Store Sales Down

Kohl's is a pass

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Jan 04, 2017
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Kohl’s (KSS, Financial) was designated on Nov. 28 as one of the publicly listed companies that saw its share price rise to double digits, up 23% to be exact, post-election.

The Wall Street Journal article also indicated that since the company operates its business purely domestically it could benefit from a lowered tax rate, as per President-elect Donald Trump’s policy proposals.

However, a recent analyst note revealed Friday sent a negative assessment to department store stocks. Post-management discussion, JPMorgan (JPM, Financial) stated that Nordstrom (JWN, Financial) did not have enough "multiyear silver bullets" to boost sales growth.

"Management cited full-line brick-and-mortar traffic levels as the worst since 1972 with the accelerating model shift from brick and mortar to online yet to reach equilibrium citing 'no easy answer' to re-stimulating foot traffic."

JPMorgan

As a result, department store stocks crashed on that day. Kohl’s, in particular, dropped 7.97%, sending post-election gains to 16.31% instead.

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(10-K)

Earnings performance

Kohl’s reported its third quarter fiscal 2016 results on Nov. 10. The $9 billion department store operator lost 2.62% in sales growth to $12.5 billion and 19.6% profit growth to $303 million nine months into fiscal 2016. The company also recorded a 3.8% increase in operating costs. As a result, Kohl’s shares rallied hard, interestingly, that day and closed with a gain of 11.5% compared to Standard & Poor's 500 index’s 0.20%.

"We are pleased to see continued improvement in our sales trends. Our back-to-school season was strong, followed by a soft September, and progressive improvement throughout October. We are encouraged by these trends as we enter the holiday season. Our teams did an excellent job managing inventory. Expenses were also well-controlled as substantially all teams outperformed their plans." – Kevin Mansell, Kohl's chairman, CEO and president

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Valuations

Kohl’s had a trailing 12-month price-earnings (P/E) ratio of 15 times (higher than 66% of its peers), price-book (P/B) ratio of 1.8 times (lower than 52% of its peers) and price-sales (P/S) ratio of 0.5 times (higher than 60% of its peers; 1). Kohl’s had a trailing dividend yield of 3.91% with a 61% payout ratio and 7.8% buyback ratio.

Market performance

Despite its good returns post-election, Kohl’s still slightly underperformed the broader S&P 500 index in one-year returns with 8.71% versus 12.9% (2). In a five-year time frame, Kohl’s returned 3.78% while the index provided 14.5%.

Kohl’s

Kohl’s was organized in 1988. In its filing, Kohl’s stated that it sells moderately priced private label, exclusive and national brand apparel, footwear, accessories, beauty and home products.

As of Oct. 29, Kohl’s operated 1,155 Kohl's department stores, compared to 1,164 stores back in January. The company also operates its website (www.Kohls.com), 12 FILA outlets and three Off-Aisle clearance centers.

Kohl’s sells both national and private and exclusive brands in its stores. Kohl’s stated that its national merchandise carries higher selling prices than the latter but has a lower gross margin. Nonetheless, Kohl’s believes that the presence of national brands in its stores drive customer traffic (3).

Representing Kohl’s private brands are Apt. 9, Croft & Barrow, Jumping Beans, SO and Sonoma Goods for Life. On the other hand, the Food Network, Jennifer Lopez, Marc Anthony, Rock & Republic and Simply Vera Vera Wang are included in Kohl’s exclusive brands.

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(10-K)

As shown in the image above, Kohl’s derives most of its business from its women’s and men’s merchandise categories over the years.

Comparable store sales (3)

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(10-Q and 10-K filings)

Kohl’s sales from its one-year and older stores were not that impressive. The department store struggled and had far uglier performances in its year-to-date operations than it had last year.

Meanwhile, Kohl’s had five-year sales and profit growth averages of 0.87% and -9.59% (2).

Cash, debt and book value

As of Oct. 29, Kohl’s had total cash of $597 million and total debt of $2.79 billion with a debt-equity ratio of 0.55, compared to 0.58 year on year. The company also had no goodwill or intangibles and a book value of $5.1 billion compared to $5.47 billion year on year.

Cash flow

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(10-Q)

Kohl’s grew its cash flow from operations by 214.5% to $1.28 billion in its recent nine months of operation. Besides the increased cash flow Kohl’s had from higher deferred income taxes and impairments, the company also had a positive change or increase in its inventories and accounts payable for the period.

Capital expenditures were $591 million, leaving Kohl’s with $689 million in free cash flow. The company allocated 103%, or $711 million, of its free cash flow in shareholder payouts such as dividends and share repurchases. On average, Kohl’s had provided 111.7% of its free cash flow in shareholder payouts over the past three fiscal years.

Kohl’s did not take in any debt for the period and allocated $95 million in capital lease and financial obligation.

Conclusion

The recent share price decline in Kohl’s shares may seem warranted given its weak earnings figures in its year to date operations. The company, however, seems to have a solid balance sheet that could carry on despite weak industry outlook, such as e-commerce dominating brick-and-mortar businesses.

Kohl’s cash flow, on the other hand, demonstrated possible weakness as such as it could be expected as a result of prolonged profits decline.

In summary, Kohl’s is a pass.

Notes

(1) GuruFocus data.

(2) Morningstar data.

(3) 10-K: Comparable sales include sales for stores (including relocated or remodeled stores) which were open throughout both the full current and prior year periods. Kohl’s also includes omnichannel sales in its comparable sales. Adjustments for omnichannel sales that have been shipped but not yet received by the customer are included in net sales but are not included in the company’s comparable sales.

(4) Me: In 2015, Kohl’s derived 52% of its sales from national brands; I can only assume from the chart provided below that was found on Kohl’s recent 10-K.

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Disclosure: I do not have shares in any of the companies mentioned.

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