Kohl’s Tanks on Weak Q3 Results, Cuts Outlook

Kohl’s (KSS) stock was down 17.6% as of 11:48 AM today after the company declared weak results for the third quarter of fiscal 2019. The mid-tier department store chain also lowered its guidance for fiscal 2019. Its poor results impacted the stocks of its department store peers. Macy’s, Nordstrom, and JCPenney (JCP) were down 9.5%, 5.4%, and 0.3%, respectively, as of 11:48 AM.

The company’s third-quarter net sales fell 0.3% year-over-year to $4.36 billion. Analysts expected net sales of $4.40 billion. The company’s same-store sales grew 0.4%, falling short of analysts’ forecast of 0.8%. JCPenney’s same-store sales fell 9.3% in the third quarter as the company continued to struggle amid growing rivalry from online retailers.

Kohl’s cited soft sales in September due to seasonally warm weather and an intense promotional environment as the reasons for its dismal sales. The men’s, accessories, and footwear categories performed well in the quarter. However, same-store sales in the women’s category fell 1% in the quarter. The company’s digital sales grew in the mid-teen percentage.

Kohl’s earnings failed to impress

Kohl’s third-quarter adjusted EPS of $0.74 lagged analysts’ estimate of $0.86. Its adjusted EPS declined 24.5% YoY as its margins contracted in the quarter.

Kohl’s gross margin contracted by 67 basis points to 36.3%, as the company had to keep its prices competitive amid increasing rivalry from online retailers and off-price players such as TJX Companies. An unfavorable mix due to weakness in the women’s business dragged its gross margin down even further.

The company’s operating margin contracted to 4.7% in the third quarter from 5.9% in the third quarter of fiscal 2018. Higher store expenses, a rise in marketing expenses, and increased technology expenses negatively affected its operating margin. The rise in Kohl’s store expenses was the result of new brand introductions, higher wages, earlier hiring for the holiday season, and expenses to support the Amazon returns program.

Dismal guidance

Kohl’s lowered its adjusted EPS guidance for fiscal 2019 to the range of $4.75–$4.95 compared to its previous outlook range of $5.15–$5.45. A heightened promotional environment and growth investments are expected to weigh on its bottom line. Meanwhile, Kohl’s expects its fiscal 2019 same-store sales to fall in the range of -1.0% to -1.5%. Kohl’s had earlier predicted flat to slightly down same-store sales.

Kohl’s expects a 60–65-basis-point fall in its full-year gross margin. Its operating margin is expected to be under pressure due to higher selling, general, and administrative expenses.

Nonetheless, Kohl’s will continue to invest in growth categories such as activewear. The company has expanded the active space in 160 stores. It added 100 Adidas in-stores in the third quarter, bringing the total count to 175. To improve the sales of its home division, the company added new Koolaburra by UGG Home and Scott Living offerings. It’s also trying to boost its home division sales through innovative merchandise in the housewares and electronics categories. The company introduced the Nine West and Elizabeth and James brands to improve its women’s business. Despite these efforts, investors are skeptical about the growth prospects of Kohl’s and other department stores.