With a Cloudy Forecast, the Narrative for Kohl’s Looks Bullish

Kohl’s (NYSE:KSS) had many question marks prior to their first-quarter earnings report on March 19. The retailer couldn’t answer the largest question (i.e. what is the company’s sales outlook for the rest of 2020 and beyond), but Kohl’s made a solid case that consumers are still seeking out the store, primarily online.

On the bottom line, Kohl’s reported earnings that were significantly lower on a year-over-year basis. But earnings are largely a mulligan for many retailers this quarter. It was, however, significant that Kohl’s came in pretty much in-line on revenue.

Kohl’s has frustrated analysts in recent quarters by consistently lagging in revenue. So posting revenue that was in-line with expectations during one of the most unprecedented periods in retail history is a feather in the cap of Kohl’s.

The Company Continues to Show Digital Sales Growth

In 2019, Kohl’s had a record 65 million customers shopping at the store.  50% of Kohl’s sales were digital, and over 70% of the company’s traffic occurs through smartphones. Over the past six years, digital sales had a 17% compound annual growth rate. And those trends are continuing as the company moves into 2020.

As the pandemic broke out, the company made a significant push into digital refreshing the site’s content. Digital sales increased by 24% in the quarter and 60% in the month of April. More than 40% of those orders were either fulfilled by shipping from a store or through customer pickup. This was significant because it helped the retailer get rid of in-store inventory.

According to CEO Michelle Gass, Kohl’s achieved positive digital sales growth in all categories. The Home category, which has been a digital standout for the company, saw 50% growth in digital sales in the quarter. Active, Toys, and Beauty were also strong categories. And Gass says digital sales continue to show acceleration in May.

The company also introduced “Store Driveup”. Prior to the pandemic, Store Driveup was a nascent initiative for the company. But the necessity to drive revenue caused the company to swiftly roll out the program to over 900 stores. And 15% of demand was fulfilled by this service.

The Company Has Started Opening Stores

But, as Kohl’s CEO Michelle Gass pointed out on the conference call, the business was materially impacted by the Covid-19 pandemic. And even the strength of digital was not going to replace the impact of having all of their stores shuttered to help prevent the spread of the virus.

Kohl’s has re-opened approximately 50% of its stores throughout the country. On May 4, the company started with 50 stores, which represented about 5% of the company’s store locations. .  Early results are encouraging, but at this point still difficult to forecast. So far, the company is seeing about 50-60% of “normal” sales. And in the 50 stores that have been open for two weeks, the traffic is starting to increase

Prudent and Nimble

Perhaps not surprisingly, Kohl’s management did not provide forward guidance for the rest of 2020 and into 2021. However, the oft-used words prudent and nimble gave a glimpse into the company’s strategy.

On the prudent side of things, management stressed that they would be cautious in ordering inventory as they try to get a better sense of consumer demand. However, the company also emphasized they would take a nimble approach to ramping up inventory should demand call for it.

The Balance Sheet Looks Solid

Anytime you have to draw down a billion dollars on a revolving credit line while closing your stores for an indefinite period is seen as a negative. And Kohl’s stock paid the price, dropping nearly 70% as the market sell-off began.

However, the company’s long-term debt obligations will not be due for a few years. And, to help navigate itself through the pandemic, Kohl’s extended payment terms with vendors by up to 100 days. This is allowing them to get stores open (and revenue flowing) as those payments are coming due.

On the earnings call, Kohl’s acknowledged that margins will be squeezed. The company was optimistic that they can improve margins through a mix of technology and promotions. But the company didn’t provide specifics on exactly what it would do. And, as previously stated, the company did not offer forward guidance.

The Bottom Line on Kohl’s

The challenges facing omnichannel retailers are still significant. And nobody knows for certain what the new normal in retail will look like. But with retailers such as J.C. Penney declaring bankruptcy, more than half the battle for many retailers is living to fight another day.

Kohl’s has done that. And for that reason alone, I think the stock is worth far more than it is trading for at the moment. Continued growth in its online business, paired with the continued re-opening of stores may set a low bar, but a bar the company should be able to jump over.

In the meantime, while investors may have to wait a little bit on growth, Kohl’s continues to be a great dividend stock, increasing its dividend each year for the last nine years.