If you thought you enjoyed warm weather this fall for longer than usual, you were right, and that hurt retailers who had stocked up on fall and winter wear. Kohl’s Corp. (KSS.N), a department store operator, is likely to suffer from this. Kohl’s is also trying to build out its online business, but that business comes with lower margins that are razor thin — and falling. Let’s try on the forecast and see what fits.
According to the Thomson Reuters Same Store Sales (SSS) Index, Kohl’s is expecting SSS growth of just 1% for the third quarter. That is down from 2.4% expected SSS growth just 90 days ago. The third quarter is usually the weakest for retailers as they gear up for the holiday season, and a negative Predicted Surprise of 5.4% indicates that Kohl’s may miss already-lowered earnings expectations.
Source: Eikon/StarMine
Margins and movies
Trailing 4Q operating profit margins have been falling at Kohl’s for the past five years and are now 8.7%. The last quarter operating margins were just 6.9%. Those falling margins could be a concern as the department store is discounting products to move them off the shelf. While margins at Kohls have fallen, the rest of the industry has seen margins stay steady and even improve over the past year. One of the products driving sales at Kohl’s was the ever popular Frozen merchandise. That has melted as the novelty has worn off. While Kohl’s may benefit from Star Wars merchandise going forward, that may not move at warp speed in the current reporting quarter.
Source: Eikon/StarMine
What’s in the stockroom?
Inventory management is critical for department stores. In general, they have done a good job lowering inventory levels, but Kohl’s has seen inventory days increase in seven of the last eight quarters. In the last earnings call, CFO Wes McDonald stated that, “inventory per store increased 9% and units increased 8%. The excess inventory is the result of slightly lower than expected sales.” When inventory levels rise, stores tend to offer larger discounts to move products, and that leads to lower margins. We will continue to look at inventory levels and margins going forward to judge the efficiency of the the inventory management system.
Source: Eikon/StarMine
Shopping around
Analysts have been lowering estimates for Kohl’s over the past 90 days. Earnings estimates have fallen by 8 cents per share to 72 cents per share. The SmartEstimate is lower at 68 cents. There is even a Bold Estimate of 67 cents, which represents the judgment of a 5-star rated analyst with a strong track history. With poor SSS growth expected for this quarter and for next quarter (1% for Q4), it looks like Kohl’s may not have much good news coming soon.
Management is implementing what it calls a “Greatness Agenda” aimed at improving performance in the medium and long term. In the short term however, and this reporting quarter in particular, it looks like Kohl’s may ring up an earnings miss.
