KSS will be reporting 2Q EPS next Tuesday August 18th. The quarter will no doubt be a disaster on an absolute basis, but we think for the most part that is in expectations. To review, 1Q sales were down 43%, and around the print in late May stores were still running down 40-50% YY, in late June CEO Michelle Gass said stores will running at 75% of last year (ie down 25%). Ecommerce is making up some portion of that. But we think the comp rate has likely stalled out somewhere around down 10-20%. And with the street expecting comps to continue to improve linearly to a 4Q down only low single digits, what appears to not be in expectations is the potential for a prolonged period of sales pressure, and that is looking more and more likely to be the reality. We have heard many retailers talk about weakening sales where the virus cases have ramped. And as we approach back to school season, data points are looking net negative as to the continued recovery. In our consumer survey, we are not seeing a recovery in intention to shop at a department or clothing store, even as we enter what is historically one of the biggest apparel shopping periods of the year. You might think people are simply buying it all online, but in checking Kohl’s online interest on google, it’s actually down slightly vs this time last year.
Then there is the credit risk angle. We’re modeling in the area of $400mm in profit risk for the year, with about half the impact in 2Q compared to what we think 3Q and 4Q will see. Credit card companies have been provisioning for expected losses, but so far charge-offs have not actually risen due to the forbearance programs and government stimulus. We’re not sure exactly how KSS’s P&L recognition works vs the card issuers, but we suspect the credit impact will be moderated some until charge-offs are a reality. The 2Q numbers should at least give some better clarity as to timing and potential depth of the decline, though this Q wont be the bottom, and we don’t expect management to give explicit guidance on credit risk in the coming quarters.
So 2H is where we could have a poor back to school season, a stalled out consumption recovery, an overly stuffed apparel retail channel with high promotions, continued covid procedural cost pressures, competitor and covid driven wage inflation, and retailers looking to be extra lean within seasonal goods heading into holiday to preserve cash and mitigate further markdown risk which means less sales.
Since the end of April, KSS 2021 street EPS has gone from $3.03 to $1.44, 2022 has gone from $2.77 to $1.70… though the stock is up a bit over that time period. We still think these ‘recovery’ earnings numbers are too high, the question is when will the market decide that is the case (assuming we are correct), and when will the market decide that giving KSS a mid teens EPS multiple or higher is perhaps not the best move given the leverage.
We think fundamental performance vs expectations here in 2H is likely to be the negative catalyst for the KSS stock.
