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Takeaway: Tomorrow, Wed Oct 19 at 11am ET, we present our latest Black Book on KSS - specifically, why this qtr is critical for the KSS short thesis.

Tomorrow, Wed Oct 19th at 11am ET, we present our latest Black Book on KSS -- specifically, why this qtr is critical for the KSS short thesis.

If there was ever a quarter for KSS to surprise on the upside, this is probably it. In 2Q we saw KSS print 13.5% EPS growth, which is 3x its norm during this economic cyle. At the same time, expectations are for a 5% decline in earnings in 3Q, and then the company goes up against a -17% EBIT compare in 4Q. On top of that, it is pretty clear that inventories in the channel -- at KSS and competitors -- have corrected, and therefore gross margin risk is probably lower on the margin. From a TREND perspective, KSS has it easy heading into this print. And let's face it, if this company hits a quarter -- even by accident -- the stock is likely to go up, especially with 12.7% of the float held short.

On the flip side, the stock is up 33% since the June low of $34. Clearly, there's at least some good news in the stock.

The crux of our thesis around this name is our view that it will cut its dividend at the end of this economic cycle, and go bankrupt at the end of the next one. The company is woefully underinvested and cannot prevent losing share rapidly as the consumer changes shopping behavior at an increasing rate in a manner that goes against the purpose for which KSS was built. We should increasingly see stress to the P&L due to both the first and second derivitive of credit weakening (32% of EBIT -- and nearly 150% of KSS' EPS growth since 2011). We've said all along that KSS will never earn over $4 again, with the Street's estimates marching above $5.00.

Unfortunately for the Street, we think there's a better chance of seeing an EPS number starting with a $2-handle before we see $4.50.

But for some reason or another, about every 2-years, KSS has a way of scaring off the bears, and giving the long-only community a reason to believe.

We'll be vetting the upside/downside in the fundamantals and the stock six ways til Sunday to see if this will be one of those quarters. After all, if KSS can't put up a decent number in a quarter like this, can it ever?  All in, this print should be a big tell either way. 

Call Details:

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Confirmation Number: 13647640

Materials Link: CLICK HERE

Video Link: CLICK HERE