After earnings debacle, Kohl’s (KSS) still sees potential in physical stores

Department stores are among the worst-hit by Covid-19, with customers staying indoors and stores remaining closed. While it was expected that widespread store closures would have a negative impact on the first-quarter performance of Kohl’s Corporation (NYSE: KSS), the retailer reported a wider-than-expected loss.

In the past few months, Kohl’s market value suffered the biggest loss ever, erasing several millions of investor money. Though the shares pared a part of the loss last week, they pulled back after the company reported dismal first-quarter results. The stock has been trading at a 13-year low since early March. Since there are no clear signs of a near-term revival, this is not the right time to invest in Kohl’s, and it makes sense to hold the stock at least until the next earnings.

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Interestingly, unlike rival retailers Walmart (WMT) and Target Corp. (TGT), Kohl’s failed to take advantage of the shopping spree in the early weeks of the virus outbreak when people rushed to stock on essential items ahead of the shutdown. Apparently, customers were drawn to large supermarket chains that offer discounts and e-commerce platforms during the crisis days.

Liquidity

The stress on Kohl’s liquidity due to the poor sales is going to derail its capex program this year. It needs to be noted that the management has already discontinued share buybacks and quarterly dividend to limit cash outflow. More cost-cutting measures and in the pipeline. The recent initiatives to strengthen the balance sheet, such as reduction of debt with no immediate maturities, provides the backdrop for the revival process.  

With travel restrictions being lifted and retailers including Kohl’s gradually reopening stores, the question is what lies ahead for the company. For sure, the worst is not over as the company will have to deal with multiple challenges in the post-pandemic phase, such as supply chain disruptions and order cancellations.

Rebuilding

After closing all of its stores in March, Kohl’s reopened about half of them this month, in response to the relaxation in movement restrictions. In her opening remarks at the first-quarter earnings call, CEO Michelle Gass said the rebuilding process has already begun. “Stores are the lifeblood of Kohl’s, and more than 90% of our customers have historically shopped them. While the current crisis has had a significant impact to our store business, we continue to see our store portfolio as one of the core assets of our strategy going forward,” she added.

Outlook

The company expects that the strategic location of its stores, spacious interiors that support social distancing and the off-mall setup would drive traffic going forward. The other factors that bode well for the company are its popular loyalty program and the upcoming brand launches, including Lands’ End and TOMS. Meanwhile, clearing the excess inventory will be a challenging task as the process will add to pricing pressure and affect margins since the market is going to be flooded with promotional offers.

That brings the company’s digital platform into focus, which is yet to become a full-fledged shopping channel. Though digital sales rose sharply in the first quarter, the prevailing situation demands more innovation in that area to maintain momentum.

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In the coming weeks, customers can expect additional measures from the company to improve the shopping experience, like the recent launch of Store Drive Up. Experts predict a fundamental change in people’s shopping habits going forward, regardless of how the economy re-emerges from the pandemic, and e-commerce might even outpace brick-and-mortar business in the future.

“While we have a fast-growing digital business, it has only replaced a small portion of the sales lost from our entire store base being closed during the second half of the first quarter. Our business was on track entering the crisis, with comparable sales trends consistent with our previous guidance at the time of our fourth-quarter earnings release.”

Michelle Gass, CEO of Kohl’s

Incurs Loss in Q1

In one of the worst shows, Kohl’s reported a loss of $3.20 per share for the first quarter compared to profit last year, reflecting a 41% fall in revenues to $2.43 billion. Surprising the stakeholders, the bottom-line missed the estimates by a wide margin, while revenues topped the Street view. Obviously, there was no scope for comparable sales as the majority of the stores remained shut during the quarter.