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Sales Trends Are Stabilizing at Kohl's

By Adam Levine-Weinberg - Aug 20, 2019 at 8:37PM

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After a weak start to the year, the retailer began to bounce back in late June.

Kohl's (KSS -3.06%) was one of several department store chains that returned to sales growth in the second half of 2017, but its momentum ran out earlier this year. Comparable-store sales unexpectedly plunged 3.4% in the first quarter of fiscal 2019, causing earnings per share to decline and forcing Kohl's to slash its full-year sales and earnings guidance.

Not surprisingly, this news caused Kohl's stock to crash. Shares of the No. 2 department store operator have lost more than a quarter of their value over the past three months. But on Tuesday morning, Kohl's revealed that sales trends have improved over the past two months or so. That makes the stock look like a bargain at its current marked-down price.

KSS Chart

Kohl's stock performance, data by YCharts.

Another quarter of falling sales and earnings

Comps declined 2.9% in the second quarter, which represents a slight improvement over the first quarter. Total revenue (including income from Kohl's credit card program) declined 3.1% to $4.43 billion. This decline should not have come as a shock to investors. After all, during the Q1 earnings call three months ago, management said that sales trends had remained soft in the first few weeks of May.

Kohl's experienced an uptick in margin pressure last quarter, with gross margin falling to 38.8% from 39.5% a year earlier. This was foreshadowed on the Q1 earnings call, too, as management said that it would be more aggressive with its promotions to drive a rebound in customer traffic.

On the bright side, Kohl's did a very good job of controlling expenses in the second quarter. This allowed it to limit the impact of its gross margin decline on profitability. Adjusted earnings per share fell 12% year over year to $1.55, essentially in line with the analyst consensus of $1.53.

The trend is moving in the right direction again

The good news in Kohl's earnings report was that after a weak start to the quarter, comps returned to growth in the last six weeks of the period, rising 1% year over year. That growth has continued into August, according to CEO Michelle Gass.

The exterior of a Kohl's store

Kohl's sales started growing again in the middle of the second quarter. Image source: Kohl's.

This indicates that the moves Kohl's made a few months ago to reinvigorate traffic are working. Additionally, Kohl's began accepting unpackaged returns of Amazon.com purchases in all of its stores in early July, bringing in more traffic. While many of those people make the return and leave without buying anything, others are sticking around to shop.

New brand launches also may help Kohl's regain its momentum. It recently began selling a collection of Nine West apparel, shoes, and handbags. In the next few months, it will begin selling products from several additional major brands through its stores and e-commerce channels. And Kohl's is partnering with Facebook to bring merchandise from a rotating collection of emerging brands to 50 of its stores and Kohls.com beginning this fall.

With sales trends already improving and more catalysts on the way, the chain is maintaining its updated full-year guidance, which calls for EPS between $5.15 and $5.45 on a modest decline in sales. That said, the company did warn that new tariffs on Chinese imports will cause greater gross margin erosion than previously expected.

Kohl's stock is on the discount rack

As of noon EDT on Tuesday, the stock had fallen more than 5%, as investors were apparently hoping for a quicker turnaround. That left it trading for less than nine times earnings and near its 52-week low. Meanwhile, the dividend yield is approaching 6%.

This rock-bottom valuation doesn't make much sense in light of Kohl's strong balance sheet, its stellar free cash flow, and its promising initiatives to boost sales and earnings growth. As a result, the stock looks like an attractive buying opportunity for patient investors.

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