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.
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.
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.