THE HEDGEYE EDGE
Kohl's (KSS) does not need to exist, and ultimately won’t.
The Street thinks that it will earn over $6.00 per share in 2-years, while we’re below $4.00. Today earnings are pushing $5.50, but what the Street is missing is that KSS has $2.30 in credit income, $1.25 in EPS from sub-prime customers, and another $2.25 is EPS due to an operating lease structure that is inflating EPS at the risk of lack of business flexibility. In other words, excluding these items, the company is earning nothing.
INTERMEDIATE TERM (TREND)
KSS comped 7% in the fourth quarter, marking the fourth time in 14 years KSS growth matched government retail sales. While retail is a full contact outdoor sport (i.e. occasionally the best retailers miss and the worst one’s win) the KSS number was solid – it did something right.
But with reported comp sales being impacted by a calendar shift in 2Q, we are looking at a sharp deceleration in sales trends. In a recent round of meetings with investors the company ‘talked down’ the quarter due to weather (KSS is one of the most weather-sensitive retailers out there).
On the margin, trends are decelerating while costs are inflating and then the company faces one of the most difficult back half comparisons it will have seen in years. This company is setting up for a 2H miss.
LONG TERM (TAIL)
KSS's long-time CEO just left in April. He made many promises on his way out – easy to say, but not easy to do. On the heels of a monster fourth quarter, he’s talking about 2% traffic growth for the next 2-3 years. Note that KSS has only grown traffic three quarters since the great recession. By our math, 80% of Americans that could potentially be KSS shoppers already are.
Newsflash…it’s not going to 100%.
This means that existing shoppers need a reason to come to the store 2-3% more often than they already do, or simply spend 4-5% more every time they come. From a merchandising perspective, nothing is meaningfully changing to support this.
The company has 1,100 stores, and openly admits that it has 300-400 too many, and the stores in aggregate are about 30% too large. That’s unfixable, and KSS lacks the lease structure to buy out of these stores. Simply put, KSS is stuck between a rock and a hard place and should put up the earnings to support it.