Key Takeaways
- The Estimize mean is calling for EPS of $1.69, 14 cents above Wall Street. The more accurate Estimize consensus which gives a heavier weighting to more accurate analysts is predicting a more modest beat of 4 cents.
- Kohl`s Corporation (N:KSS) has already commented on the tough holiday season which produced meager SSS growth of 0.4%, but that still puts them ahead of several peers in the department store category.
- The retailer’s focus on an improving loyalty program, smaller format stores, celebrity partnerships and in-store beauty counters are all important strategic initiatives that should pay off in 2016.
The retail earnings parade is well underway, and results thus far have been rather underwhelming from the discounters to the department stores. Yes, there have been some bottom-line beats from the likes of Wal-Mart Stores Inc (N:WMT) and Macy`s Inc (N:M), but top-line strength still isn’t there, and forward-looking guidance is worrisome. Terry Lundgren, CEO of Macy’s, said it best when his company reported yesterday morning… consumers are spending, just not necessarily in the apparel and accessories category. By contrast, home improvement retailer, Home Depot Inc (N:HD), had a spectacular Q4, prompting an increase in its quarterly dividend and strong 2016 guidance.
So that brings us to Kohl’s, which sits somewhere at the lower-end of the department store segment. It’s not quite as high-end as Macy’s or Nordstrom Inc (N:JWN), but not a discounter like Wal-Mart or Target Corporation (N:TGT) either. This puts Kohl’s in a unique and potentially beneficial position. Consumers certainly have more money in their pockets due to lower oil prices, but they are more value-driven than ever, likely the cause of stagnant wage growth. There is also validity to what Mr. Lundgren said, consumers would rather allocate discretionary income to technology and big ticket items like autos and appliances, and save on apparel items.
For the fourth quarter, reporting tomorrow, the Estimize community is currently looking for Kohl’s to report EPS of $1.69, that’s 14 cents ahead of Wall Street. However our Select Consensus, a weighted average of the most historically accurate analysts and most recent estimates, is showing a slightly more modest beat of 4 cents. Revenue expectations are roughly in line at $6.4B. No matter which EPS metric you’re looking at, this suggests a YoY decline in profits of at least 6%, while revenues are anticipated to increase 1%.
Earlier this month, Kohl’s warned that the holiday season hadn’t gone as well as it wanted, something we’ve been hearing from many retailers. Like others, KSS had to offer deep discounts in order to clear inventories and compete with peers. Seasonably warmer weather throughout the quarter also disrupted sales of higher margin winter apparel such as coats and boots. As a result, Same Store Sales for the fourth quarter came in at a meager 0.4%, below analysts estimates for 1.2%. Even so, this is still much better than peers such as Macy’s and Nordstrom who each reported negative comp sales.
Despite the tough environment for retailers, Kohl’s has a few bright spots. They offer fashionable attire at value prices, partnering with well known fashion designers and celebrities on what have become their most popular apparel lines. One such line, Fit to Wander, is in conjunction with actress Shay Mitchell and capitalizes on the athleisure trend, helping to boost back-to-school sales this fall.
Another high growth space that Kohl’s is focused on is beauty and personal care, investing in full-fledged beauty departments that carry top brands. This has worked well for other department stores such as JC Penney (N:JCP) which has expanded their in-store Sephora counters. Beauty is a huge business right now, with research firm Research and Markets expecting the global beauty market to reach $461 billion in revenues by 2018.
It’s also Kohl’s locations that make a difference. With smaller format stores they are able to enter neighborhood shopping plazas, often next to grocery stores, which are getting more foot traffic than malls. It’s this sort of neighborhood appeal that has driven improvements to the retailer’s loyalty program. Members are incredibly dedicated to Kohl’s and end up spending $80 more a year, on average, than other Kohl’s shoppers.
The new year may be a hard slog for Kohl’s, but with fundamentals that are holding up better than their peers, Kohl’s may end up being the best bet in a category with some not-so-great options.