Kohl’s Stock Plunges after Mixed Q2 Results

Kohl’s (KSS) stock was down 6.3% as of 12:35 PM ET today as the company lagged analysts’ sales forecast for the second quarter. Sales of the mid-tier department store chain fell 3.3% on a YoY (year-over-year) basis to $4.17 billion in the second quarter of fiscal 2019, which ended on August 3. The company lagged analysts’ forecast of $4.20 billion.

Also, Kohl’s same-store sales fell 2.9% in the second quarter. This decline was higher than analysts’ expectation of a 2.5% fall. Rival Macy’s (M) reported a 0.5% fall in its second-quarter sales, while its same-store sales grew 0.2% on an owned basis. JCPenney’s (JCP) sales fell 9.2%, and its same-store sales fell 9.0% in the second quarter.

The results of these leading department stores reflect the impact that online retailers are having on brick-and-mortar players. Department stores are investing in their omni-channel capabilities but are still unable to thrive due to intense rivalry from online and off-price retailers.

Kohl’s has been entering into some key partnerships to improve store traffic and boost sales. It’s started accepting Amazon product returns at all of its stores. On August 13, it announced the launch of Curated by Kohl’s, a new assortment of products from emerging brands. These brands will be on offer in over 50 Kohl’s stores and at Kohls.com effective mid-October. In 2020, the company will collaborate with Facebook to identify brands that have a strong online following.

Kohl’s second-quarter adjusted EPS fell 11.9% YoY to $1.55. However, its EPS came in ahead of analysts’ estimate of $1.53. The company’s gross margin contracted 72 basis points to 38.8%. Aside from weak sales, investment growth has been affecting department stores’ profitabilities. Kohl’s operating margin contracted to 9.0% in the second quarter of fiscal 2019 compared to 10.5% in the second quarter of fiscal 2018. Deleveraging in its selling, general, and administrative expenses on lower sales adversely affected its operating margin.

Kohl’s kept its fiscal 2019 guidance intact despite its weak performance in the first half. The company expects fiscal 2019 adjusted EPS of $5.15–$5.45. It’s optimistic that brand launches and higher traffic from its Amazon returns program will improve its performance in the second half of fiscal 2019. Kohl’s same-store sales turned positive in the last six weeks of the second quarter. According to the company, a good start to the back-to-school season helped drive a positive sales trend in August.

On August 13, the US Trade Representative postponed the 10% tariffs on certain items from China, including some footwear and clothing items. This decision was to ensure that the tariffs don’t impact the holiday season. The back-to-school and Christmas seasons are key shopping periods for department store stocks and retailers. The tariffs have been postponed from September 1 to December 15. The threats of escalation in the US-China trade war and higher tariffs continue to affect retailers.

On August 19, the stocks of Kohl’s, Nordstrom (JWN), Macy’s, and JCPenney were down 27.3%, 44.0%, 45.8%, and 43.1%, respectively, year-to-date.

Nordstrom is slated to announce its second-quarter results after the financial markets close on August 20. Analysts expect Nordstrom’s revenue to fall 3.3% to $3.93 billion. They expect Nordstrom’s adjusted EPS to fall 21% to $0.75.