2022 has so far brought about a huge downfall of equities as the world suffers blows from the geopolitical and economic crises. The Russian invasion of Ukraine, China’s lockdowns, global supply chain disruptions, soaring inflation, and rising interest rate are taking a toll on the economies as well as stock markets. Despite the rising instability, Kohl’s Corp. (KSS) stock had a good time in early 2022. Reports of multiple suitors being interested in buying the company at a substantial premium had the stock soaring.
However, lately, things have taken a gloomy turn. The spiking inflation and rising interest rates have taken a toll on the company’s sales and profitability. This has not only plunged the stock into new lows but also to the loss of interest of some bidders in the company. What’s more that the remaining bidders have lowered their offers, as reported by Reuters. Hence, given the decline of KSS share price due to all the combined elements, is it a good time to buy the stock? And what’s the situation with the underlying business? Let’s have a look:
Kohl’s Corp. (KSS)
Down over 16% year to date, KSS stock has lost over 30% in the past three months. Contributing to this downfall has been the company’s latest earnings, which showed a bleak picture. Currently, the stock trades at a price of $43.36 per share, as of the close of trading on June 2, 2022.
KSS’s Declining Sales & Profitability
In the previous quarterly earnings, the company said that its sales rose by 5.8% YOY as it continued to recover from the pandemic. Unfortunately, in the latest report, sales took a harsh hit as inflationary pressure impacted discretionary spending. Resultantly, net sales of the department store chain plunged by 5.2% YOY in Q1 2022. Total revenues for the quarter came it $3,715 million, which missed the consensus estimate of $3,854 million.
The earnings also took a sharp fall in the quarter with a decline of 90% from the year-ago period. Quarterly earnings came at a mere 11 cents per share against the comparable $1.05. Thus, the bottom line also missed the consensus expectations of 75 cents per share for the quarter.
Furthermore, KSS’ gross margin contracted to 38.2% while SH&A expenses went up by 10.5%. The reported operating income of $82 million was also way below the comparable $273 million.
The company ended the quarter with cash and cash equivalents of $646 million and long-term debt of $164 million.
A Bleak Outlook
Expecting a further hit from the soaring inflation throughout the year, management guided for a net sale growth of just 0-1% for fiscal 2022. The company also slashed its EPS guidance for the year from $7.00-$7.50 to $6.45-$6.85. Analysts had their estimate for earnings pegged at $7.14 per share for the fiscal year.
Additionally, KSS now expects an operating margin between 7.0% and 7.2% for the full year.
Insights into the Business
Given the sharp drop in profitability and the guidance cut, it seems investors have bought into the narrative that the company is in deep trouble. Most importantly, Macellum Advisors (activist investors) are urging the company to sell itself as it underperforms its peers Dillard’s, Macy’s, and Nordstrom. The activist investors further said to the company to slash investments until it consummates a deal, be it at any price. Moreover, the remaining interested parties, Sycamore Partners and Franchise Group Inc. are said to have lowered their bid for the company by at least 10-15%. However, a deeper look into the company suggests no need for such panic as the business is on track for much growth and improvement.
Growth & Developments
KSS has been committed to its store growth strategy and remains on track with its long-term strategy. The company has been updating its store experience with Sephora at its shops. Its 200 stores with Sephora boutiques dramatically outperformed the rest of the chain. The company is now working on the rollout of an additional 400 Sephora stores in the second half of 2022, which would be a big sales catalyst. Sephora’s presence in Kohl’s is expected to have reached 850 doors by 2023. The demand for beauty products is soaring as mask restrictions are being lifted and more people are returning to offices.
The company recently shared its plan for increasing investments in-store strategies with 100 new smaller outlets in new markets over the next four years. In order to further add to its stores’ experience, KSS is also introducing dedicated discovery zones for customers seeking newness and inspiration. The reinvention plan of its stores also includes services like In-Store Pick Up, Drive-Up, Self-Pick Up and Amazon Returns. By the end of this year, the company will have rolled out self-serve buy online, and pick up in-store in all of its stores as its continues investments on the technological front.
In the coming days, the company’s board is expected to discuss and review the takeover bids from Sycamore and Franchise. There is no surety of the outcome, but KSS staying public seems more likely. The ride up ahead might prove to be bumpy as the wider economic conditions continue to deteriorate, but for the long term, the company has positioned itself well. As the Sephora rollout continues and demand stabilizes over the next few years, sales and earnings will most probably reach new highs. Therefore, despite the current downfall and curious as well as concerning situation, KSS is up for big gains in the long term.