5 Kohl's Analysts On Bloated Inventory, Guidance Cut: 'Fundamentals Are Likely To Get Worse'

Kohl's Corporation KSS shares are down 4% on Friday after the company cut its guidance and said inflation is eating into its sales growth.

On Thursday, Kohl's reported second-quarter adjusted EPS of $1.11 on $4.09 billion. Both numbers exceeded consensus analyst estimates of $1.30 and $3.85 billion, respectively. Revenue was down 8.1% from a year ago.

Same-store sales dropped 7.7% in the quarter. Kohl's also said its inventory ballooned 48% compared to a year ago.

Looking ahead, the company cut its fiscal 2022 adjusted EPS guidance from a previous range of between $6.45 and $6.85 to a new range of between $2.80 and $3.20.

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Macroeconomic Pressures: Bank of America analyst Lorraine Hutchinson said she remains cautious as macro pressures mount for Kohl's.

"Mgmt called out a slowdown from the middle-income consumer, cited reduced spend per transaction and a shift to value-oriented private brands," Hutchinson wrote.

Morgan Stanley analyst Kimberly Greenberger said Kohl's "fundamentals are likely to get worse before they get better."

"We worry KSS' diminished financial flexibility leaves it with far fewer shock absorbers should the road ahead remain bumpy," Greenberger wrote.

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Credit Suisse analyst Michael Binetti said Kohl's updated guidance is concerning, but it may be conservative.

"We're concerned to hear that Children's apparel underperformed the chain in 2Q ahead of the important BTS season," Binetti wrote.

Difficult Margin Outlook: Telsey Advisory Group analyst Dana Telsey said Kohl's need for promotional activity doesn't bode well for its margin outlook.

"Promotional activity looks to weigh on margins in the back half of the year as the company moves through elevated inventory, while ongoing investments in strategic initiatives adds incremental expense as well," Telsey wrote.

Guggenheim analyst Robert Drbul said improved inventory and reduced freight pressures should set Kohl's up for a much better 2023.

"While we are disappointed with the earnings reduction, we believe, at these levels, the shares reflect many of the concerns and challenges the company is facing and offers an attractive risk-reward ratio," Drbul wrote.

Ratings And Price Targets:

• Bank of America has an Underperform rating and a $26 target.
• Morgan Stanley has an Underweight rating and a $19 target.
• Credit Suisse has a Neutral rating and a $28 target.
• Telsey Advisory Group has a Market Perform rating and a $35 target.
• Guggenheim has a Buy rating and a $44 target.

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