2023-05-25 09:15:28 ET
Summary
- KSS' shares rose by +7.5% on May 24 after the company reported an earnings beat for Q1 FY 2023.
- But Kohl's Corporation didn't raise the company's guidance, which I assume is due to downside risks related to KSS' revenue and profitability in the near term.
- I continue to rate KSS' shares as a Hold, as I think that the stock's valuations are fair.
Elevator Pitch
My investment rating for Kohl's Corporation ( KSS ) stock is a Hold.
In my prior October 6, 2022 write-up for Kohl's Corporation, I highlighted KSS' key potential re-rating catalysts relating to capital allocation and asset divestment.
With this current update, I review KSS' Q1 FY 2023 (YE April 30) financial results and the company's near-term prospects. Kohl's Corporation's first quarter results were good, but the company still retained its existing full-year guidance. I think that KSS' current valuations are fair, as the company won't come close to meeting its long-term financial targets this year. A Hold rating for KSS is justified considering both its outlook and valuations.
The Analysts' Expectations Of Kohl's First Quarter Financial Performance
Earlier, the sell-side projected that KSS would report lower revenue and a net loss for the first quarter of fiscal 2023 according to the market's consensus financial forecasts .
The Wall Street analysts had previously predicted that the top line for Kohl's Corporation would decrease by -2.9% YoY and -41.6% QoQ to $3.37 billion in Q1 FY 2023. The market also expected KSS to register a net loss of -$0.44 per share for the first quarter of the current fiscal year, in contrast the company reported positive earnings per share or EPS of $0.13 for Q1 FY 2023.
As detailed in the subsequent section, KSS' actual Q1 2023 bottom line exceeded the sell-side analysts' expectations by a wide margin.
The Market Reacted Favorably To KSS' Q1 Earnings Beat
Kohl's Corporation's share price jumped by +7.5% to close at $20.72 at the end of the May 24, 2023 trading day. This suggests that investors had a positive view of KSS' Q1 FY 2023 results announcement .
KSS turned out to be profitable in the most recent quarter with an EPS of $0.13 as opposed to the analysts' consensus forecast of a net loss per share of -$0.44 for Q1. The company's operating profit grew by +19.5% YoY to $98 million in Q1 FY 2023, and this surpassed the consensus operating income estimate of $25.7 million (source: S&P Capital IQ ) by +281.3%. Operating margin for Kohl's Corporation expanded by +0.55 percentage points YoY to 2.8% in the first quarter of fiscal 2023, which was substantially better than the consensus forecast of 0.8%.
As per KSS' management commentary at its Q1 FY 2023 earnings call , the company's above-expectations profitability was largely driven by "disciplined expense management", "simplifying our pricing and promotional strategies" and "lower freight expense."
Separately, the actual Q1 2023 revenue of $3,355 million for Kohl's Corporation was marginally (-0.4%) below the consensus forecast of $3.37 billion, implying that KSS' first quarter top line met the market's expectations. KSS mentioned at the first quarter results briefing that "an increase in store traffic and higher units per transaction" were negated by "a lower average ticket" in the most recent quarter, which explained why it didn't deliver a revenue beat.
In a nutshell, KSS' better-than-expected Q1 2023 bottom line performance was a positive surprise for the market which drove its stock price up after the earnings announcement.
But Kohl's Corporation Didn't Raise Full-Year Guidance
Q1 FY 2023 wasn't a "beat-and-raise" quarter for Kohl's Corporation, as KSS stuck to the company's existing fiscal 2023 financial guidance.
As per its FY 2023 management guidance, Kohl's Corporation expects to achieve a narrower top line contraction and an improvement in profitability for the new fiscal year. Specifically, KSS sees its revenue decline narrowing from -7.1% in FY 2022 to -3% for FY 2023, and it expects its operating margin to expand from 1.4% to 4.0% during the same time period. Also, Kohl's Corporation has guided for an EPS of $2.40 for fiscal 2023 based on the mid-point of its guidance, which will represent a significant turnaround as compared to FY 2022 when KSS incurred a net loss of -$0.15 per share.
However, it will be challenging for Kohl's Corporation to report better-than-expected financial results for FY 2023, which could explain why KSS has chosen to maintain (rather than raise) its full-year guidance.
At its Q1 FY 2023 earnings briefing, KSS acknowledged that its comparable sales for May month-to-date was "slightly less than we anticipated." While Kohl's Corporation's Q1 FY 2023 top line was in line with the sell-side's expectations, the company is still very likely to be negatively affected by a weak economic environment as seen with May comparable sales data.
Also, Kohl's Corporation noted at its most recent quarterly results call that the company "will continue to see (inventory) shrink headwinds" for FY 2023. Negative operating leverage is another factor that will weigh on KSS' profitability and bottom line in the current fiscal year, considering that the company still expects a decline in revenue for FY 2023. Kohl's Corporation's profitability improvement potential in the current fiscal year is limited by factors such as inventory shrink and negative operating leverage.
In summary, I don't expect KSS to deliver positive surprises with its subsequent quarterly results disclosures, taking into account downside risks associated with its top line and profit margins as discussed above. My view is supported by the fact that Kohl's Corporation has decided to leave its FY 2023 management guidance unchanged.
KSS' Shares Are At A Fair Valuation
Following the +7.5% rise in KSS' stock, the market values Kohl's Corporation at 6.9 times consensus forward next twelve months' EV/EBITDA now as per S&P Capital IQ's valuation data. KSS' current valuations are slightly above the stock's three-year and five-year mean EV/EBITDA ratios of 6.7 times and 6.5 times, respectively.
Kohl's Corporation's key financial goals for the long run include a low single digit percentage top line expansion and an operating margin in the 7%-8% range. With KSS expected to deliver negative revenue growth and a 4.0% operating margin for the current fiscal year, it would be unreasonable for Kohl's Corporation to trade at a valuation multiple that is significantly higher than historical averages. In that respect, I view KSS' current valuations as fair.
Closing Thoughts
Investors shouldn't get too excited about KSS' Q1 FY 2023 earnings beat. In my opinion, it might be tough for Kohl's Corporation to achieve positive surprises for the remaining quarters of fiscal 2023. More importantly, KSS' current valuations appear to be reasonably fair. In conclusion, I deem Kohl's Corporation to be deserving of a Hold rating.
For further details see:
Kohl's Shares Are Fairly Valued Despite Earnings Beat