Kohl's (NYSE:KSS) Q3: Misses On Net Sales

Jabin Bastian /
2023/11/21 7:23 am EST

Department store chain Kohl’s (NYSE:KSS) reported results ahead of analysts' expectations in Q3 FY2023, with revenue down 5.2% year on year to $4.05 billion. Turning to EPS, Kohl's made a GAAP profit of $0.53 per share, down from its profit of $0.82 per share in the same quarter last year.

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Kohl's (KSS) Q3 FY2023 Highlights:

  • Net Sales (excludes 'Other Revenue' from credit card operations): $3.84 billion vs analyst estimates of $3.95 billion (2.8% miss)
  • EPS: $0.53 vs analyst estimates of $0.39 (34.4% beat)
  • Full year guidance lowered for same-store sales but raised for EPS
  • Free Cash Flow was -$6 million compared to -$64 million in the same quarter last year
  • Gross Margin (GAAP): 42.1%, up from 40.6% in the same quarter last year
  • Same-Store Sales were down 5.5% year on year (miss vs. expectations of down 2.7% year on year)

Tom Kingsbury, Kohl’s chief executive officer, said “Kohl’s third quarter earnings reflect strong gross margin and expense management as well as additional progress against our strategic priorities. I am pleased with our store performance driven by strong growth in Sephora and the newness in our home and gifting initiatives. This reinforces our actions are working and resonating with our customers. In addition, we drove a 13% reduction in inventory as we benefited from our new disciplines.”

Founded as a corner grocery store in Milwaukee, Wisconsin, Kohl’s (NYSE:KSS) is a department store chain that sells clothing, cosmetics, electronics, and home goods.

Department Store

Department stores emerged in the 19th century to provide customers with a wide variety of merchandise under one roof, offering a convenient and luxurious shopping experience. They played an important role in the history of American retail and urbanization, and prior to department stores, retailers tended to sell narrow specialty and niche items. But what was once new is now old, and department stores are somewhat considered a relic of the past. They are being attacked from multiple angles–stagnant foot traffic at malls where they’ve served as anchors; more nimble off-price and fast-fashion retailers; and e-commerce-first competitors not burdened by large physical footprints.

Sales Growth (including revenue from credit card operations)

Kohl's is one of the larger companies in the consumer retail industry and benefits from economies of scale, enabling it to gain more leverage on fixed costs and offer consumers lower prices.

As you can see below, the company's revenue has declined over the last four years, dropping 3.2% annually.

Kohl's Total Revenue

This quarter, Kohl's revenue including credit card operations fell 5.2% year on year to $4.05 billion. Looking ahead, analysts expect revenue to decline 2.9% over the next 12 months.

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Number of Stores

A retailer's store count is a crucial factor influencing how much it can sell, and store growth is a critical driver of how quickly its sales can grow.

When a retailer like Kohl's keeps its store footprint steady, it usually means that demand is stable and it's focused on improving operational efficiency to increase profitability. As of the most recently reported quarter, Kohl's operated 1,100 total retail locations, in line with its store count a year ago.

Kohl's Operating Retail Locations

Taking a step back, the company has kept its physical footprint more or less flat over the last two years while other consumer retail businesses have opted for growth. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Same-Store Sales

Kohl's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 4% year on year.

Kohl's Year On Year Same Store Sales Growth

In the latest quarter, Kohl's same-store sales fell 5.5% year on year. This decrease was a further deceleration from the 6.9% year-on-year decline it posted 12 months ago. We hope the business can get back on track.

Key Takeaways from Kohl's Q3 Results

With a market capitalization of $2.75 billion, Kohl's is among smaller companies, but its $190 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

This was certainly a mixed quarter. While same-store sales and net sales (excluding credit card operations revenue) missed expectations, gross margin and expense control was better, leading to a nice EPS beat vs. analysts' expectations. Guidance was also mixed, with the full year outlook lowered for same-store sales but raised for EPS. However, with the full year operating margin maintained, the EPS raise is likely from non-fundamental factors such as lower interest expense or a lower tax rate. Lastly, management commentary shows that the company could face further choppy topline results in the near term. “Our strategies to reposition Kohl’s for improved sales and earnings performance remain in the early stages." Zooming out, we think this was a mixed quarter with some positives and some negatives. The stock is down 2.9% after reporting, trading at $24.13 per share..

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The author has no position in any of the stocks mentioned in this report.