Kohl's Corporation Continues to Disappoint

Kohl's has been thoroughly incapable of taking advantage of J.C. Penney's woes.

Feb 10, 2014 at 3:20PM

Over the last two years, Kohl's (NYSE:KSS) has missed the opportunity of the decade. In that short time, J.C. Penney (NYSE:JCP) -- one of Kohl's key rivals in the low-to-mid-price department store segment -- has watched 30% of its sales volume disappear. Yet Kohl's failed to take advantage of this golden opportunity to grow its market share.

Instead, Kohl's investors have endured misstep after misstep. In 2012, the company didn't have the right mix of inventory to attract customers. Last year, the company also came to the realization that it did not have enough national brand merchandise in its stores. These mistakes were compounded by weak consumer spending in the U.S.

Images

Kohl's has stumbled badly in the last two years.

Unfortunately, Kohl's has not righted the ship yet. Sales fell short of the company's expectations yet again last quarter, while costs came in higher than expected. This forced the company to reduce its earnings guidance again. Investors should stay away until Kohl's demonstrates that it can return to sustainable earnings growth.

Earnings expectations falling
At the beginning of last year, Kohl's CEO Kevin Mansell offered a mea culpa, stating, "From a strictly financial results perspective, 2012 was a disappointing year for our company." He noted that Kohl's lost market share in some categories and had to offer big discounts to clear unwanted inventory, damaging profit margins. However, he offered hope for a nice bounce-back year in 2013.

That didn't materialize. At the beginning of the year, Kohl's provided guidance for full-year EPS of $4.15-$4.45 on a 0% to 2% increase in comparable-store sales. At the midpoint, that represented low single-digit EPS growth.

By midyear, Kohl's had already backed away from the high end of its guidance, lowering the top of its projected EPS range to $4.35. Kohl's earnings trajectory fell again in Q3, as choppy performance led to an earnings miss and the company reduced its EPS guidance range to $4.08-$4.23.

Finally, Kohl's provided a fourth-quarter update last week, which stated that comparable-store sales fell 2% during the quarter due to exceptionally weak sales in January. January sales were probably undermined by the severe weather that affected much of the U.S. last month. Kohl's also pointed to lower levels of clearance inventory as a significant negative factor. The combination of lower sales and higher expenses in the e-commerce business will bring full-year EPS down to just $4.03.

Core performance continues deteriorating
Kohl's most recent update implies that full-year EPS will be down 3% year over year and down 6% from two years ago. Moreover, the company has been propping up EPS in the past few years with massive share buybacks. Kohl's net income for FY13 is likely to come in a full 25% below its FY11 result.

In order to fund these buybacks, Kohl's has allowed its balance sheet to deteriorate. Just three years ago, Kohl's held more than $2 billion of cash and less than $4 billion of debt and capital lease obligations. As of last quarter, Kohl's cash balance had fallen to just under $600 million, while its debt burden rose to nearly $5 billion.

Waiting for a turnaround
As my colleague Rich Duprey pointed out last weekend, Kohl's 2% decline in same-store sales means that it lost market share to J.C. Penney during the holiday season. (J.C. Penney recently reported a 2% gain in Q4 same-store sales.) Considering the depth of J.C. Penney's problems, that's not a good sign.

Obviously, Kohl's is still in better shape than J.C. Penney. It is on track to earn almost $900 million for the full year, whereas J.C. Penney has already reported losses of more than $1 billion through the first three quarters of FY13.

That said, Kohl's has now closed the books on a second straight disappointing year of weak sales and declining earnings. On multiple occasions, the company's management has professed to be confident that improvements were just around the corner. However, shareholders have been disappointed again and again.

As a result, even if Kohl's provides good earnings guidance for 2014, investors can't really rely on that projection. In light of its persistent problems, it's probably a good idea to stay away from its stock until the company manages to string together a few solid quarters.

Find better dividend stocks for your portfolio
One of the dirty secrets that few finance professionals will openly admit is the fact that as a group, dividend stocks like Kohl's handily outperform their non-dividend-paying brethren. However, knowing this is only half the battle. The other half is identifying which dividend stocks are the best! With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Adam Levine-Weinberg has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers