Kohl's Shares Offer Appeal After A Failed Holiday Season Experiment

| About: Kohl's Corporation (KSS)

Shares of Kohl's (KSS) fell 1.7% so far in 2013, not benefiting from the positive market sentiment after the announcement of some sort of fiscal cliff resolution. The department store selling apparel, footwear and home products, reported its December sales results on Thursday.

December Sales Report

Kohl's reported its sales for the five weeks ending on December 29, just like most of its retail colleagues. Total sales for the month rose some 4.0% to $3.37 billion, driven by a 3.4% increase in comparable sales.

Year-to-date, sales of Kohl's rose by 1.0% to $18.1 billion. So far in 2012, comparable store sales fell by 0.3%. CEO and Chairman Kevin Mansell commented on the sales results,

December sales were lower than planned. Additionally, sales came late in the holiday shopping season and, as a result, were at deeper discounts than planned. We are taking the necessary markdowns in the fourth quarter to manage our inventory as we transition into the Spring season.

The weaker-than-anticipated performance at the brick-and-mortar stores was offset by strong e-commerce sales, which rose 46% compared to the year before.

Poor End To 2012

As a result of the poor performance, Kohl's now expects fourth quarter earnings to come in between $1.60 and $1.62 per share, far below the previous guidance of $2.00-$2.08 per share. Consequently, Kohl's expects full-year earnings to come in between $4.11 and $4.13 per share.


Kohl's ended its third quarter with $550 million in cash and equivalents. The company operates with $4.6 billion in long-term debt and capital lease obligations for a net debt position of roughly $4.0 billion.

For the first nine months of the year, Kohl's generated revenues of $12.9 billion. The company net earned $609 million for the period, or $2.54 per diluted share. The company is on track to deliver annual revenues around $19 billion on which the company could earn roughly $1 billion.

The market currently values Kohl's at $9.7 billion. This values the firm at roughly 0.5 times annual revenues and 10 times earnings. Kohl's pays a quarterly dividend of $0.32 per share, for an annual dividend yield of 3.0%.

Some Historical Perspective

Shares of Kohl's have traded in a relative tight range over the past year. Shares traded for most of 2012 between $45 and $55 per share, ending the year around $42 per share on a poor performance during the holiday season.

Over a longer term, shares peaked at $80 in 2007, falling to lows of $25 during the crisis in 2008. Shares traded within a $40-$60 range since that time. Between 2008 and 2012, the company expanded its annual revenues by approximately 15% to an estimated $19 billion. Net earnings rose by a similar percentage, expected to come in around $1 billion in 2012. Earnings per share rose by roughly 50% over the past four years after the company retired almost a quarter of its shares outstanding.

Investment Thesis

It seems that Kohl's has put on an experiment this holiday season, which is very unusual for this normally prudently-led company. While third quarter revenues were up just 2.6% on the year before, Kohl's massively boosted its inventories this holiday season. At the end of the third quarter, which ended in October of 2012, Kohl's carried $4.82 billion in inventories, which is up almost 17% on the year before.

Worse is that the company performed really badly in November, reporting a same-store sales decline of 4.9% for the month. As such, it had to clear the inventories in December. These clearance sales largely explain the 3.4% increase in comparable sales for December, but they did severely impact profitability.

The market did certainly not appreciate Kohl's strategic moves and sent shares drastically lower in November and December. At the start of the month of December, I took a look at the prospects for Kohl's, and argued that shares did look appealing at those levels. Today, shares trade at similar levels, although full-year earnings are coming in below my initial estimates at the time. Yet I think that the past events are largely a one-time item, although clearance sales in December cannot entirely eliminate the recent inventory built up.

Expect soft earnings for the fourth quarter of 2012 and the first quarter of its fiscal 2013, but long-term prospects look good. Shares trade at merely 10 times earnings and pay a decent 3.0% dividend yield. Long-term investors can even see greater returns as the company has a strong tradition of repurchasing its own shares at attractive levels. Given the reasonable leverage levels, do not expect a "gift" to make up for the dismal performance in the form of a dividend increase, or a new share repurchase program in the short term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.