2023-04-11 13:38:00 ET
Summary
- Kohl's installed a new CEO Tom Kingsbury, former President and CEO of Burlington Stores after the departure of embattled CEO Michelle Gass.
- The company has been subject to shareholder activism by Macellum Advisors amidst declining sales, shrinking margins and a failed sale process.
- While the new CEO has taken challenges head on, focused inventory management controls, merchandising, and customer experience, there is no silver bullet in the current scenario.
- We rate the shares as Neutral given the tougher competition, challenging macroeconomic conditions and near term clearance inventory to put pressure on margins.
Background
Kohl's ( KSS ) reported a significantly underwhelming Q4 with net sales down 7% YoY and comparable sales down over 6%. Gross margins tumbled down by a hefty 10 percentage points plus mainly impacted by clearance markdowns while product cost inflation also bit away some chunk of it. It reported a net loss per share of ($2.49) compared to the consensus EPS estimates for the quarter at $0.40. It introduced its FY23 EPS guidance in the range of $2.10-$2.70, about 15-35% down compared to the Street estimates and revenue declines in the range of 2% - 4%. KSS' revenue guidance also includes the positive impact of the 53rd week for the year (excluding the incremental impact of 53rd week, the revenue guidance is (-3%) to (-5%)). Also, earlier last year, the company failed another sale process after it received a bid of $60 per share from the Franchise Group owing to a deteriorating retail environment.
The new CEO has taken challenges head on and focused on better inventory management, customer experience and branding as well as strengthening its balance sheet; however, he admitted that it will take some time to turn things around. The silver lining is the expectations are low, and at current levels the risk-reward looks fairly balanced. We initiate at Neutral rating with a target price of $22 at 8x 1Y Forward PE.
Recent Trends
Management highlighted that February sales were positive but driven by clearance markdowns and expect trends to normalize once the clearance inventory is through. It wants to focus on ordering down inventory to MSD and focus on improving turnover and receipts. Gross margins is expected to be under continued pressure as it plans to take markdowns more regularly rather than at the end of the season. Categories such as active and denim which has higher national penetration are in dismay, down HSD in Q4 22 while private brands performed better as consumers look for value in the current environment, as inflationary pressures have pressured its middle-income consumers, impacting their discretionary purchases. The new CEO has adopted a long term strategy focusing on inventory control, aligned with customer offerings as well as efforts to shake up its offerings including the expansion of its partnership with Sephora and a new partnership with Levi’s . It also unveiled recently to start everyday value pricing strategy with a small percentage of its product assortment recognizing the sensitivities of the consumers around pricing. A similar move by JC Penney several years back had failed miserably. Apart from that, the company continues to face an intensified market share loss as consumers' migrate to e-commerce channels, retailers with better value-for-money propositions such as TJX brands' (TJX) own stores and retailers which have a diverse offering such as Walmart (WMT), Macy's (M) (with its Toys R Us department) and Target (TGT) among the likes of others.
Valuation
Department stores have faced a derating in the last year as inflation pinched consumers leading to softer discretionary spending along with stiffer competition from other retailers.
While the PE rating for most of the department stores have cratered along with the prices, it has seen a significant derating with regards to KSS due to a failed sale attempt and a string of earning shocks that followed. This means it could further face downward EPS revisions and PE deratings as the fundamental challenges in the near term remain. That being said, at current prices, the risk-reward looks fairly balanced and the company's long term strategy is a step in the right direction. We rate the shares as neutral with TP of ~$22.
For further details see:
Kohl's: No Easy Fixes