Kohl’s Has Too Many Flanks to Defend

Kohl’s NYSE: KSS stock is down over 19% in late afternoon trading as the company reported a miss on third-quarter sales estimates. The company also dramatically reduced its annual earnings forecast.

The company was optimistic that it would get a boost after entering a partnership with Amazon NASDAQ: AMZN with the rollout of its Amazon Returns program. The partnership allows online shoppers to return items they purchased on Amazon.com to more than 1,150 Kohl’s stores across 48 states.

However, the disappointing third-quarter results are further evidence that the company is struggling with competition on multiple fronts.

The poor earnings report can’t be overstated

Kohl’s missed on both the top and bottom lines. Revenue came in at $4.36 billion which was less than analysts’ estimates for $4.43 billion. That 1.57% loss was dwarfed by the company’s earnings per share (EPS) miss. The company reported 74 cents per share EPS a 13.63% miss from analysts’ expectations for an EPS of 86 cents per share.

In addition, the company lowered its adjusted earnings per share (EPS) forecast from a range between $5.15-$5.45 to a range between $4.75-$4.95. The consensus estimate from FactSet was for an EPS of $5.19. In addition, same-store sales (a key metric in retail) rose 0.4% which was lower than the FactSet estimate for 0.9% growth.

Kohl’s is getting hit from all sides

I live in an area that is tough for retail. Two major shopping areas are less than an hour away and a major metropolitan city known for its shopping is only 90 minutes away. The words “destination shopping” was invented for a region like mine.

So it was encouraging to see Kohl’s come on the scene about a decade ago. It entered with a lot of fanfare and it seemed to connect, particularly with the mothers of the area who were crazy about the Kohl’s cash they could, or had, earned. The store was always busy and, even during less than peak times, there was usually at least a small wait at the registers.

But recently, I’ve noticed that Amazon Prime trucks are more prevalent than ever. And the last few times, I’ve been to Kohl’s it’s been empty.

Looking at the news today, it’s not hard to see why.

The threat that Kohl’s faces is not just from Amazon. It also faces threats from discount stores such as T.J. Maxx NYSE: TJX which recently reported that sales at stores open at least a year increased by 4% last quarter. And whereas Kohl’s is lowering their forward guidance, TJX is raising its guidance for the rest of the year.

In fact, the financial services firm UBS estimates that Kohl’s has lost 17% of its market share since 2011.

Investors are growing weary of the roller coaster ride

This earnings report makes it three consecutive quarters that Kohl’s has missed on revenue. The company has managed to come in ahead of earnings estimates in two of the previous four quarters. The problem for the retailer is they have narrow wins and bad misses.

Kohl’s stock is down nearly 30% in 2019. The stock plunged beneath both its 50-day and 200-day moving averages today. And with little to propel the stock, there’s a reason to believe it could be heading down to prior levels of support around $37 per share.

Looking at the chart, the one somewhat piece of good news for the stock is that the Relative Strength Index is around 33. This is suggesting that the stock may be reaching oversold territory. With the holidays approaching, it’s possible that sales could increase. But that will require an additional catalyst for the company.

The partnership with Amazon makes it easy for customers to return items. However, while that may increase the company’s goodwill with customers, it’s also encouraging behavior that leads to lost revenue.  

Kohl’s needs to prove it to me

I’m not much of a shopper in general. I’m more of an observer than anything else. I think Amazon has tapped into a societal trend that makes online shopping less about price and more about convenience. I also observe that the more social our society gets online, the less social we become in person. We don’t just want our clothes delivered, we want our groceries delivered and our takeout delivered.

In other words, if we don’t have to deal with people, we don’t do it. I’m not sure what that says about our society, but it’s not good news for Kohl’s and Kohl’s stock.

Kohl’s has an online presence for sure, but at its core, it relies on foot traffic in its brick-and-mortar stores. Kohl’s is making an effort by testing the store-in-store concept with a retailer like Aldi’s. But while that may help to get customers in the door, it remains to be seen if that will be enough to increase sales.