Morningstar | Kohl’s Reports Solid 2018 Close and More Operational Excellence Plans; Shares Slightly Undervalued
No-moat Kohl’s wrapped up 2018 with fourth-quarter numbers that slightly exceeded our estimates. Operating income (excluding a $104 million restructuring charge) of $545 million in the quarter beat our expectation of $528 million. Kohl’s same-store sales of 1.0% in 2018’s fourth quarter were solid given the tough comparison against 6.3% same-store sales in fourth-quarter 2017. Kohl’s indicated, however, that fiscal 2019 started slow due to weather. Further, we think rivals, including no-moat Macy’s and narrow-moat Nordstrom, continue to discount to move post-holiday inventory. Kohl’s announced 2019 EPS guidance (excluding charges) of $5.80-$6.15 and same-store sales of 0%-2%, in line with our forecasts of EPS of $5.91 and same-store sales of 0.5%. As such, we do not expect a material change to our $77 fair value estimate and see shares as slightly undervalued despite the 7% move.We think Kohl’s has areas of strength but lacks a competitive edge. In activewear, Kohl’s has been testing increased shelf space in some stores and will expand the program to an additional 160 stores after good results. Kohl’s, though, has no clear advantage over its many competitors in activewear or most other apparel categories. While the firm continues to implement Operational Excellence, we think more aggressive action may be needed. Kohl’s plans to close four stores in April and open four small format stores later in the year. It also plans to downsize some stores and add tenants. Planet Fitness, like Aldi, will open locations in unneeded Kohl’s space. While we view these actions as positive, they are rather modest given that Kohl’s has 1,159 stores. We believe it may have to close more stores as competition intensifies. As for Kohl’s partnership with wide-moat Amazon, Kohl’s intends to close the Amazon mini-stores in favor of selling its products on a wholesale basis in 200 stores. However, we aren’t convinced consumers will make extra trips to Kohl’s to shop for Amazon products.
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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