The latest quarterly earnings from department-store operator Kohl's (NYSE:KSS) showed signs of improvement after a few quarters of lackluster results, and the stock has risen nicely since then. I previously outlined a few reasons shares of Kohl's could continue to rise in the long term, including a couple of key initiatives that the company hopes will drive customers back to its stores. However, there are a few things working against the company as well, and these could potentially drive the stock price lower.
The slow recovery of J.C. Penney
One of Kohl's competitors, J.C. Penney (NYSE:JCP), suffered a dramatic collapse during 2012. Revenue declined by nearly 25% in that year, followed by an additional decline of around 9% the next year. More than $5 billion in annual sales vanished.
Where these sales went is unclear, but what is clear is that Kohl's didn't really benefit from the near-demise of its competitor. Kohl's revenue in 2013 was just about $200 million higher than in 2012, and that was partially driven by new stores. It seems strange that Kohl's was unable to capitalize on J.C. Penney's problems, especially since both stores are more value-oriented than other department stores, competing for the same group of customers.
While Kohl's didn't gain anything from J.C. Penney's collapse, it could suffer as J.C. Penney slowly crawls its way back. Penney has managed to increase comparable-store sales for three consecutive quarters, and while its revenue is still far below peak levels, this growth comes at a time when Kohl's is still struggling with negative comps. J.C. Penney is still a long way from returning to profitability and proving that it's viable in the long term, but if the company can continue to grow sales, it makes it that much harder for Kohl's to do the same.
Kohl's biggest problem is that it's having a hard time getting people in its stores. Store traffic has been on the decline, and while the company has started plenty of initiatives in an attempt to drive comparable store traffic back into positive territory, the most recent quarter showed that there's still plenty of work left to do.
Even J.C. Penney, which increased comparable-store sales by 6% during its previous quarter, has still failed to increase store traffic on a year-over-year basis. The Internet and mobile devices certainly have a part to play in the difficulty retailers are having getting customers to come to their stores, with consumers shifting purchases online and price comparisons now easier to make than ever.
Kohl's has fought back by investing in e-commerce, and its online sales have been growing rapidly. During July, e-commerce sales rose by 30% year over year, and Kohl's expects consistent 20% annual growth going forward. Strong online sales can help counter weak store traffic, but lower margins online coupled with decreased store efficiency caused by lower sales could lead to shrinking profits and a shrinking stock price.
Ultra-competitive holiday season
The holiday season of 2013 was one of the most competitive in recent memory, with increased promotional activity driving down profits for many retailers. During the holiday quarter, Kohl's saw comparable-store sales slump 2% and operating margin contract by 80 basis points year over year.
While the 2014 holiday season is expected to be better for retailers than 2013, with Prosper Insights & Analytics predicting that total spending on gifts will rise by 8%, aggressive competition could still prove to be trouble for Kohl's. Store traffic for the entire industry was down last holiday season, and the average shopping trip fell from five stores in 2007 to three to 3.5 stores in 2013, according to ShopperTrak.
Getting customers in the store is half the battle, and if these trends continue this year and beyond, Kohl's will have to be extremely aggressive to avoid further declines in store traffic and sales. This necessary promotional activity will likely come with lower margins, and that could be detrimental to the stock price.
The bottom line
Kohl's is facing some serious issues, and while it's implemented various initiatives in an attempt to return to growth, there's no guarantee that these will work. Store traffic may be on a permanent downtrend as consumers shift spending online, and considered along with increased competitiveness among retailers and a potentially resurgent J.C. Penney, Kohl's return to growth is far from a sure thing.
Timothy Green and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.