Kohl's Corp. (NYSE:KSS) competes with Target (NYSE:TGT), Macy's (NYSE:M) and Walmart (NYSE:WMT). However, the company has been in a less favourable position than its competitors since it has not shown any initiative in changing its business model to fight the competition that is becoming fiercer day by day. The company recently reported troubled earnings for the recently ended third quarter of FY2014 and the future outlook seems rather bleak as well. The following discussion will revolve around the company's position as an investment prospect.
Recent Quarterly Performance
Kohl's is in quite a flux as it missed both the revenue and the earnings estimates. The company's top line plunged from $4.44 billion in the third quarter of FY2013 to $4.37 billion in the latest quarter. The revenue showed a decline compared to the last year and Kohl's also missed the analysts' expectation of $4.4 billion. The company's comparable sales plunged 1.8% YoY in the recently ended quarter compared to Target's comparable sales growth of 1.2% YoY and WalMart's marginal comparable sales increase of 0.5% YoY. While the company's overall sales and comparable sales fell during the recently ended quarter, e-commerce continues to report robust performance.
Although the sales growth has remained weak among retailers, Kohl's suffered the most primarily because it has not adjusted itself to evolving consumer shopping trends. This is why the company is in a less favourable position to fight the fierce competition in the retail industry.
The company's bottom line plunged 20% YoY to $142 million or $0.70 per share in the recently ended quarter compared to $177 million or $0.81 per share reported in the same quarter last year. Analysts' expected $0.74 per share. The company failed to meet expectations even though it cut its earnings growth forecast. This is the fifth consecutive quarter of decline in comparable sales growth and the seventh consecutive quarter that the company has fallen short of estimates and these are red flags that cannot be ignored. What's even more troubling is the fact that the deceleration in the comps figure continues.
Kohl's has not taken any meaningful steps so far to ensure improvements in the future. Its other rivals continue to make efforts and rather bold steps to align their business models to customer shopping trends. For instance, Macy's is working on its omni channel strategy while Target has decided to revamp its entire store layout. On the other hand, Kohl's is hoping that consumer traffic will improve due to the same dynamics that have impacted other retailer chains positively such as declining unemployment rates and improving economic conditions. Where these improving dynamics had a positive impact on the financial performances of other retailers in their recent quarters, Kohl's reported a disappointing quarter since the company has not made any effort whatsoever to attract consumers. The store layout at Kohl's is crowded and aisles are full to the brim making it harder to navigate. All in all, shopping at Kohl's stores is tiresome instead of enjoyable and this is one of the reasons why consumers are favoring Target and other retailers over Kohl's.
Although the company is not working to improve the traffic in its stores it is taking the development of its online sales channel quite seriously since it is the only area where the company has been showing growth in its recent history. During the third quarter of FY2014, e-commerce sales grew 30% YoY. Going forward, the company will launch a "buy online, pick-up-in-store" initiative in 100 of its stores next spring. However, this is quite a late move since other stores have already employed this feature. The capital expenditure required to establish these channels will further stress the margins as sales are expected to remain weak even during the holiday season as customers find other retailers are better options.
Nonetheless, to boost sales in the holiday season, Kohl's is offering deep discounts on a number of its products and is offering shoppers $15 gift cards on every $50 they spend to lure consumers back to its stores. Then there is the company's Yes2You Rewards Program which will allow the retailer's members to save more money if they shop at Kohl's on Black Friday. Note that approximately 17 million consumers are registered with the company's loyalty program. These promotional activities could enhance the consumer traffic in the retailer's stores and sales might show growth. However, earnings are expected to remain depressed as increased sales would be offset by increased costs attributed to promotions.
In light of the discussion above, I would not recommend Kohl's Corp. for investment. The company is not adopting a proactive approach to deal with its challenges and its reaction to its troubled sales figure is rather late. Developing an alternative e-commerce sales channel is important but the importance of the traditional brick and mortar stores cannot be negated. The company's P/E based valuation does not favor the decision to invest in the company either. Although the company looks undervalued when we compare its P/E ratio of 14.41 with the industry's P/E ratio of 38.27, the company's stock price does not have much potential to appreciate in the foreseeable future as evident by its forward P/E ratio of 13.26.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.