More Trouble Ahead For Kohl's, Morgan Stanley Warns

• Kohl's Corporation KSS shares are down 24 percent year-to-date, and are trading significantly below their 52-week high of $79.60.
• Morgan Stanley’s Kimberly C Greenberger maintained an Underweight rating on the company, while reducing the price target from $53 to $45.
• Citing the lack of catalysts for the company’s sales and margin growth next year, Greenberger said that there is downside to the Street estimates for 2H15 and 2016.

Having declined 24 percent TYD, Kohl's shares are trading 13 percent below the prior price target. Shares came under pressure due to Kohl's sales and earnings missing expectations in 1H15. The stock has underperformed the department store group, which has appreciated 4 percent YTD, as well as the S&P, which declined 7 percent during the same period.

Analyst Kimberly Greenberger said that there is further downside to Kohl's shares, citing the reasons as:

1. The Street’s estimates for 2H15 and 2016 appear optimistic
2. Kohl's operating income has declined steadily since 2012. With no visible catalyst to reverse this, the trend could continue in 2016-2018

Greenberger elaborated that the stock valuation would not expand with the company’s free cash flow slowly eroding.

In the report Morgan Stanley noted, “The Street's 2015e $4.32 EPS (vs. our $4.20) is predicated on 3Q/4Q15: (1) comps +1.5%/+1%; (2) GM +10/+20 bps; and (3) SG&A rate ~flat/+10 bps y/y. We see risks to each of these forecasts.”

Greenberger expects department stores to witness challenges in 2H15, especially in the fourth quarter, when Kohl's faces its toughest quarterly comps since 4Q11.

The Street’s estimates for 2016 reflects a return to 10 percent EPS growth, following four consecutive years of no growth. “We struggle to identify a catalyst to improve the company's sales or margin trajectory, and therefore prefer to take a more conservative stance modeling 2016e $4.30 EPS (~3% growth y/y) with similarly minimal growth in 2017/2018,” Greenberger added.