Analysts Cautious On Kohl's Despite Marketing, Holiday Push

Kohl’s Corporation KSS’s Monday earnings beat had little effect on the stock, and analysts are weighing whether the retailer merits a price bump or a plunge.

The Analysts 

Edward Jones analyst Brian Yarbrough maintained a Hold rating on Kohl's with a $71 price target.

Morgan Stanley analyst Kimberly Greenberger maintained an Underweight and $51 target.

The Edward Jones Thesis

Edward Jones anticipates pressure on Kohl’s long-term earnings growth, particularly as e-retailers begin distributing the same brands and poaching brick-and-mortar consumers.

“The high cost of shipping e-commerce items is negatively impacting profit margins as well,” Yarbrough said in a Tuesday note.

“We don't see competitive pressures easing, and we expect that the continued shift towards online sales will continue to put downward pressure on profit margins for the foreseeable future.”

The analyst forecast long-term store closures and site shrinkage from 85,000 square feet to 35,000 square feet — factors that are expected to improve sales productivity and returns.

Edward Jones wants to see a more aggressive consolidation timeline.

“While we give management credit for the recent strategy of new fresh merchandise, a new loyalty program, an updated beauty section and improved marketing around branded products, we just don't believe this is leading to consistent sales growth,” Yarbrough said. 

The Morgan Stanley Thesis

Morgan Stanley doubts Kohl’s ability to achieve 2018 guidance — and it fears the implications of a miss. 

“Given KSS stock fell 9 percent after the Q3 comp missed investor expectations by 50-100 basis points, we wonder what will happen if Q4 expectations, facing the hardest compare of the year, are not met,” Greenberger said in a Wednesday note. 

Nonetheless, the quarterly report and guidance provide six reasons for optimism, the analyst said: 

• A forecast of sales momentum through the holidays;
• Strength in the firm’s product assortment and proprietary brands;
• Plans to boost marketing;
• Growth in Kohl’s e-commerce channel;
• Staff preparedness for the holidays; and
• The closure of rival stores.

“Finally, we note that the consumer spending environment remains strong, which should continue to drive sales performance across the retail industry,” Greenberger said. 

Reflecting on recent performance, the analyst attributed a strong portion of the firm’s Q3 bottom-line beat to an atypically healthy tax rate, which suggests fundamental improvements were less impressive than numbers convey.

Price Action

Kohl's shares were trading up 3.15 percent at $66.52 at the time of publication Wednesday. 

Related Links:

Tuesday's Retail Earnings Roundup: Red Performance Across The Board

Goldman Sachs Picks 3 Buys, 1 Sell In Retail: 'We Expect The Better Growth Outlook To Persist'

Photo by MB298/Wikimedia.