Kohl's Earnings Impress But Only This Leadership Decision Will Make it Investible

Standalone chain department store Kohl's KSS may not trade under $10, but the firm sure is a small cap. 

The beleaguered retailer went to the tape on Wednesday morning with the firm's fiscal second quarter financial results. The stock gave up 6.5% on Tuesday ahead of the event. The stock is up significantly more than that on Wednesday morning and sales are still contracting. 

That said, the business is executing at a higher level. Profitability landed at levels better than expected and the firm was able to raise guidance. Better than feared? Yes, for those long Kohl's, the stock on Wednesday morning is in much better shape than feared.

The Quarter

For the three-month period ended August 2, Kohl's posted an adjusted EPS of $0.56 (GAAP $1.37) on revenue of $3.546 billion. While the top-line print was only good for annual "growth" of -5%, the number also fell short of consensus. However, both the GAAP and adjusted bottom-line prints absolutely crushed the $0.30 or so that Wall Street was looking for either way. 

The huge gap between the firm's GAAP and adjusted earnings was largely created by a $129 million gain made due to a legal settlement. Net sales decreased 5.1% and comp sales decreased by 4.2%. That may sound lousy, but was considerably better than the -4.6% to -4.7% in comp sales that Wall Street had priced in.

Operations

As sales contracted 5% to $3.546 billion, the cost of merchandise contracted 5.5% to $2.011 billion. This took the firm's gross margin up to 39.9% from 39.6%. Normal operating expenses dropped 4.1% to $1.199 billion. After the $129 million gain on the credit card related legal settlement in the firm's favor, operating income increased 68.1% to $279 million. Once adjusted to exclude that settlements and allow for some other smaller adjustments, operating income would have printed at $221 million, up 5.7% from the year-ago comp.

After accounting for interest, other income and expenses and taxes, GAAP net income hit the tape at $153 million, up from $66 million for the year-ago period. This worked out to a GAAP EPS of $1.35, up from $0.59 a year ago. Adjusted, EPS crossed the tape at $0.56, down from last year's $0.59, but much better than expected.

Guidance

For the full fiscal year, Kohl's is now projecting net sales "growth" of -6% to -5% and an adjusted EPS of $0.50 to $0.80. This pulls the midpoint of that range above the $0.63 that Wall Street was looking for. The firm sees full-year comp sales growth of -5% to -$4%, improving upon prior guidance of -6% to -4%. This also pulls the midpoint of the range below the -4.6% that Wall Street had in mind. Operating margin is seen at 2.5% to 2.7%, while capex spending is seen at a rough $400 million.

Fundamentals

For the first six months of the fiscal year, Kohl's generated operating cash flow of $506 million (up from $247 million). Out of that has come $200 million (down from $239 million) in capex spending, leaving free cash flow of $306 million (up from $8 million). Out of this number, the firm paid out $28 million in cash dividends to shareholders and paid down some debt.

Glancing at the balance sheet, Kohl's ended the period with a cash balance of $174 million and inventories of $2.994 billion. That put current assets at $3.474 billion. Current liabilities add up to $2.548 billion, including just $75 million borrowed through a revolving credit facility, down from $410 million. This left the firm's current ratio at a more than acceptable 1.36. This is a dramatic improvement from 1.08 over a 12-month period.

Total assets amount to $13.391 billion, which is mostly property. Total liabilities less equity comes to $9.464 billion. This does include $1.52 billion in long-term debt. While that's not very pretty relative to cash, it is clear that management is making a disciplined effort to improve this balance sheet.

The Interim CEO

Yes, "interim." 

Interim CEO Michael Bender commented in the press release: “Kohl’s second quarter performance is a testament to the progress we are making against our 2025 initiatives. This resulted in sales performance that came in ahead of our expectations. While it is clear that these initiatives are beginning to resonate with our customers, our team remains focused on delivering progressive improvement throughout the remainder of the year against a challenging economic backdrop. In addition to our top line progress, we managed the business with great discipline in the quarter. We were able to expand our gross margins, reduce our inventory, and lower our expenses, leading to solid second quarter earnings. I continue to be impressed with our entire team at Kohl’s and am thankful for all their hard work.”

My Thoughts

After a long list of misfits that nearly ran this stock and company into the ground, this guy Bender is the first leader at this firm to actually oversee an improvement in profitability and balance sheet discipline at the same time, all while sales continue to slow. 

There is every reason to invest in this stock if the word "interim" is removed from Bender's title. Should the firm go and hire another chief executive from the produce aisle of the local grocery store, then forget it. ​

Disregard what happened on July 22. That was a short squeeze. ​By the way, 44% of the entire float is still held in short positions at last count so there is some potential for another one of those on Wednesday. In other words, maybe I want to get this name long, but maybe I don't want to do that today. The stock has another chance to break out of its uptrend on Tuesday morning, as it did back in July, but if these are short coverings, the stock will revert back towards the central trendline of this regression model and/or the 21-day EMA.

So, briefly, Kohl's with this CEO in place, is worthy of investment. It is not investable with anyone else at the helm and it is certainly not worthy of being chased. Let the shorts run out of ammo first. Rock on.

At the time of publication, Guilfoyle had no positions in any securities mentioned.