Takeaway: The entertainment value is trumped only by blind process in running this business. $2.50 in EPS before $4.00. #s are too high.

There was definitely entertainment value in listening to this KSS call. To be clear, when it gets to a point where one can joke w buddies in the business as to how ridiculous management sounds – you gotta wonder if sentiment has hit a bottom. Unfortunately for KSS, it has not. This is not an over-shorted stock relative to how much numbers still have to come down. $2.50 in EPS before $4.00. And I’d argue sub-$2.00 before $4.01+.

One of the best things I heard Mansell say on this call is that [traffic is more important than comp.] Hmmm… you had a great backdrop via the best two months of Macro tailwinds we’ll see all year – exceptional weather (funny how mgmt calls out when it hurts, not when it helps) which resulted in less bad traffic. But people still bought less. Simply put, that tells me that people want less of the stuff that KSS is selling.

That leads me to one of the many questions I’d ask if I had the opportunity to look Mansell in the eye – something he won’t let me do (I’m banned from analyst meetings). Here’s a doozy…

McGough Q: How many brands does KSS have (it’s 537, fyi)? How many of your brands do you think the consumer would be genuinely disappointed to see go away?

Note: I asked Paul Charron at LIZ this a decade ago. He said ‘maybe 2-3’ out of his rolled-up 46 brands. There are only 3 left – and are owned by 3-different parent companies.

I’m willing to bet that if 500 of KSS’ brands simply vanished overnight – the consumer would not even blink. That’s a severe problem in #retail5.0 when 150% of your EPS is from Credit, Sub-prime, and deferred lease payments.

Here’s a list of ‘stuff Kevin said’...

"I was pleased that second quarter sales improved to relatively flat to last year."

Sales were down 0.9%

New Rewards Pilot
"We have three objectives in that loyalty pilot: simplify it, broaden the reach and make a platform even more rewarding."

More rewarding? Does that = bigger discount, lower AUR, lower margins?

"We're activating a very targeted effort to capture more than our fair share of sales from competitor stores that are closing in our trade areas. The marketing supporting in that plan started at the end of July and will continue through the fall and holiday season. We do believe there's a significant sales opportunity for us to capture in several hundred stores and early results on that are promising."

Aren't your competitors doing the same?

"While we remain even more committed to our goal of achieving best-in-class as an omnichannel retailer, those headwinds continue to be present looking forward. As a result, we've clearly seen the need to identify ways to work faster and smarter, and the organization has embraced that goal. We now believe that we can capture over $250 million of SG&A savings from our current annualized rate over the next 3 years, which will offset many of these headwinds."

So cost cutting plan still means no earnings improvement? Who still uses the word omnichannel? That was a buzzword from 5-years ago.

Q: With positive traffic, how were comps in July?
"I'm actually looking at that right now. It's pretty much flat for the July period."

 (Translation: negative)

So we probably have a bigger spotlight on traffic movement and transactions increasing and we've been doing our overall sales results because we know that's sort of the leading indicator that people are visiting our stores more often.

Traffic is only good if it = sales.

Q: You commented on Nike performance in some prior quarters. Can you give us an update on that?
"It's been great."

The analyst was likely looking for a growth number, the fact that the reply was instead the growth in active apparel and footwear signals it likely slowed from the HSD rate seen last Q.

"Hey, we understand the difficulty in the sector that you operate in. And you seem to be doing a good job managing through that." And there are a lot of good things coming, but at the end of the day, over the last few years, your net income has fallen. It's fallen because you haven't been able to find a way to offset these increasing expenses. We're going to put a stake in the ground and say, "Okay, we have ways to offset these increasing expenses." And we'll provide more color on that as we go forward and when we get to the point where we're going to provide future guidance, we'll definitely give you more detail around the specifics.

 

Question on Inventory since 2012….
"I'm going to answer that, this is Kevin, just because I don't think Bruce is in a position to be able to talk about this as well."

I get he's new, but that phrasing seems to insult the CFO.