Is Awful Good Enough for Kohl's?
After a surprisingly bullish reaction to harsh earnings, is there a trade to be made here?
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
These results certainly are not very good. In fact, they are quite awful. However, these results are better than what had been consensus view coming in and also much better than feared.
Kohl's Corporation KSS released the firm's fiscal first quarter results on Thursday morning. For the three-month period ended May 3, Kohl's posted a GAAP EPS of -$0.13 on revenue of $3.233 billion. Both of these numbers, awful as they are, beat Wall Street despite that top-line print reflecting a 4.4% year-over-year decline. Comp sales contracted 3.9% from the year-ago period. The stock is up a rough 6%, perhaps largely because Kohl's maintained its full-year guidance. Then again, the stock is well off of the highs of the day. Let's dig in.
Operations
As the firm was experiencing a 4.4% contraction in revenue to $3.049 billion, the cost of merchandise sold decreased 4.6% to $1.834 billion. This took the firm's gross margin up to 39.9% from 39.5%. Operating expenses dropped to $1.164 billion or 36% of total revenue, down from 36.3% of total revenue a year ago.
After accounting for depreciation, amortization, interest, other income and expenses and taxes, net income/loss improved from -$27 million to -$15 million. That works out to a GAAP EPS of -$0.13 per fully diluted share, up from the year ago comp of -$0.24.
The CEO
As readers likely know, Kohl's had to fire CEO Ashley Buchanan in April after an investigation had discovered that he had engaged in undisclosed conflicts of interest. Apparently, Buchanan had directed the company to enter into what were called "highly unusual" business deals with a company whose founder Buchanan had a personal relationship with. Michael Bender was named interim CEO at the time. The loss was not considered tremendously significant as Buchanan had only been on the job since January.
Interim CEO Michael Bender commented on the quarter in the press release:
“Our first quarter performance was ahead of our expectations and the actions we are taking are starting to make progress with early signs of a positive impact. Our team is focused and motivated to deliver great products, great value, and a great shopping experience to our customers. I want to thank our amazing team of associates for their hard work and dedication. I am excited to lead this next chapter of Kohl’s and build on the momentum we have begun to generate."
Fundamentals
For the quarter, Kohl's generated an operating cash flow of -$92 million. "Out of that number" the firm spent $110 million on capital expenditures leaving free cash flow of -$202 million. Despite the lack of positive cash flows, the firm paid shareholders $14 million in cash dividends.
Turning to the balance sheet, the firm has a cash position of $153 million, which is down 32.9% over 12 months. Inventories are up to $3.137 billion, taking current assets to $3.58 billion. Current liabilities are running at $3.28 billion, including $353 million in shorter-term debt and $545 million in borrowing under a revolving credit facility. While the current ratio of 1.09 is not truly terrible, the fact that the firm has to lean on revolving credit to meet its obligations is a red flag. No to mention the simple fact that the cash position of $153 million is up against debt of $898 million that will have to be refinanced somehow.
Total assets amount to $13.639 billion. There is no value entered for anything intangible. Total liabilities less equity comes to $9.86 billion, including $1.174 billion in long-term debt and $5.12 billion in both operating and financing leases. Kids, this balance sheet ain't pretty.
Guidance
For the full fiscal year, Kohl's is looking for net sales "growth" of -7% to -5%. Wall Street was looking for -4.3%. The firm sees profitability with a projected EPS of $0.10 to $0.60. At the midpoint, this is well below the $0.49 that Wall Street had in mind. Comp sales are seen at -6% to -4%. Wall Street had hoped for -4.6%.
While maintaining this guidance might be seen as a positive, this is still a business in decline and all of these metrics are less optimal than what Wall Street had in mind for the firm.
The Chart
After a long downtrend, KSS appears to have developed a cup or saucer pattern. Readers will see that the stock is well off the highs of the day, but that both relative strength and the daily MACD are postured more bullishly than one might have expected. Do I think Kohl's is invest-able? Not really. I would need to see actual improvement in execution under the interim CEO or whomever takes his place. The balance sheet is awful. Cash flows are a bonfire. The firm should not be paying a dividend.
Is the stock trade-able? Maybe. I would not dare initiate above the 50-day SMA though. This is not one to chase on a good day. This is one to buy speculatively on weakness, and not in size either.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
