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Kohl’s Corporation (KSS): Refocus of Strategies – Macy’s, Inc. (M), J.C. Penney Company, Inc. (JCP)

Kohl’s Corporation (NYSE:KSS) one of the largest department stores, reported in-line results for fiscal 2012. But it also announced FY13 EPS guidance below analyst expectations: flat to +2% in sales and comparable same-store sales, and $4.15 to $4.45 EPS. Kohl’s continues to struggle with its increasing inventory, but during the Q4 2012 earnings call, it mentioned various improvements in its merchandising and execution strategies. In the wake of its earnings, the stock was trading at $46, at the lower end of the 52-week range of $41 – $55.

In-line but rather unexciting 4Q12 results

Kohl’s Corp. call options active as shares sell offWhile Q4 2012 sales increased 5.4% year over year, comps came in at 1.9%. Kohl’s had reported weak November and December comps (5.6% and 3.4%, respectively) but had strong January comps of 13.3%. It’s important to note that the strong January comps were a result of its clearance inventory and the benefit of an additional calendar week. Hence, its higher sales were at the cost of its margin (clearance merchandise is sold at a lower Gross Margin). This is very well depicted in the lower Q4 2012 margin: gross margin was lower by 287 basis points, at 33.3%.

Q4 2012 EPS of $1.66 topped the revised guidance of $1.60 to $1.62, which the company had lowered in January from a prior range of $2.00 to $2.08.

Its cash balance declined to $537 million from $1.2 billion at the end of fiscal 2011, mainly on account of lower operating cash flow. The company continues to utilize cash flow for share repurchases ($1.3 billion) and dividends ($300 million).

Refocusing strategies

During the Q4 2012 earnings call, Kohl’s Corporation (NYSE:KSS) management acknowledged that it faced difficulties in FY12, mainly with respect to merchandising and execution strategies. It faced problems with proper pricing, high inventory, and ineffective marketing strategies. As a result, it lost out on competition, and failed to take advantage of J.C. Penney Company, Inc. (NYSE:JCP)’s declining market share.

One of Kohl’s Corporation (NYSE:KSS)’s main issues (as mentioned above) was its high level of inventory, after its spring and summer assortments failed to attract customers. At the end of fiscal 2012, inventory had increased 16.5% year over year, while accounts payable to inventory was 330 basis points lower year over year at 35.2%, primarily because of slower inventory turnover.

Management mentioned various strategies to fix the above issues:

Inventory: With a new merchandise team, Kohl’s Corporation (NYSE:KSS) aims to increase assortments and expand the number of private and exclusive brands. Furthermore, through its global inventory visibility project, it aims to better manage in-store inventory, which will help in setting up in-store pickup for online orders.

E-commerce: Currently, its e-commerce business faces the issue of low profitability, mainly due to deleveraging in shipping costs. With the aim of raising it from mid-single digit profitability to high single-digit profitability, the company will focus on broadening its assortments, as well as introducing higher-margin categories.

Pricing: Kohl’s Corporation (NYSE:KSS) believes its pricing is aggressive and does not intend to increase the depth of its promotions, unlike competitor J.C. Penney Company, Inc. (NYSE:JCP), which recently announced a decision to move toward being more promotional. Kohl’s is working toward its price management, which  focuses on promotional and permanent markdown.

Advertising: Higher advertising spending, mainly through television and online, focusing on savings.

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