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Takeaway: Not the beat a $75 stock expected.

The headline beat does not mean much here, particularly given that the print is below where estimates were before it guided down in February. The key here is that the prevailing view over the past quarter has been that the KSS story is bullet proof. The company had just printed a 3.7% comp in 4Q, and people could not tell how much was easy comps, gas, or a structural change in the company’s model (new brands, beauty, rewards program). Management had an extremely active NDR schedule both on the road and at KSS HQ – where it seemed to perpetuate that the company was on the right path. Then the latest data from some of the more widely used services as well as commentary from its top competitor (JCP) all pointed toward comps of 4%+.

But here’s what we got…

  1. Only a 1.4% comp – far below the 4%+ expectation, and a sharp deceleration from the 3.7% comp that KSS reported previously that the Street seemed to think was straight-lineable throughout 2015.
  2. It was also well below JCP, which came in at 3.4%. We still think (based on our surveys) that KSS took $1bn in sales from JCP when it was down and out, and JCP will either earn it back, or buy it back. Either way, it’s bad for KSS.
  3. The upside was entirely due to lower SG&A spending, which grew at 1.6% versus guidance of 4-5%.  Let’s face it, if there’s any line item a company like KSS should be extremely accurate, it’s SG&A. It’s clear that they guided up on this line simply to take EPS numbers down for 1Q.  We think it will be tougher – if not impossible – to leverage this line once we see the changes in the credit program hit critical mass later this year (as outlined in our Black Book presentation on Tuesday replay link: CLICK HERE, materials link: CLICK HERE).
  4. Gross margins were up 18bps, which is nice. But at the same time we saw 5% growth in inventories, implying a 9-point negative swing in the sales/inventory spread – something we never want to see.

We still think that EPS will steadily march below $3.00 – at a time when consensus numbers are going over $6.00. There’ll be ebbs and flows by quarter, but overall we think this one will serve as an appropriate reminder when people are tempted to get bulled up on KSS’ multiple anytime in the future.