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Will Kohl’s Q3 Sales Exceed Expectations?

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Kohl’s (KSS) is scheduled to announce its fiscal 2019 third-quarter earnings results on November 19. The company lagged analysts’ sales estimates in the second quarter. However, its earnings surpassed expectations. Sales of Kohl’s and its department store peers have been unimpressive recently, as online and discount retailers have been seizing their market shares.

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Kohl’s sales and EPS fell in the second quarter

In the second quarter, Kohl’s sales fell 3.3% year-over-year to $4.17 billion. It also lagged analysts’ estimate of $4.20 billion. The company’s same-store sales fell 2.9%. It cited unfavorable weather as the reason for this decline. Also, the footwear, home, and women’s categories failed to impress in the quarter, while accessories, children’s, and men’s performed well. Active apparel continued its strong momentum.

Kohl’s second-quarter adjusted EPS fell 11.9% to $1.55. However, it beat Wall Street’s forecast of $1.53.

Expectations from Kohl’s third-quarter results

On its second-quarter conference call, the company expressed optimism about its top line in the second half of fiscal 2019. It forecast flat to slightly down same-store sales in fiscal 2019. It expects brand launches, higher traffic from the Amazon (AMZN) returns program, and other strategic initiatives to drive its top line in the second half. The company expects its fiscal 2019 adjusted EPS to be in the range of $5.15–$5.45 compared to $5.60 in fiscal 2018.

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Meanwhile, analysts expect Kohl’s third-quarter sales to rise 0.7% to $4.40 billion. They expect its third-quarter adjusted EPS to fall 12.2% to $0.86. Continued margin pressure is expected to impact its bottom line. Costs to support growing digital sales, growth investments, and increased technology expenses could drag on Kohl’s earnings.

Overall, analysts expect Kohl’s fiscal 2019 sales to fall 1.0% to $19.0 billion and its adjusted EPS to fall 7.3% to $5.19.

Last week, JCPenney (JCP) announced better-than-expected third-quarter results. However, weakness in the company’s top line continued, with its third-quarter revenue falling 8.5%. The company’s same-store sales fell 9.3%.

Sales improvement strategies

In July, Kohl’s started accepting Amazon product returns at all of its stores. The company believes that this initiative will help it drive higher traffic. To capture further growth prospects in the active apparel and footwear market, the company is adding 100 Adidas in-stores. The move will increase the presence of Adidas in-stores to 175 Kohl’s locations.

Kohl’s is enhancing its beauty business with the addition of new brands, such as Evolution_18 by Bobbi Brown. Through its Curated by Kohl’s concept, the company is offering upcoming digitally native brands in 50 Kohl’s stores and online. Starting next year, the company will work with Facebook to identify brands that have a strong online following on the platform.

A site redesign with improved imagery and navigation, facilities such as buy online, pick up in store and buy online, ship to store, and enhanced merchandise could boost the company’s digital sales. It’s also investing in its sixth e-commerce fulfillment center to support its digital sales growth.

Kohl’s continues to add several brands to attract customers, including Nine West, Fanatics, Koolaburra by UGG, Scott Living at Kohl’s, and Caliville.

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Analysts’ opinion

Ahead of Kohl’s third-quarter results, nine out of 19 analysts rate it as a “buy.” Eight analysts have “hold” recommendations, while the stock has “sells” from two analysts. On October 23, Evercore ISI lowered its rating on Kohl’s stock to “inline” from “outperform.” It also cut its price target to $58 from $70. Concerns regarding the survival of department stores amid rising competition from online retailers are worrying analysts and investors alike.

Kohl’s stock has fallen 10.9% so far in 2019. Stocks of peers Macy’s and Nordstrom were down 43.4% and 18.4%, respectively, year-to-date as of November 17. Meanwhile, JCPenney stock has risen 12.5%. Analysts currently see further downside potential of 5% in Kohl’s stock with a 12-month price target of $56.29.

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