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Kohl's Stock Plunges 10% Despite Earnings Beat: Time to Buy

By Adam Levine-Weinberg - May 21, 2021 at 7:21AM

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The No. 2 U.S. department store chain reported excellent first-quarter results, but Kohl's stock fell anyway.

On Thursday morning, Kohl's (KSS 2.98%) became the latest department store chain to report a big first-quarter earnings beat and raise its 2021 forecast. It also became the latest department store stock to tumble after posting excellent results.

To be sure, Kohl's management warned about potential near-term sales and earnings headwinds. Furthermore, the company still projects that full-year 2021 sales and earnings will remain below 2019 levels. Nevertheless, the 10% pullback in Kohl's stock Thursday looks like an overreaction in light of the growing fundamental strength of the business.

KSS Chart

Kohl's stock performance data by YCharts

The recovery continues

During the first quarter, Kohl's recovered most of the sales volume lost during the height of the pandemic last spring. Net sales surged nearly 70% year over year, reaching $3.66 billion -- down just 4.2% from the first quarter of fiscal 2019. In fact, sales exceeded 2019 levels in March and April.

Total revenue (including revenue from Kohl's credit card program) reached $3.89 billion, beating even the highest analyst estimate.

Strong customer demand and excellent inventory discipline enabled Kohl's to deliver an impressive increase in gross margin to 39%. This was more than double the gross margin figure of 17.3% logged a year earlier. More importantly, it surpassed the company's Q1 2019 gross margin of 36.8%.

Finally, Kohl's was able to hold its operating expenses approximately 8% below 2019 levels last quarter. This helped it post adjusted earnings per share of $1.05, crushing the analyst consensus of $0.04 -- as well as its Q1 2019 EPS of $0.61.

Guidance rises -- a bit

Kohl's raised its full-year forecast following its big sales and earnings beat. It now expects sales growth in the mid-to-high teens in fiscal 2021, compared to its previous outlook for mid-teens growth. More significantly, it now expects full-year EPS between $3.80 and $4.20, up from its initial guidance range of $2.45 to $2.95.

The exterior of a Kohl's store

Image source: Kohl's.

This new guidance failed to impress investors. That's not surprising. For sales to match fiscal 2019's level this year, Kohl's would need to post full-year sales growth of approximately 26%. Thus, the updated guidance implies that the retail chain's recent sales momentum will peter out quickly. Additionally, Kohl's full-year EPS guidance remains well below its fiscal 2019 adjusted EPS of $4.86, even though the company's first-quarter profit easily exceeded its Q1 2019 result.

Management is just being conservative

Rather than worrying about the downbeat guidance, investors should recognize that Kohl's is taking an extremely conservative approach to guidance. The retail recovery has been volatile so far, and management doesn't want to assume that the recent strong trends will continue indefinitely.

Additionally, management pointed to several specific revenue and earnings headwinds. These include the end of government stimulus programs, supply chain disruption, expected increases in industry inventory levels, and costs associated with launching the retailer's partnership with Sephora.

That said, all signs point to Kohl's dramatically outperforming its updated forecast. U.S. consumers are exiting the pandemic with an estimated $2.6 trillion in excess savings, which should keep demand humming. Apparel sales will likely strengthen further as more in-person activities resume. Store traffic will continue to rise as vaccination rates improve. Last but not least, Kohl's is poised to benefit from a slew of new brand launches in the back half of the year.

Together, these factors suggest that Kohl's sales could continue to exceed 2019 levels for the remainder of 2021. Thus, it could beat its updated sales guidance by 10 percentage points or more. That in turn would allow it to continue posting EPS above fiscal 2019 levels. Importantly, Kohl's upcoming brand launches -- especially Sephora -- should allow the company to continue growing revenue and earnings beyond 2021.

With Kohl's stock now trading for just 11 times fiscal 2019 earnings, the pullback Thursday looks like a great buying opportunity for long-term investors.

Adam Levine-Weinberg owns shares of Kohls and has the following options: short January 2022 $55 calls on Kohls. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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