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Kohl’s Corporation (KSS): This Retailer Has Four Major Problems

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Kohl’s Corp. call options active as shares sell offThere is no question that the retail business is difficult. In the last several years, customers have seen companies like Circuit City, Borders, and others disappear. What these companies had in common was, they were trying to compete with more efficient companies. While Circuit City and Borders competed in the electronics and books business, an industry that is ripe for a company to disappear is the clothing and home goods industry. While I would argue that J.C. Penney Company, Inc. (NYSE:JCP) is likely the first to go, if Kohl’s Corporation (NYSE:KSS) management doesn’t get its act together, this company could be next.

The company promises “expect great things,” where are they?

I’ve been watching Kohl’s Corporation (NYSE:KSS) for over a year, and there is clearly something wrong with the company’s strategy. The stores are generally nice and well put together, most people enjoy shopping there when they go. As I was thinking about the company, there were two things that struck me.

First, Kohl’s online presence is virtually non-existent. I’m not suggesting they don’t offer online shopping, but they are one of the few retailers to say almost nothing about how their online sales are doing. I don’t remember the last time I heard of someone ordering something online from Kohl’s, and that’s probably not a good sign.

Second, I realized that the comments I’ve heard about Kohl’s Corporation (NYSE:KSS) are something along the lines of, “great sale prices.” My wife and pretty much everyone we know love Kohl’s sales, but without the sale, their deals aren’t that great. As proof that these are issues, consider that while the majority of Kohl’s peers are reporting same-store sales, the company is reporting declines. For a growing concept, this company isn’t growing like it should be.

I’m not sure Kohl’s management knows their competitive position

Kohl’s Corporation (NYSE:KSS) faces significant competition from both ends of the price spectrum. On the one hand, they compete with stores like Macy’s, Inc. (NYSE:M). Macy’s, Inc. (NYSE:M) has high margins, and is usually known for their service.

On the other hand, Kohl’s has to fend off companies like Target Corporation (NYSE:TGT) and Ross Stores (NASDAQ: ROST). Target offers shoppers groceries along with home goods and clothing. Ross offers deep discounts on clothes that might have been in Kohl’s at one point. For value conscious shoppers, Target and Ross are better destinations than Kohl’s.

One of the big problems facing Kohl’s Corporation (NYSE:KSS) is their same-store sales are declining faster than their peers. In the current quarter, the company’s same-store sales declined by 1.9%, which was worse than Target’s decline of 0.6%. This performance was also far worse than Ross’ same-store increase of 3%, or Macy’s increase of 3.8%.

Part of the reason for Kohl’s Corporation (NYSE:KSS) same-store sales challenges is their cost structure. This is the second issue facing the company;

they are spending too much on selling, general, and administrative expenses. Take a look at the difference in gross margin and SG&A expenses at the different chains:

Name

Gross Margin

SG&A As Percentage Of Sales

Kohl’s

36.39%

23.74%

Macy’s

38.8%

31.96%

Ross

29.18%

14.25%

Target

30.7%

20.3%

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