Kohl's Shows Stability on Fundamentals - Analyst Blog

On Apr 10, 2014, we issued an updated research report on Kohl's Corp KSS. The specialty retailer reported fourth-quarter 2013 results on Feb 27. While Kohl's delivered positive surprises in three out of the four quarters of 2013, it faces headwinds from a volatile retail sales environment in the U.S.

Kohl's fourth quarter 2013 earnings of $1.56 per share declined 6.0% from the prior-year quarter due to lower sales and higher operating expenses. An extra operating week in the year-ago period made comparisons difficult this quarter. Net sales dipped 3.8% and missed the Zacks Consensus Estimate due to a challenging retail environment and a decline in comparable sales. While gross margin expanded due to lower costs of merchandise, operating margin declined due to higher operating expenses particularly higher e-commerce costs.

Despite soft fourth quarter results, we have faith in the company's strong fundamentals. Kohl's has a solid brand portfolio. It has expanded in the apparels, fashion jewelry/beauty brand and cosmetic categories. Kohl's has been working on improving its merchandising and execution strategies and aims to increase assortments and expand the number of private and exclusive brands.

Kohl's continuously focuses on introducing new brands in order to keep the inventory assortment fresh and drive customer traffic to its stores and website. In 2013, Kohl's launched an assortment of over 20 new national beauty and fragrance brands in over 250 stores and online. Kohl's plans to launch the Jumping Beans brand featuring Disney characters in fiscal 2014. The company is also planning to offer the IZOD branded menswear and Juicy Couture brand in fall 2014.

Furthermore, through its global inventory visibility project, it aims to better manage in-store inventory, which will help improve in-store pickup for online orders. In addition, Kohl's is working toward price management strategies to increase savings. The company has also made aggressive investments to develop and upgrade its e-commerce business, which is quite encouraging.

However, a gloomy consumer spending and higher apparel costs anticipated in 2014 keep us on the sidelines. Moreover, absence of international exposure makes Kohl's vulnerable to a weak U.S. economy and declining consumer spending environment in the domestic market. Kohl's currently carries a Zacks Rank #3 (Hold).

However, better-ranked stocks in the retail sector include Macy's Inc. M, Foot Locker, Inc. FL and The Kroger Co. KR. All of them carry a Zacks Rank #2 (Buy).