As expected, this qtr was pretty much a non-event for KSS. Sales down 3%, EPS down 9%, Cash Flow down 19% -- in line w preannouncement. The biggest somewhat subtle callout – yet no less critical to the investment thesis – is that this quarter (last quarter, actually) likely marked the peak for credit. More on that in a minute.
My punchline on KSS is (still) that KSS might be a consensus short – but for the wrong reasons. Timing might be less-than certain near-term. But that's also consensus. The consensus is NOT saying that there’s a roadmap to a dividend cut, and after $1.65 in credit income, $1.25 in EPS from sub-prime customers it did not sell to a decade ago, and another $1.00 in lease accounting that is so aggressive that it is making a bet on a consumer that has not even been born yet – KSS is actually losing money. That’s not a ‘hypothetical’ losing money statement – it’s one that could ultimately be realized. There’s a perception that KSS has already ‘come clean’ and cleared the deck for EPS in 2017. Why can’t this company comp -5%? It’s done worse when the environment was better. This company is more likely to earn $2.50 before it earns $4.00.
More on Credit (link to KSS Credit Deck)
- Once again, we gotta look back to Macy’s -- its credit income was down 26% in 4Q.
- It was far worse than even we (ie McLean’s model) expected. Lower sales were in our plan…but we’re seeing lower card usage (proprietary penetration of 47.1% in 4Q vs 47.9% last year), higher charge-offs/delinquencies. Plus late fees down vs last year.
- Here’s what I STILL don’t get. M and KSS are nearly spot-on with credit earnings – both roughly a third of EBIT. Macy’s has a higher quality portfolio than KSS. Yet KSS is trending UP while M is trending DOWN. COF (KSS partner) is also trending bearish. What gives?
- AND KSS is underwriting promos with its tender-agnostic reward plan (which seems to be failing) bc COF won’t go deeper down the FICO spectrum.
- [note: COF 10K out later this week -- should get good detail that KSS does not disclose]. Can someone explain how KSS' auditors allow it to disclose things like UA (at best 0.7% of sales), and not full credit detail ($1.65 in EPS).
- Only mention of credit performance on the KSS call was that credit was the “only area to leverage expenses vs last yr”.
- Given the trend in Macy’s credit, we think the KSS credit business is a balloon being pushed deeper and deeper under water. Macy’s saw 4Q credit down 26%, when Kohl’s finally sees it’s reversion, it will be even worse.
- KSS also said promotional strategy will remain focused on the credit customers and credit’s extra value creation. KSS had been changing its tone on the promotional focus from Yes2You in 2015 to back to credit in 2016.
- A comment on the call provided some color on why that might be the case. “One thing that was different than our expectations was we expected a certain lift-out of loyalty in the second year and we just didn't get that. As we dug more into it and talk to some experts from the outside that was probably a bad assumption on our part to assume a similar lift in year two as year one. As you start to anniversary the program you have to make it more enticing to the customer that's been with you for a year.”
What happens when people realize that it’s cheaper to get a $30 faux-cashmere sweater at Kohl’s with an Amazon Prime card than it is to use the KSS Store Card? (yes, I’m dead serious).
ATHLETIC -- UA/NKE
- KSS expects the launch of Under Armour will drive national brand penetration higher in 2017 and be significant enough in year 1 to add 75-100bps to the overall company comp. Our prior math put the benefit at about 60bps in comp.
- When asked about how it will position its Nike offering with the Under Armour launch, KSS said UA will be incremental as to not diminish other Active brands, and has expanded Active areas in stores by as much as 25-30%. [note to self, if Mansell said “we’re cutting Nike” on an investor call, he’d get a ‘stern’ phone call from Beaverton in about 3 seconds flat.]
- KSS called out a big opportunity in UA within women’s apparel, children’s apparel, and footwear. We think this has to be Champion/Maidenform (ie HBI) share bearish.
- KSS noted that Nike grew mid-teens for the year. By our math Nike is over $1.1bn at KSS, and drove nearly a point in comp growth in 2016.
- National brands as a whole were up LSD with particular strength in Nike, Carter’s, Levi’s, Columbia & Van Heusen. (CRI reported Carter’s brand up 1% at wholesale in 4Q)
Ecommerce was up low teens in 4Q, slowing from mid-teens last Q, but accelerating 500bps on 2 year. Not nearly enough to offset a store comping down MSD. Given how margin dilutive e-comm is (1,000bps) maybe slowing growth here actually helps GM%.
Guidance
For FY17, KSS expects EPS of $3.50-$3.80 (including the 53rd week) vs street at $3.73. That implies EPS down 4%, after 6% drop in 2016.
Comps were guided to be flat to down 2% even with the benefit from UA. Why not down 5%?
Total revs down 1.3% to up 0.7% (includes 53rd week of expected $160mm)
GM% up 10-15bps w/ significant improvement in 1Q, against a very easy 140bps decline last year, and modest improvement the rest of the yr.
I don’t want to come across as perennially bearish on everything KSS – but these numbers seem very aggressive for such a poorly positioned company that is so structurally ill-equipped to turn on the lights each morning profitably.
NOTE: SIGMA went the wrong way. #bad
