Goldman Still Worried Long-Term Profit Headwinds Remain At Kohl's

Goldman Sachs reiterated its Sell rating on Kohl's Corporation KSS, despite better second quarter comp and profitability, saying that long-term profit headwinds still remain.

"The sequential comp improvement does not signal a path to positive comps near-term, in our view, as structural pressures like declining traffic and online/off-price competition weigh," analyst Lindsay Drucker Mann wrote in a note.

Goldman's analysis of Kohl's historical comp trends indicates that sequential comp improvements of 200 bps or more (as this one was) are typically followed by sequential decelerations on average of -150 to -200 bps.

Related Link: Kohl's Shows Q2 Sales Above Estimates While Earnings Rise 14%

Though the analyst doesn't model a sequential deterioration in the third quarter comps sales trends, it appears unlikely that Kohl's can stabilize comp sales trends from here, especially under pressured store traffic.

Meanwhile, the analyst said rival Macy's Inc M decision to close 100 stores in early 2017 could be disruptive to Kohl's business due to liquidation of excess inventories, but it's likely to get positive thereafter. Macy's has guided to $1 billion of lost sales.

"We estimate $1.3bn of gross sales (assuming a 25% recapture rate), which equates to 7% of KSS's annual sales. A minimum comp impact of 100-200 bps next year to KSS's 1H17 seems plausible," Mann highlighted.

Mann raised FY16/17 EPS estimates to $3.84/$3.61 from $3.66/$3.37, reflecting the second quarter beat and more favorable gross margin behavior due to cleaner inventories.

The analyst also upped the target price by $2 to $35 on upward EPS revisions.

At time of writing, shares of Kohl's rose 2.10 percent to $45.12.