Avoid Kohl’s: Buy Other Retail Stocks
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Kohl’s (NYSE: KSS) has a supply chain problem. And a discount problem. And a margin problem.
Last quarter the company had trouble re-stocking its most in-demand merchandise, leading to a shortage of some of its most profitable items. The lapse in the supply chain no doubt hurt the large retailer, who saw a 1% decline in sales, down to $4.21 billion, and whose same store sales dropped 2.7%.
But that’s only half the story. Kohl’s also has a discount problem. Analyst favorite Macy’s (NYSE: M), who has been tailoring its products to local consumers, and stores like Wal-Mart (NYSE: WMT) and Target (NYSE: TGT), who offer low-priced goods that have done well in the poor economy and have hurt Kohl’s sales. These three firms have all boosted their quarterly sales, have strong operating and profit margins, and earned above average returns on equity.
Competitor Comparison
| Quarterly Sales Growth (yoy) | Operating Margin | Profit Margin | Return on Equity | |
| Wal-Mart | 4.5% | 5.9% | 3.5% | 22.9% |
| Macy's | 3.0% | 9.3% | 5.0% | 22.7% |
| Target | 3.3% | 4.1% | 7.4% | 19.0% |
| Kohl's | -1.0% | 10.6% | 5.6% | 16.0% |
| J.C. Penny | -22.6% | -3.5% | -1.1% | -12.9% |
Kohl’s does have an excellent discount strategy in place, however. The company mails a random coupon to homes near its stores. These coupons range from 10% to 30% and have a very short life. The massive savings encourage shoppers, mostly female deal-seekers, to band together to figure out who received the best coupon. Then they lend it to each other or head out in tandem to clear out the racks of Kohl’s. The strategy has aided Kohl’s volume, but competing on the basis of price has lowered its margins.
Effect on Margins
Based on last quarter’s earnings report, Kohl’s reported the following numbers:
- Earnings fell a whopping 20%
- Kohl’s revised its annual earnings outlook to $4.50 - $4.65 per share from $4.75 per share
- Gross margins took a wallop – falling from 40.7% to 39%
- Operating margin of 10.61% and profit margin of 5.63%
- Return on assets of 9.01%
- Return on equity of 16.00%
These numbers do not look promising for Kohl’s. The company would have to make a major turnaround in order to reverse its downward trend. But hey, things could always be worse – you could always be J.C. Penney (NYSE: JCP).
J.C. Penney has been bleeding losses, posting a -3.47% profit margin and an embarrassing .24% operating margin. Also, the company returned just .2% on its assets and had a negative return on equity of 12.90%. The company has foregone the psychological impact of deals in favor of an "everyday low price." Is it working? Apparently people feel they can get a better deal elsewhere.
Where to Go From Here
Kohl’s has a number of options moving forward. While its earnings have been hit, Kohl’s is still a strong brand that resonates with consumers, and it does pay out a 2.40% dividend. Thus, if Kohl’s can improve the economics of its business, then it could do well come this Christmas shopping season. Here are a few suggestions that could benefit Kohl’s:
- Push discounts to get foot traffic in the store – Then promote high-margin goods in the most highly trafficked parts of the store.
- Play up the exclusive brands – Kohl’s offers exclusive brands like Marc Anthony, Jennifer Lopez, and Rock & Republic. Make consumers more aware that they can only get these brands at Kohl’s.
- Start holiday shopping early – run sales to attract the deal-seekers. Instead of letting these customers run from store to store come November or December, attract them in at the end of October or early November with a “Pre-Christmas Sale.”
- Copy Macy’s – Localize offerings like Macy’s has. Different parts of the country want and need different types of merchandise. Identify the desires of customers and then give them exactly what they want.
In all, I do not want to own Kohl’s right now. The company has stocking issues and is competing based solely on price. Moreover, a few of its insiders sold significant stock holdings. The insiders could be simply raising cash for some reason, but then again, $25 million is a lot of cash to raise.
If I wanted to hold a retailer, I would pick Wal-Mart for low-end goods and Macy’s for high-end goods. Wal-Mart is adept at controlling its costs, and therefore its profits, and Macy’s exclusivity and focus on customer wants and desires will likely continue to drive growth.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
