What Makes This Retailer a Good Bet?

Ash 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) stock price has increased by 16% in the last six months, outperforming the S&P 500. Its first quarter results were mixed as comparable sales were negative, but its gross margin still beat the consensus estimates by 50 basis points.

The sales decline that the company experienced last quarter can be attributed to the bad weather conditions whose impact was felt across the industry; as per the Consensus Bureau, department store sales declined 7.6% in March following the 4.6% decline in February. The one-time impact of the weather aside, the company presents an attractive investment opportunity.

Kohl's has appointed a new officer for customer acquisition with increased marketing spending and investment in the Omni-channel network. It has also focused on moms, which provides a very large and loyal customer base for the company. Let's discuss some of the initiatives taken by the company in detail.

Newly appointed Chief Customer Officer will play key role in customer acquisition

Kohl’s has created the new role of Chief Customer Officer and recruited Michelle Gas for this role. She has 16 years of experience with Starbucks at leading positions and has played a key role in customer loyalty and social media initiatives for the coffee giant.

She has focused initially on the company's merchandising and marketing efforts. Kohl's is focusing more on stocking in-depth assortments of merchandise rather than a simple mix of different merchandise. It has decided to increase its marketing spending for the second quarter to provide more national advertising of its brands. It will also extend the testing of its non-credit loyalty program to 200 stores from the current 100 stores. These efforts will help it acquire new customers and retain its present customer base.

Investment in Omni-channel network will drive e-commerce sales

The e-commerce platform is the biggest growth driver for the company, showing a 31% increase this year above its 40% growth in 2012. It is expected to grow 35% this year as well with emphasis on additional fulfillment centers and in-store kiosks. The company has invested in additional infrastructure to fulfill online orders and to extend its shipments from stores to 200 stores. It also has plans to invest in a new point-of-sale system that will help it to track in-store inventory with global inventory visibility. Contributing 8% of total sales, the e-commerce platform will be a growth driver as Kohl's makes an increased investment in technology.

Moms strategy will drive sales growth with credit to stay-at-home spouses

Moms are the highest-spending customer base for the company and they will continue to drive its sales. Kohl's has invested a significant amount on customer research on ways to serve moms better. The management has indicated that new rules which are expected soon will grant credit to stay-at-home spouses. This plan is expected to increase the company's penetration in this very large and loyal customer base.

Peer analysis

In the departmental stores segment, the  company's primary peers are Macy’s (NYSE: M) and Nordstrom (NYSE: JWN).

Macy’s has taken initiatives in merchandise assortment as part of its "My Macy’s" strategy. This strategy focuses on the segmentation of stores and the localization of offerings. It will ensure quick delivery to 500 stores after the expansion of its delivery mechanism under the Omni-channel network. The company is currently targeting the “millennial” customer base which is made up of young, active and impulsive buyers through new product launches and brand extensions. Macy's has increased its marketing spending on digital and social media in hopes that it will attract this millennial customer base and increase company’s sales growth.

Nordstrom has invested in technology to fuel its sales growth in its biggest growth driver, the Nordstrom Direct channel. Its enhanced technology will provide a better customer experience through online and mobile platforms. Its Rack stores channel is another growth driver, with higher earnings before interest and taxes margin levels than the company's full-line stores. Its Fashion Rewards and Topshop merchandise will attract fashion-forward but price-conscious customers to its stores. Nordstrom has also announced an expansion plan into Canada which will provide additional long-term growth opportunities for the company.

Company

P/S

1 Year Fwd. P/E

Op. Margin

Kohl’s

0.69

10.52

7.55%

Macy's

0.73

10.48

6.81%

Nordstrom Co.

1.05

13.73

10%

Source: Google Finance and Yahoo! Finance

Kohl’s has reported an operating margin of 7.55% and 1 year forward price-to-earnings ratio of 10.52, which is a moderate performance among the peers. Macy’ has the lowest operating margin of 6.81% but with lowest forward price-to-earnings ratio of 10.48. Nordstrom has the highest operating margin of 10% among the peers but with highest forward price-to-earnings ratio of 13.73.

Conclusion

Kohl’s has reported mix results in its most recent quarter with negative comparable sales, but its earnings-per-share was better than consensus estimates. It has taken initiatives for growth and appointed a new CCO with increased marketing spending planned for the second quarter this fiscal year. The company's investment in technology to drive growth and its focus on moms will help to provide growth in the long term. I believe that all these initiatives will turn sales growth positive as time goes by.

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Ash Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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