Why Kohl's Corporation Stock Tumbled Today

The retailer's shares fell after a warning from rival Macy's.

Jeremy Bowman
Jeremy Bowman
Jun 6, 2017 at 4:25PM
Consumer Goods

What happened

Shares of Kohl's Corporation (NYSE:KSS) took a hit today, falling in sympathy with rival Macy's (NYSE:M), after the latter's CFO said at an investor conference that gross margin was getting compressed.

As a result, Kohl's shares were down 6.1% and Macy's was off 7.2% as of 3:18 p.m EDT. The news also weighed on other department store stocks like J.C. Penney.

The exterior of a Kohl's store

Image source: Kohl's.

So what

Macy's CFO Karen Hoguet said that her company's gross margin could fall by 100 basis points in the current quarter and 60 to 80 basis points for the full year. 

Gross margin, which measures the percentage of revenue that remains after product costs are subtracted, is a closely watched figure in retail as it's a sign of how effectively management is operating the business and shows how much money is left for costs like payroll, rent, marketing, management expense, debt interest, and dividends.

The news was seen as a negative for the department store industry as the market believes competitors are subject to the same headwinds, though that may be a misreading of today's news. Macy's has been the worst-performing of the major department store chains based on falling comparable sales and profits so its problems are likely greater than its competitors.

Kohl's has fared better than Macy's recently as the company posted an increase in profit in its first quarter despite a decline in comparable sales as it cut costs effectively. It also saw a 83-basis-point increase in gross margin, a positive sign for inventory management. 

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Now what 

Macy's maintained its earnings guidance for the year as it said it would cut costs to make up for the slide in gross margin. Macy's had complained about excess inventory in its first-quarter earnings report, saying that pushed gross margin down, and management acknowledged that the problem has persisted in the current quarter. That may indicate falling sales, but Kohl's has avoided building up inventory.

In other words, the company may not be affected by today's news from its rival. While significant headwinds remain in the industry, Kohl's has shown itself to be a better operator than Macy's recently, and shouldn't be trading in tandem on negative news about its peer.