Kohl's (NYSE:KSS) Q2: Beats On Revenue

Max Juang /
2023/08/23 7:10 am EDT

Department store chain Kohl’s (NYSE:KSS) reported Q2 FY2023 results beating Wall Street analysts' expectations, with revenue down 4.7% year on year to $3.9 billion. Kohl's made a GAAP profit of $58 million, down from its profit of $143 million in the same quarter last year.

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Kohl's (KSS) Q2 FY2023 Highlights:

  • Revenue: $3.9 billion vs analyst estimates of $3.71 billion (4.96% beat)
  • EPS: $0.52 vs analyst estimates of $0.22 (133% beat)
  • Free Cash Flow of $186 million is up from -$413 million in the same quarter last year
  • Gross Margin (GAAP): 42.4%, down from 42.9% in the same quarter last year
  • Same-Store Sales were down 5% year on year

Tom Kingsbury, Kohl’s chief executive officer, said, “Our second quarter earnings were in line with our expectations. We maintained strong sales momentum in Sephora at Kohl’s, reduced inventory by 14%, and managed expenses tightly. Further, solid cash flow generation allowed us to reduce our borrowings in the period.”

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 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

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 2.88% annually .

Kohl's Total Revenue

This quarter, Kohl's revenue fell 4.7% year on year to $3.9 billion but beat Wall Street's estimates by 4.96%. Looking ahead, Wall Street expects revenue to decline 4.45% over the next 12 months.

While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Number of Stores

When a retailer like Kohl's keeps its store footprint steady, it usually means that demand is stable and it's focused on improving its 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 3.75% year on year.

Kohl's Year On Year Same Store Sales Growth

In the latest quarter, Kohl's same-store sales fell 5% year on year. This performance was more or less in line with the same quarter last year.

Key Takeaways from Kohl's Q2 Results

With a market capitalization of $2.85 billion, Kohl's is among smaller companies, but its $204 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.

We were impressed by how significantly Kohl's blew past analysts' EPS expectations this quarter. That along with the revenue beat, driven by strong performance at Sephora, really stood out as a positive in these results. On the other hand, the company reconfirmed its full-year revenue guidance, which came in below Wall Street's estimates. Overall, the results could have been better. The stock is up 1.01% after reporting and currently trades at $26 per share.

So should you invest in Kohl's right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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