We Must Protect This House: Kohl's Hoping Under Armour Launch Will Offset Mounting Headwinds

Baird sees a path to recovery at Kohl's Corporation KSS in the form of recent Under Armour Inc UA UAA launch and tight cost controls amid challenging retail environment for department store operators.

Print Review

Kohl’s reported a fourth-quarter EPS beat ($1.44 vs. $1.33 consensus), driven by better-than-expected margins due to lower markdowns and improved fulfillment productivity. Comps of -2.2 percent were essentially in line with reported November to December results (-2.1 percent) and consensus (-2.1 percent).

“Big picture, it was a disappointing holiday season for Kohl’s and the broader sector (Q4 transactions/store -6 percent, ATV +3.8 percent on mix, reduced discounting) but final results topped reduced expectations,” analyst Mark Altschwager wrote in a note.

Rating, Justification

However, Altschwager maintains his Neutral rating on the stock, saying that F 2017 targets won’t be easily achievable amid a very challenging department store backdrop.

Management acknowledged that traffic may need to improve to “-3 percent” from “-5–6 percent” to hit the upper end of comp guidance (flat to down 1 percent), suggesting some risk to estimates.

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“Achieving even flat comps remains an uphill climb given structural traffic declines (~MSD percent), competitive threats (Amazon, off-price), and consumer spending shifts away from apparel,” Altschwager continued.

These pressures are largely reflected in the company’s initial F2017 outlook, which calls for EPS of $3.50–$3.80 (bracketing prior consensus). The analyst cut his F2017 EPS estimate by 2 percent to $3.62, near the midpoint of guidance.

As of now, the risk/reward for the shares appears to be balanced. On one hand, investors may embrace higher dividend yield (now >5 percent), but would be concerned with overhangs such as traffic headwinds, Amazon.com, Inc. AMZN and border tax uncertainty.

At last check, shares of Kohl’s rose 3.54 percent to $42.36. The analyst has a price target of $44.