Throughout 2021, Kohl's (KSS 6.51%) reported a string of strong profits as sales began to recover toward pre-pandemic levels. That said, Kohl's revenue didn't recover as robustly as many other department-store chains, due in part to supply-chain challenges.
On Tuesday, the No. 2 U.S. department-store operator reported that these trends continued in the fourth quarter of fiscal 2021. Let's see what that means for investors.
Margin expansion continues
Last quarter, Kohl's generated $6.5 billion of revenue, up 5.8% year over year but down 4.9% from its revenue of $6.83 billion in the fourth quarter of 2019. In the previous two quarters, sales had increased slightly, compared to 2019.
Image source: Kohl's.
That said, tighter inventory management enabled Kohl's to expand its gross margin relative to the past two years. The company's cost-control measures also kept operating expenses in check. As a result, Kohl's operating margin increased to 6.9%, compared to an adjusted operating margin of 5.2% a year earlier and 6.7% in Q4 2019.
Adjusted earnings per share (EPS) reached $2.20. That was down 0.9% from the prior year -- when Kohl's booked significant one-time tax benefits -- but up 10.6% from the fourth quarter of 2019. Kohl's EPS also beat the analyst consensus of $2.12.
For the full-2021 fiscal year, Kohl's posted record adjusted EPS of $7.33, surpassing the previous all-time high (set in fiscal 2018) by more than 30%. This result beat the company's most recent guidance range of $7.10 to $7.30.
Should investors be satisfied?
Kohl's revenue decline didn't come as a surprise but compared unfavorably to department-store peers like Macy's. Last week, Macy's reported that comparable sales grew 6.1%, compared to Q4 2019, whereas Kohl's sales declined over that period.
Activist investment-fund Macellum Advisors saw the latest results as yet another sign that the company's strategy is flawed. By contrast, management blamed the weak sales on temporary supply-chain challenges. Kohl's entered 2021 with a conservative inventory plan due to the expected impact of the pandemic on sales. Demand rebounded faster than expected, and global supply-chain chaos prevented the company from restocking its shelves in a timely fashion.
According to Kohl's, worsening supply-chain disruption reduced sales growth by about 4 percentage points last quarter. (That estimate appears to be over and above the impact Kohl's had expected as of November.) Management noted that merchandise categories with better inventory availability posted stronger growth.
Even after making allowances for inventory shortages, Kohl's recent sales results seem subpar, compared to peers. But the retailer is just beginning to implement its most important growth strategy -- the addition of Sephora beauty shops to most of its stores. As the Sephora rollout gains traction and inventory levels normalize over the next two years or so, sales growth should accelerate.
Image source: Kohl's.
Looking ahead
For fiscal 2022, Kohl's expects sales to rise 2% to 3% year over year while operating margin normalizes to between 7.2% and 7.5% after hitting a multiyear high of 8.6% in 2021. Based on those inputs, management estimates that EPS will wind up between $7 and $7.50, roughly flat year over year.
Those targets look beatable. Management thinks sales growth will accelerate over the course of the year, but it's probably offering a conservative outlook, given the volatile external environment.
In any case, Kohl's stock trades for just eight times the midpoint of management's 2022 guidance range. That makes the stock look like a bargain, even if the company can't beat its earnings forecast.
Adding to the appeal, Kohl's plans to double its annual dividend payments to $2 per share this year while buying back at least $1 billion of stock. That will amplify Kohl's shares' potential for long-term investors.
