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Stock Analyst Update

Kohl's Continues Its Turnaround, but Shares Rich

We think investors should wait on this no-moat firm.


No-moat  Kohl's (KSS) first-quarter results showed its continued efforts to drive top-line growth, although concerns about the sustainability of these trends coming out of the quarter support our views about the market getting ahead of itself on this name. We but don’t see a material change to our $53 fair value estimate, as the retailing landscape remains competitive. With shares trading at a 15% premium, we think investors should wait for a better margin of safety.

Comparable-store sales increased 3.6% versus a 2.7% decline last year and our estimate of 3%. These sales were supported strong average transactional value (the result of improved national brand merchandising), impact of the Friends & Family  event leading into Mother's Day (aided comps by 320 basis points) and digital sales (up 19% on top of 13% last year). Together, this led to healthy gross margin increase in the quarter, up 50 basis points to 36.9%, versus our 36.7% estimate.

We attribute the firm’s top-line success to its national branded marketing initiatives, as these sales increased 6% in the quarter (penetration grew to 60% of total sales from 55% in 2017). Within this category is active wear (Nike, Under Armour, etc.), comping up 10% with plans to expand these offerings by 40% in select stores later this year. These national branded products did come at the expense of Kohl’s proprietary brands, albeit comping flat (down 1% last year) but longer term, we believe this remains a constructive part of the firm’s merchandising efforts. Its pilot with Amazon, including returns, shops within Kohl’s stores, and stores offering smart home experiences, contributes to traffic gains. While we acknowledge market concerns about slower sales the next few quarters due the Mother's Day calendar shift and tougher comps, we still believe national brands and other initiatives support our annual sales growth of 1% over the next five years versus a low-single-digit average annual decline over the last three years.

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John Brick, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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