Why I’m Avoiding This Stagnant Department Store Stock: Kohl’s Corporation (NYSE:KSS)

Page 1 of 2

Kohl’s Corp. call options active as shares sell offAnother day, another weak retail forecast.

Last Thursday, Kohl’s Corporation (NYSE:KSS) fit right into the trend seen at some of the larger brick-and-mortar retailers, with unimpressive earnings and weak guidance for 2013. While the company’s fourth-quarter EPS of $1.66 beat its most recent guidance, that figure fell significantly short of the company’s original EPS estimate of $2.00 to $2.08, and was lower than last year’s fourth-quarter EPS of $1.81. Kohl’s Corporation (NYSE:KSS) had a very disappointing 2012, with comparable-store sales up just 0.3% for the year. The company now expects another small comparable-store sales increase of 0% to 2% for 2013. In light of this mediocre performance, Kohl’s Corporation (NYSE:KSS) seems like a stock to avoid.

2012: Missed opportunities
Kohl’s Corporation (NYSE:KSS)  minuscule 2012 sales gain was particularly unsatisfactory because of the missed opportunity it represented. J.C. Penney Company, Inc.(NYSE:JCP) , which is probably the closest direct competitor for Kohl’s Corporation (NYSE:KSS), had a disastrous year due to a poorly executed strategy change, with sales down roughly 25%. J.C. Penney had eliminated the use of promotions and coupons, driving away customers who were “addicted” to discounts. Kohl’s, as a highly promotional department store, ought to have been able to attract many of these shoppers, but instead the company appears to have lost market share in 2012.

Poor execution was largely to blame for this missed opportunity. The company did not have sufficient inventory to meet demand during the first half of the year, particularly in popular seasonal categories. This miscue was bizarre insofar as management had come into the year planning to compete aggressively on price to gain market share. Even more troubling, when the inventory situation improved in the second half of the year, there was insufficient demand. Kohl’s was forced to ramp up discounting and sell more merchandise on clearance, which led to a 290-basis-point decrease in fourth-quarter gross margin year over year (from 36.2% to 33.3%).

2013: No improvement expected
Management’s guidance for sales to be flat to up 2% in 2013, and EPS to be $4.15 to $4.45 (compared to $4.18 in 2012) does not inspire very much confidence. Kohl’s plans to repurchase $1 billion of shares in 2013, bringing the average share count down to 216 million. This implies net income of $896 million to $961 million, compared to net income of $986 million in 2012. In other words, Kohl’s is only preventing an EPS decline by repurchasing shares to shrink the share count.

There is nothing wrong with repurchasing shares if they are trading at an attractive valuation and the business is generating ample free cash flow. However, Kohl’s has been repurchasing shares at an unsustainable rate during the past two years while the business has struggled. Share repurchases and dividends combined exceeded free cash flow by more than $1 billion in each of the past two years. Kohl’s balance sheet cannot support such heavy repurchase activity if revenue remains flat. If net income continues to drop, Kohl’s will not be able to maintain EPS at its current level by buying back more shares.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!