Can Kohl's keep its momentum after earnings dip?

Key Points

• Kohl's reported a double beat on November 21, but KSS stock is falling on shaky guidance. 
• The retailer is not alone in sounding the alarm about a weakened consumer. 
• Your decision to buy KSS stock depends on whether you believe the worst is over.  

Kohl's Corporation NYSE: KSS followed the trend among retailers this earnings season. It beat on the top and bottom lines but issued mixed to soft guidance that sent the stock lower. Specifically, KSS stock dropped 13% after releasing its earnings.

But the stock has recovered some of those gains the day after earnings. Investors frequently sell first and take a closer look second. KSS stock was up over 7% for the month heading into the earnings report. Can the stock keep its momentum going? 

A very mixed earnings report... 

At face value, the earnings report was solid. Kohl's revenue follows a pattern of strengthening throughout the year before reaching a peak in the fiscal first quarter, the company's current quarter. Those results won't be out until March 2024. 

However, viewed year-over-year, the results lose some steam. Revenue was down 5% to $4.05 billion from $4.28 billion in the same quarter in 2022. Analysts were expecting a YOY sales decline, but of only 3.8%. So, even by that measure, this number was a disappointment. And pulling back to 2021, the revenue decline for the same quarter is 11%. 

However, the company's inventory position is improving. The company reported $4.2 billion in inventory, a 13% improvement from the prior year. As investors in this sector remember, excessive inventory was a key issue in 2022 as supply chains recovered. 

... and even more mixed guidance 

This earnings season, investors are less impressed by what companies do but what those companies expect the consumer to do. Kohl's and other companies such as Walmart Inc. NYSE: WMT and Target Inc. NYSE: TGT are part of a broad group of consumer discretionary stocks. And so far this earnings season, the overall sentiment is that the consumer may run out of steam. 

To that end, Kohl's narrowed its full-year 2023 guidance raised the low end to $2.30 from $2.10 but kept the high-end number at $2.70. The same picture came into view with net sales. The range dropped from 2% to 4% to a decline between 2.8% and 4%. 

Kohl's may be a better trade than an investment

The saving grace for investors is that KSS stock still looks like a bargain compared to other retail stocks. It currently trades for a forward P/E ratio of 9.27. According to Yardeni Research, the average P/E of apparel retailers is around 22x. 

Kohl's analyst ratings on MarketBeat give the stock a consensus hold rating with a price target of $25.75, an 8.8% gain. Investors get a dividend but take that 8.45% yield with a considerable tablespoon of salt. Declining earnings and revenue will make the dividend unsustainable if the trend doesn't reverse. 

That said, Kohl's stock is in a clear downtrend that has been going on for the last five years. However, the latest rally came after the stock bounced off a low that seems to support its 52-week low. It's likely more a trade than an investment, but if you believe KSS has the bar set low enough, the options chain shows outsized interest on January 19, 2024, calls.