Image Source: Mike Mozart
Kohl’s (KSS) may be doing better than JC Penney (JCP) and Bon-Ton (BONT), the owner of Carson Pirie Scott, but the department store arena is flailing and has been for some time, even before the days of irrational exuberance when hedge fund giant Eddie Lampert merged Kmart and Sears (SHLD) in 2005. Things have only headed south since that time, and even the strongest in Macy’s (M), which has experienced falling comparable store sales and a plummeting gross margin as of late, has been forced to pursue innovative ways to generate value for shareholders in the midst of “consumer abandonment,” namely the consideration of an independently-traded real estate investment trust.
Fourth-quarter results at Kohl’s, released February 26, may not have been as bad as we’ve witnessed at J.C. Penney’s during the last few years as a result of the failed “Ron-Johnson experiment,” or even Macy’s more recently, but they weren’t great either. But even if Kohl’s is holding the line with total sales, reported profits are plummeting, dropping more than 20% in 2015 from last year’s mark. Investors need to think long and hard about the punishing discounting that’s going on in this industry. The consumer has been trained to wait for that “30% off” coupon in the mail, and it may get worse, as e-commerce continues to proliferate. The overhead at department stores has become too burdensome, and millennials do not care for the “big box” experience.
We think management’s outlook for 2016 is far too optimistic in light of current business momentum. Kohl’s is targeting total sales to be roughly flat for the year and earnings per diluted share to reach the range of $4.05-$4.25. The department store giant is piloting smaller format stores and plans to close 18 underperforming stores, but that may not be enough to stem the weakness. We think the recent dividend increase at Kohl’s is nothing more than a distraction, as Kohl’s cash-flow-from-operations generation and balance sheet are not as strong as they once were. Shares of Kohl’s yield ~4.5% at the moment, but we’re not biting.