Why Kohl’s Stock is Falling After Earnings Beat

Shares of Kohl’s (NYSE:KSS) stock are nearly 2% lower in mid-day trading after the company posted an earnings report that beat estimates for both earnings and revenue. Kohl’s posted $1.99 earnings per share ahead of the $1.91 that analysts had forecast. Revenue was also slightly higher than projected. The company reported revenue of $6.54 billion topping analysts’ estimates for $6.52 billion.

Prior to the market open, shares had surged nearly 11% on news of the earnings beat. However, once the market opened, the stock failed to hold its gains.

Can the company find sustained success?

Kohl’s faces the same problem it has for the last year. Investors are having a difficult time seeing a path to sustained success. In fairness, the company had lowered expectations after issuing news that holiday sales had been dreadful. Same-store sales, which is a key metric for retailers, fell 0.2% in November and December. The company told analysts that it was projecting full-year earnings to be on the low end of its guidance.

The earnings report delivered a bit of “not as bad” news when the company came in with relatively flat same-store sales for the quarter. Analysts had projected a 0.1% decline.

But where are the sales coming from? According to Kohl’s CEO Michelle Glass, the company is benefiting from new brands and partnerships that the company launched in 2019. One of those partnerships is with Amazon (NASDAQ:AMZN). Kohl’s is now a location for customers to return Amazon products. Amazon has been creating these partnerships to avoid having to build out a brick-and-mortar infrastructure for handling returns.

In theory, a customer that stops by Kohl’s to return an Amazon item will also shop at the store. Critics cite lower same-store sales during the holiday period. However, Glass pointed out that after the Holiday season, Amazon return volume picked up. That makes sense, but it will take another quarter or two to determine whether this is a viable strategy.

Analysts are growing sour on Kohl’s

Jen Redding, an analyst from Wedbush lowered her price target on Kohl’s from $42 to $35. One of Redding’s concerns about the stock was a rise in inventories and promotional activity. But Kohl’s also gave analysts some reason for concern when they announced the elimination of 250 jobs as part of a streamlining initiative in February. If there is any good news to a job cutting announcement it was that the company was not announcing any store closings.

And, the news shows that Kohl’s is no longer just papering over the very real concerns of investors. However, the reality is that Kohl’s is not going to be able to cut its way to profitability.

Can Kohl’s successfully catch up to the digital curve?

By now investors know the work in retail is omnichannel. This means being able to reach your customer where they want, when they want and in the way they want. That is the path for Kohl’s to take. But that path has become crowded. And Kohl’s has been behind the curve in advancing this technology. This has allowed companies like Target (NYSE:TGT) and Walmart (NYSE:WMT) to spring past them. However, even Target stock was punished after it delivered a good earnings report. The reality is investors are beginning to expect more.

The good news for Kohl’s is that retail can be a fickle game with changing loyalties. In the not too distant past, Kohl’s had a loyal following. If the company can find ways to recapture that magic, it could spring back as a customer favorite.

Is Kohl’s a good dividend stock?

One thing that value investors can love about KSS stock is a reliable dividend. The company’s balance sheet is solid and shows a healthy free cash flow that should allow the dividend to be sustained. And, as part of its earnings report, the company announced an increase to the dividend. Kohl’s current dividend yield is over 7%.