In a report published Friday, MKM Partners analyst Patrick McKeever reviewed Koh's Corporation KSS's second-quarter results, noting that it was overall "disappointing," even though comps were positive for the third quarter in a row.
According to McKeever, Kohl's third straight quarter of positive comps was an accomplishment that hasn't been seen since 2011. Same-store sales rose 0.1 percent (although fell short of the analyst's 2.0 percent) and were impacted by poor weather in June, particularly in Texas, which accounts for 7 percent of the store base. Absent of poor weather, a shift in tax holidays in several states from July to August and a later back-to-school season, the company's comps would have gained 1 percent.
McKeever continued that Kohl's merchandising margins held up "relatively well," while expenses were "well managed." On the other hand, the company's inventories were "high," but could be attributed toward strategic reasoning.
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As such, the company outperformed other apparel retailers in what was a "very weak" quarter for the group. In addition, Kohl's may have seen its sales picked up "a bit" so far in August with strong performances in active wear and denim.Kohl's loyalty program (Yes2You) saw the addition of two million new members, bringing its total count to 32 million while loyalty transactions comprised around half of all transactions. Looking forward, the analyst sees the initiative "working" while the company refines and enhances the program with a "major" anniversary event in October.
Finally, Kohl's new beauty department rollout (now in 80 percent of stores) drove 200 basis points of comp outperformance, while buy online pickup in store is seeing 20 to 25 percent attachment rates. A revised focus on national brands also helped boost sales in Nike, Levi and other brands. These initiatives and trends "hold promise" and should continue into the new year with new brands being added including Stride Rite.
Shares remain Buy rated with a price target lowered to $69 from a previous $82, which is derived on a lowered multiple (14 versus a prior 16) on a revised 2016 earnings per share estimate of $4.95 (versus a prior $5.15).
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