery which is to, you know, via ship to people's homes was up 212%. And drive-up, where you order online to go to the store to pick it up, was up 500%. So, Target needs the stores even to have the e-commerce sales that they have. And so, uh, you know, I don't mind that they're investing in bricks and mortar.

Apparently, a lot of people do, though, because what happened today is at first the stock was up a little bit on the earnings, which were spectacular earnings. I mean sales up 20%, earnings up 60-something percent year-over-year. You know, both were beats, and so, and the stock's way up in the last year, you know, up something like 70%, 80%. So, so at first, the stock was even up on top of that. But then when they had the press conference they announced a couple of things. First, they said they're spending billions of dollars on new bricks and mortar stores, and that they had to spend more in order to keep up on digital or to keep investing fulfillment there. And they are also going to spend a lot more on remodeling their stores. But those are the things that make Target, Target. And anyone who is surprised by that shouldn't have been. It's a core part of their business model. And I think they're going to be just fine when all this shakes out.

Additionally, they said they weren't going to give guidance going forward, and, you know, that's not a surprise either. Keep in mind that we're almost exactly a year, when you get to the middle of March here, to when all the lockdowns started happening with the pandemic-- remember, like, two weeks to stop the spread-- that was between, you know, the middle of March or the end of March last year. All these stores shut, Target was one that got to stay open. Their sales skyrocketed, other people's crashed, started getting larger market share. Are they going to retain-- retain that or not? Or are they going to do even better, because with the vaccines and the pandemic looking like it may be a little bit under control, people out shopping. Nobody knows, including them, so they didn't give guidance. Those two things spooked the market. You see the sort of strange overreaction or reaction, I don't know if it's over or not, but reaction where the stock goes down sharp on a day they really reported spectacular numbers.

- Jerry, let's switch on to Kohl's because a very different story of what we're seeing going on with that retailer. We had one of the activist investors that's behind the pressure that we're seeing being placed on Kohl's, here, over the last several weeks. Now, this activist investor, he's arguing for a sale-leaseback strategy. He's saying that the board doesn't have enough retail experience. They're going after nine seats. We saw the results from Kohl's today. They're actually better than expected, posted some sales growth. I'm curious what you think of Kohl's at this point and whether or not a major shake-up is needed?

- So a couple of things. First of all, keep in mind, you know, when you showed the chart earlier-- that I love it, the way that you do that, you know, sort of market capitalization adjusted, the size of these companies. Kohl's is a little tiny square, you know, when Target was a big, giant square along with, you know, Amazon or Walmart or all the others. So, so it's not the same kind of dimension here that we're dealing with. Secondly, Kohl's is a department store. They are a middle-market value department store. They are a little better than a lot of people during this period because they are still kind of a quasi-discounter and quasi-department store. But they've got the illness, you know, they have the department store disease. And even though they beat expectations, their sales were down 10% in the quarter just completed. And people are saying, that's really great because Macy's was down almost 20% so that's doing better. It was better than expected. So the stock is up, you know, versus low expectations.

I think they still face significant strategic headwinds. The CEO is very well-respected. She's done a number of great things, she brought Amazon into a partnership. And perhaps even more importantly, everyone talks about Amazon, but the really, most important thing they've done is they, they got Sephora away from JC Penney, and now that's going to be inside of the Kohl's stores and beauty is a growth category. Apparel is not a growth category, it's a death category right now. And so, she is positioning it better for a millennial audience and there is some hope out there. Meanwhile, there's a ton of overhang. It's still a department store, still very apparel focused, and, perhaps worst of all, the internet doesn't work so well at Kohl's. You say the internet works for everyone. Well no, it doesn't. Not if you have too low of an average ticket, too low of a margin pool. It's really hard to make any money at Kohl's on the internet no matter what you do. And so they got--

- Well, Jerry.

- --the future of the world shifting to the internet, they got some problems.

- They've also got activist investors who want some big changes regarding the board of directors. Can I ask you real quick, though, I mean, it's been at least three decades when I was even eligible to walk into-- who are we kidding, almost four decades-- into an Abercrombie and Fitch. I'm just too old. I can think of no retail space that would be more difficult to hit your numbers than teenagers, and apparel, and then apparel for men or at least teenage guys. Abercrombie and Fitch, though, they're not getting rewarded today, but their earnings reports seem to be one that Wall Street said, OK they're doing well. How can that be?

- Again, they're doing well given what expectations were. I have heard that as far as, you know, mall-based traffic is concerned that stores that cater to younger people have done a little better and younger people have been more aggressive at going out and going into malls. You know, whether that's because they don't think about getting sick or whether it's just in the nature of young people that they have to wonder. But, so the mall traffic has been down very, very sharply. But that's been skewed more towards the older traffic. People with more money haven't been going. So the Abercrombie customer has probably been out there a little bit more than others. I think they've done a great job with what they have. Again, I'm not looking at that to be a major growth category. By the way, back to Kohl's and the activists, some of what they say makes sense. Most of it, most of it, I don't think is worth the paper it's printed on. And the idea doing a sale-leaseback to those stores, it's just going to leverage up something that's already, you know, poised to become an economic disaster. I think it's a serious mistake.

- We actually had them on last week and we wanted to talk about the sale-leaseback plan, we had run out of time. When they come back, we're going to get them, I'm going to ask that you come back afterward to perhaps [INAUDIBLE] on that plan but Jerry Storch--

- I'll make friends, yeah.

- I appreciate you joining us, so does Seana. Thank you for being here on Yahoo Finance.