Why Kohl's Gross Margin Outlook Appears Optimistic

Although the comp guidance provided by Kohl's Corporation KSS appears achievable, the gross margin outlook for fiscal 2020 seems optimistic, given elevated inventory clearance in the first quarter, continued challenges in women’s and shipping headwinds, according to BofA Securities.

The Analyst

Lorraine Hutchinson maintains a Neutral rating for Kohl's while reducing the price target from $50 to $45.

The Thesis

Kohl's reported its fourth-quarter earnings at $2.00 per share, marginally beating BofA’s estimate, Hutchinson said in the note.

The company announced higher-than-expected earnings guidance for fiscal 2020 at $4.20-$4.60 per share, despite projecting a challenging first quarter with gross margin pressure and a 34% decline in earnings, the analyst noted.

He added that the guidance reflects gross margin pressure in the first quarter as Kohl’s clears through excess inventory and results to improve for the rest of the year.

The company’s gross margin had contracted in fiscal 2019 because of “sharper pricing in home, weakness in women’s and higher shipping costs due to the shift to digital,” Hutchinson wrote. He expects Kohl’s to continue to face margin pressure in fiscal 2020.

Price Action

Shares of Kohl’s were down 3.79% to $36.01 at time of publication.

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Photo by Parker Burchfield on Unsplash