It's been a very painful day for investors long Kohl's (KSS). Shares of the $9 billion retailer are down -20% after reporting results last night that completely missed the mark. Here's the Wall Street Journal's summary:
"Kohl’s Corp. cut its guidance for the year ended in December, sending shares lower, as its sales in the fourth quarter were worse than expected. The retailer now anticipates adjusted earnings per share to be $3.60 to $3.65 for the full year, down from its previous guidance of $3.80 to $4 a share."
In other words, the quarter was a disaster.
Q: What do the Dodo bird and department store Kohl's have in common?
A: One is extinct. The other is going extinct.
Hedgeye Retail analyst Brian McGough has been warning investors about Kohl's for some time now. He says it is on the "road to extinction" A core tenet of his bearish call has been that the business is in secular decline. Kohl's simply has too much expensive square footage, not enough customer demand, and future growth prospects are tapped out.
The short thesis is looking more prescient than ever.
we think The worst is yet to come
"I've said it before and I'll say it again... Kohl's will not earn $4.00 again in my lifetime," McGough wrote last night. "For everyone who likes (or won't short) Kohl's because 'it's just so damn cheap on cash flow' now there's less cash flow."
In the video below from an institutional conference call a few months back, McGough lays out the trouble ahead for the Kohl's. Here's the gist of it:
- Better Than Bad Quarter? – Probably. Inventories corrected. Growth and margin expectations are muted. But… if KSS does not beat this quarter, it probably never will without a serious correction in expectations.
- Dividend Cut – There simply isn’t as much cash flow as people think. As the economic cycle turns, the dividend goes away. CEO Kevin Mansell could finally get fired.
- Road to Extinction – As leverage increases, stores close. Then nobody takes it out (public or private). Equity stops trading. KSS ceases to exist.
Bottom Line
McGough is sticking with the short Kohl's thesis here. The road to extinction will be bumpy but, make no mistake, it's coming.