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Kohl's Continues Its Turnaround, but Shares Rich

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

No-moat

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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About the Author

John Brick

Equity Analyst

John Brick, CFA, is an equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers retail defensive names, including large general merchandise retailers, sporting good manufactures, and grocery/distribution names.

Before joining Morningstar in 2017, Brick worked at Arkansas-based Stephens Inc. where he covered various consumer companies. Prior to that, he worked at Chicago-based Vilas Capital, where he was a generalist on a long-short hedge fund. Brick began his career at Northern Trust as a private equity analyst.

Brick earned a bachelor’s degree in finance, with minors in economics and decision sciences, from Miami University’s Farmer School of Business. He holds the Chartered Financial Analyst® designation.

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