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Takeaway: We think KSS stole as much as $800mm in sales from JCP. JCP wants it back. Succeed or not, JCP will inflict damage on KSS as it tries.

Conclusion: We think that KSS stole as much as $800mm in sales from JCP last year. JCP wants it back. Succeed or fail, JCP will inflict damage on KSS that is not appreciated.

We’d been assuming for much of the past year that the primary beneficiaries of JCP’s share loss have been Macy’s and GPS (Gap and Old Navy US). At face value, the sheer dollar shift in 2012 supported this thesis. But our recent work has presented us with new data that make us think we’ve been negative on the wrong names. Specifically, we recently conducted an extensive consumer survey to understand why consumers have shifted dollars away from JCP, and where the share has gone. And the big winner (and soon to be loser) turned out to be Kohl’s. Macy’s came in at number two, but by a wide margin. Gap looked surprisingly good.

Survey Says: As outlined in the chart below, consumers claim that almost 19% of items that they shifted away from JCP are now being purchased at Kohl’s. The math is pretty simple. $4.3bn in sales lost * 18.6% share shift = $800mm.  But the obvious counter-attack is “That can’t be right. KSS has been putting up horrible numbers – that’s way too high as KSS only gained $475mm in net sales in 2012”. It’s a logical question, and we’d ask the same one.

But our sense is that what’s actually happening is that the $475mm sales gain includes upwards of $800mm in sales gains from JCP.  In other words, sales on an organic basis were likely down at JCP last year by several hundred million.

We understand that there is sampling error associated with every form of survey – ours included. But we should note that this is not a typical ‘ask a bunch of people at the Garden State Plaza Mall what they think’ kind of survey. We put this up any other one out there.

Even if you do want to adjust for sampling error, these numbers are still so high that we can raise a very large red flag for anyone modeling KSS’ comp or Gross Margin out over the next 1-2 years. Customers are never easy to win back, but we surveyed how consumers would respond to pricing, promotions, private label and remodels, and we feel pretty confident that KSS is going to have a problem on its hands.

Stores Shopped Instead of JCP (blue column) vs Items Dispersion of Where Items Where Purchased (Gray)

KSS: Risk Of Share Loss Is Greater Than Most People Think  - shareshift

Source: Hedgeye Research

Share Gain From JCP By Income

KSS: Risk Of Share Loss Is Greater Than Most People Think  - share2

Source: Hedgeye Research