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Kohl’s Q1 Results: Doom for Retailers amid COVID-19

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Kohl’s (NYSE:KSS) stock fell 7.7% on May 19. The COVID-19 pandemic hurt the company’s first-quarter performance. The disappointing results also dragged down other stocks in the department store sector. Macy’s (NYSE:M) and Nordstrom (NYSE:JWN) stocks fell 6.5% and 5.2%, respectively, on Tuesday.

The COVID-19 pandemic crushed JCPenney’s (NYSE:JCP) potential turnaround. Notably, the beleaguered department store chain filed for Chapter 11 bankruptcy protection on May 15. A trade publication called “Women’s Wear Daily” reported that Amazon (NASDAQ:AMZN) might be interested in acquiring JCPenney.

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Online retailers, mainly Amazon, and off-price players like TJX Companies have been grabbing market share from department stores in recent years. Amid the struggle, temporarily closing department stores due to the COVID-19 pandemic resulted in huge losses. Meanwhile, Walmart reported stellar first-quarter results. The company benefited from a spike in demand for food and essential items amid the COVID-19 crisis.

Kohl’s Q1 results reflect COVID-19 impact

Kohl’s first-quarter net sales declined 43.5% YoY (year-over-year) to $2.16 billion. The company lagged analysts’ estimate of $2.18 billion. The first-quarter digital sales grew 24%. Kohl’s continued to address customers’ needs through its online channels. However, the strong digital sales growth wasn’t enough to offset the loss of sales from stores since the temporary closure started on March 20.

Within the digital business, the company experienced strength in the home category. Notably, kitchen electrics, vacuums, gaming, and electronics saw strong demand due to stay-at-home restrictions. Likewise, toys, active, and beauty experienced strong digital sales.

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The company reported an adjusted loss per share of $3.20 in the first quarter of fiscal 2020 compared to an adjusted EPS of $0.61 in the first quarter of fiscal 2019. The loss in the first quarter was worse than analysts’ prediction of an adjusted loss per share of $1.80. Aside from a significant decline in sales, higher shipping costs related to strong digital sales, an unfavorable product mix, and increased promotional activity hurt the earnings.

Meanwhile, Kohl’s ended the first quarter with more than $2 billion in cash. Amid the COVID-19 outbreak, Kohl’s suspended its share repurchase program and cut down its fiscal 2020 capital expenditure by $500 million. The company also suspended its quarterly dividend beginning in the second quarter.

Will the stock to recover in 2020?

So far, Kohl’s stock has fallen 65.9% this year. Macy’s and Nordstrom have fallen by 70.2% and 61.5%, respectively, year-to-date. In comparison, the S&P 500 has fallen by 9.5% as of May 19.

Following the first-quarter results, certain analysts lowered their target price for Kohl’s. Telsey Advisory Group cut its target price to $20 from $25. Deutsche Bank lowered its price estimate to $23 from $26. Meanwhile, Wedbush lowered its target price by $4 to $16.

The average target price of $20.66 for Kohl’s stock reflects an upside potential of about 19% over the next 12 months.

Kohl’s has opened about 50% of its over 1,100 stores since May 4. The company saw about 50%–60% of normal activity in the locations that have been reopened. Kohl’s intends to resume its Amazon Returns program by reopening additional stores.

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One of Kohl’s important goals is to modernize women’s merchandise. The company decided to exit eight private brands in the women’s category due to weak demand. The brands include Jennifer Lopez, Dana Buchman, Mud, Candies, Rock & Republic, Popsugar, ELLE, and Juicy Couture. The company intends to introduce new brands like Lands’ End and Tom’s. Kohl’s will focus on enhancing its active and beauty businesses.

Kohl’s will continue to invest in its digital sales. The company’s digital sales grew by more than 60% in April. However, higher shipping costs to support increased digital sales will likely impact the second-quarter gross margin. Also, lower sales volumes from physical stores and an intense promotional environment might put more pressure on the gross margin.

Investors will look forward to Macy’s preliminary first-quarter results scheduled to be announced on May 21.

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