Bear Of The Day: Kohl’s (KSS) – July 11, 2019

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The department store segment has taken a beating over the last few years with this year only exacerbating the issue. Kohl’s (KSS Free Report) is no expectation to this trend, having lost 30% of its market value since the beginning of 2019. Sell-side analysts are becoming increasingly pessimistic about KSS and have been lowering EPS estimates considerably for the next couple years pushing this stock into a Zacks Rank #5 (Strong Sell).

Analysts are expecting negative growth on both the top and bottom-lines for 2019, with an 11.5% EPS estimate drop in the last 90 days. The most recent earnings results illustrated a significant miss and the start of a downward trend in sales and profitability. Millennials are now the largest consuming generation and this is creating a dynamic consumer environment that department stores have been unable to keep up with.

Millennials are a progressively online generation and aren’t walking into stores as much as they use to. This is having a significant negative impact on department stores like Kohl’s whose business model relies on brick and mortar retail.

Kohl’s most recent attempt to grow foot-traffic in their stores was the Amazon Returns program. This program is allowing Amazon customers the ability to return unwanted products to Kohl’s. Considering the extremely volume that Amazon deals with daily, this program is giving Amazon some relief from the heavy flow of goods.

The transaction is peculiar because at first glance Kohl’s is gaining nothing and it’s actually costing them more in logistics expenses because no money is changing hands. In the most recent earnings call, Kohl’s CEO Michelle Gass, confirmed this suspicion, saying that this will indeed cost Kohl’s. What they hope to gain out of this deal is foot track into their stores.

I believe that this program could easily backfire with the increased return of foot traffic not covering the logistical costs needed for a positive return on investment. These consumers are going to Kohl’s to return something not buy anything new, the likelihood of them making a purchase is much lower the traditional foot traffic from true Kohl’s consumers going there to spend.

Take Away

The outlook of the department store industry is grim with our increasingly online lifestyles. I would stay away from these investments as their core clientele is aging. Kohl’s has seen a consistent decrease in national store square footage over the past 5 years and I expect this trend to continue.

KSS has all the momentum going against it, although it is trading at multiples that are in line with the industry average. I wouldn’t put on a short position on this security quit yet, but I would limit exposure to the department store segment.

 

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2019-07-11 10:00:00

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