Morningstar | Solid 3Q Offset by Holiday-Quarter Pressures at Kohl's; Shares Fairly Valued
No-moat Kohl’s posted a solid third quarter, delivering comp growth of 2.5%, a sales increase of 1.3%, and earnings per share growth of 40% to $0.98, ahead of our $0.93 estimate. The company also raised the low end of its full-year EPS guidance, which is now $5.35-$5.55 up from $5.15-$5.55, ahead of our $5.33 prior full-year estimate. However, the updated outlook implies Kohl’s will experience slowing comps to below 1% (from more than 3% in the past three quarters, lapping a robust 6% comp) and capture gross margin pressure from higher shipping costs and a more promotional holiday season in its final fiscal quarter, offsetting accomplished gains. Given these puts and takes, we don’t plan to materially alter our $59 fair value estimate and view shares as modestly overvalued, trading at 12 times our 2019 estimate, against 7% EPS growth we have incorporated on average over the next five years.Financial results imply that operational excellence, inventory, and customer-led initiatives are on track. Inventory reductions, contributions from buy online/pick up in store, and improved digital offerings have led to rising transaction counts and values, indicating that efforts are resonating with consumers. However, our main concern is that the pricing environment could remain competitive, given the proliferation of off-price retailers, which has hindered Kohl’s brand positioning. We think the company could see more pressure as it pushes further into e-commerce (with costly shipping) and spends to attract incremental customer to the direct-to-consumer channel, bringing the operating margin from 7.4% in 2017 to 6.3% over the next five years.
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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