Morningstar | Kohl’s Clocks Positive Holiday Season Despite Competitive Marketplace; Shares Slightly Overvalued
No-moat department store operator Kohl’s shares tumbled on holiday season results, although we believe it fared well given the competitive consumer environment, the its lack of differentiation offered, and non-existent switching costs. For Kohl’s, 1.2% same-store sales improvement over the nine weeks encompassing the holiday season tracks slightly better than the flat same-store sales we have forecast for the quarter, although we could still see a slowdown during January that could pull the final quarterly comp closer to our projection. As insight to the comp cadence Kohl’s has experienced in the final month of the quarter, we look to 2017. Kohl’s delivered 6.9% comps for the holiday season in 2017 and 6.3% comps for the full quarter last year, implying January of 2018 experienced a decent slowdown relative to the rest of last year’s fourth quarter.On a positive note, the company did take up the low end of its fiscal year earnings per share guidance, now anticipating $5.50-$5.55 in EPS versus $5.35-$5.55 prior (above our $5.38 EPS projection). This implies Kohl’s should see some combination of gross margin improvement (Kohl’s has averaged 30 basis points of improvement over this year’s quarters) and lower pressure on the selling, general, and administration ratio, supporting about 7% operating margin results in 2018. But we don't see any such potential improvement as sustainable, as our maintained long-term outlook models flat comps on average with an operating margin that contracts to below 6%, as the company sees elevated spend to remain relevant. In this vein, we don’t plan any material change to our $59 fair value estimate and view shares as modestly overvalued.
Kohl's operates department stores, a website (www.Kohls.com), FILA outlets, and Off-Aisle clearance centers. The company's Kohl's stores and website sell proprietary and national brand apparel, footwear, accessories, beauty and home products. The company's website includes merchandise that is available in its stores, as well as merchandise that is available only online. The company's portfolio includes private brands such as Apt. 9, Croft & Barrow, Jumping Beans, SO and Sonoma Goods for Life and exclusive brands that are developed and marketed through agreements with brands such as Food Network, LC Lauren Conrad, Elle and Simply Vera Vera Wang.
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