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Kohl's (KSS) Research Report: Q1 CY2024 Update


Full Report / May 30, 2024

Department store chain Kohl’s (NYSE:KSS) reported results in line with analysts' expectations in Q1 CY2024, with revenue down 5.3% year on year to $3.38 billion. It made a GAAP loss of $0.24 per share, down from its profit of $0.13 per share in the same quarter last year.

Kohl's (KSS) Q1 CY2024 Highlights:

  • Revenue: $3.38 billion vs analyst estimates of $3.36 billion (small beat)
  • EPS: ($0.24) vs analyst estimates of $0.06 (large miss)
  • Lowered full year guidance across the board
  • Gross Margin (GAAP): 43.1%, up from 42.7% in the same quarter last year
  • Free Cash Flow was -$133 million compared to -$296 million in the same quarter last year
  • Same-Store Sales fell 4.4% year on year, in line with the same quarter last year (miss vs expectations of down 0.4% year on year)
  • Market Capitalization: $3.02 billion

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.

As the name suggests, a department store offers a wide variety of merchandise organized into different departments or sections. Before the introduction of department stores in the 19th century, consumers would have to visit three different stores to buy a pair of shoes, nail polish, and towels for the home.

Today, the core Kohl’s customer is a middle-income woman shopping for herself and for her family. This customer can find prominent brands such as Nike, Levi’s, Keurig, and Samsung in a typical Kohl’s store or on its e-commerce site. Stores tend to be between 80,000 and 100,000 square feet and located in strip shopping centers rather than the traditional suburban malls that many department stores anchor. Common departments in a Kohl’s store include women’s/men’s/children’s apparel, beauty/cosmetics, and electronics. Additionally, Kohl's has an e-commerce presence which was launched in 2001 and today enables both online orders to be shipped to a customer’s home as well as buy online for store pickup.

Since the introduction of e-commerce, Kohl’s and peers have faced increased competition. Evolving specialty retailers and developments such as fast fashion have also pressured the department store model.

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.

Department or general merchandise retail competitors include Macy’s (NYSE:M), Nordstrom (NYSE:JWN), and Dillard’s (NYSE:DDS).

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 3% annually as it failed to grow its store footprint meaningfully and observed lower sales at existing, established stores.

Kohl's Total Revenue

This quarter, Kohl's reported a rather uninspiring 5.3% year-on-year revenue decline to $3.38 billion in revenue, in line with Wall Street's estimates. Looking ahead, Wall Street expects revenue to decline 3.1% over the next 12 months.

Same-Store Sales

A company's same-store sales growth shows the year-on-year change in sales for its brick-and-mortar stores that have been open for at least a year, give or take, and e-commerce platform. This is a key performance indicator for retailers because it measures organic growth and demand.

Kohl's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 5.6% year on year. This performance is quite concerning and the company should reconsider its strategy before investing its precious capital into new store buildouts.

Kohl's Year On Year Same Store Sales Growth

In the latest quarter, Kohl's same-store sales fell 4.4% year on year. This performance was more or less in line with the same quarter last year.

Gross Margin & Pricing Power

Gross profit margins are an important measure of a retailer's pricing power, product differentiation, and negotiating leverage.

Kohl's unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it's averaged a decent 38.3% gross margin over the last eight quarters. This means the company makes $0.38 for every $1 in revenue before accounting for its operating expenses.

Kohl's Gross Margin (GAAP)

Kohl's gross profit margin came in at 43.1% this quarter, flat with the same quarter last year. This steady margin stems from its efforts to keep prices low for consumers and signals that it has stable input costs (such as freight expenses to transport goods).

Operating Margin

Operating margin is a key profitability metric for retailers because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

In Q1, Kohl's generated an operating profit margin of 1.3%, down 1.5 percentage points year on year. Conversely, the company's gross margin actually increased, so we can assume the reduction was driven by weaker cost controls or operating leverage on fixed costs.

Kohl's Operating Margin (GAAP)

Zooming out, Kohl's was profitable over the last two years but held back by its large expense base. Its average operating margin of 2.6% has been paltry for a consumer retail business. However, Kohl's margin has improved, on average, by 2.4 percentage points year on year, an encouraging sign for shareholders. The tide could be turning.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Kohl's, its EPS declined more than its revenue over the last five years, dropping by 12.3% annually. This tells us the company struggled because its fixed cost base made it difficult to adjust to its shrinking demand.

Kohl's EPS (GAAP)

We can delve even further into Kohl's earnings performance. Kohl's operating margin has declined 1.6 percentage points over the last five years. This was the most relevant factor (aside from revenue) behind its lower earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.

In Q1, Kohl's reported EPS at negative $0.24, down from $0.13 in the same quarter last year. This print missed analysts' estimates. Over the next 12 months, Wall Street expects Kohl's to perform poorly. Analysts are projecting its EPS of $2.48 in the last year to shrink by 1.5% to $2.44.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe in the end, cash is king, and you can't use accounting profits to pay the bills.

Kohl's burned through $133 million of cash in Q1, representing a negative 3.9% free cash flow margin. The company increased its cash burn by 55.1% year on year.

Kohl's Free Cash Flow Margin

Over the last eight quarters, Kohl's has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 1.7%, subpar for a consumer retail business. However, its margin has averaged year-on-year increases of 5.2 percentage points, a great result that should improve its prospects.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money it has raised (debt and equity).

Kohl's five-year average ROIC was 10%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+. Its returns suggest it was mediocre at investing in profitable business initiatives.

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Over the last few years, Kohl's ROIC averaged 5.3 percentage point increases each year. This is a good sign, and we hope the company can continue improving.

Balance Sheet Risk

As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.

Kohl's reported $228 million of cash and $1.99 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $1.41 billion of EBITDA over the last 12 months, we view Kohl's 1.3x net-debt-to-EBITDA ratio as safe. We also see its $177 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from Kohl's Q1 Results

Kohl's missed significantly on same-store sales, leading to an EPS miss. The company then lowered its full year outlook across the board. Overall, this was a bad quarter for Kohl's. The company is down 19.8% on the results and currently trades at $21.88 per share.

Is Now The Time?

Kohl's may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Kohl's, we'll be cheering from the sidelines. Its revenue has declined over the last five years, and analysts expect growth to deteriorate from here. And while its popular brand makes consumers more likely to purchase its products, the downside is its shrinking same-store sales suggests it'll need to change its strategy to succeed. On top of that, its operating margins reveal poor profitability compared to other retailers.

Kohl's price-to-earnings ratio based on the next 12 months is 11.2x. While there are some things to like about Kohl's and its valuation is reasonable, we think there are better opportunities elsewhere in the market right now.

Wall Street analysts covering the company had a one-year price target of $26.79 per share right before these results (compared to the current share price of $21.88).

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