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Another Case of So Bad, They’re Good: Kohl’s Earnings

Another Case of So Bad, They're Good: Kohl's Earnings

Kohl’s Corporation (NYSE:KSS) reported a dismal Q4 2022 earnings report, missing top and bottom lines and decreasing its full-year 2023 expectations. Kohl’s missed practically every metric, with shares initially falling in the post-market but rebounding the next day, perplexing investors.

Because the market is always looking ahead, stocks tend to fall even if a business meets its current quarter profits projections if it cautions and cuts guidance. In this situation, Kohl’s far exceeded its current quarterly projections and cut its full-year 2023 top and bottom line guidance. This is usually a recipe for a disastrous sell-off. Is it possible for wages to be so low that they appear to be high? Yes. This quarter marks the end of Michelle Gass’ four-year tenure as CEO. From 2008 through 2018, she was succeeded as CEO by Tom Kingsbury, formerly of Burlington Stores Inc. (NASDAQ:BURL).

From Pandemic Superstar to Cautionary Story

Former CEO Michelle Cass had the insight to push Kohl’s substantially into athleisure and casual apparel accommodating homebodies when the country went into lockdown mode during the pandemic. As stay-at-home workers replaced professional clothing with comfortable wear, she boosted brands like Under Armour, Inc. (NYSE:UAA) and Champion. This helped propel Kohl’s stock into the $60s. As many as 25 suitors were said to have approached the company, ranging from Sycamore Partners to the Franchise Group, Inc. (NYSE:FRG).

Trying Far Too Hard To Get

While the corporation was on a roll, it played hardball. Regrettably, as workers returned to the workplace, Kohl’s went all in on casual wear, moving expenditure back to office and formal dress. Kohl’s totally missed out. Consumers cut back on discretionary purchases such as clothing when inflationary pressures reached 40-year highs in 2022.

Kohl’s main demographic of middle-to-low-income people were hurt the most. Kohl’s inventory grew as a result of the blunder. As the stock market plummeted, suitors stepped away, leaving disgruntled shareholders holding the bag. As Kohl’s presented a dismal Q2 2022 earnings report, The Franchise Group reduced its offer from $60 to $53.

Ancora Holdings, an activist investor, had had enough and pressed the Board of Directors to dismiss CEO Michelle Gass. As customers returned to the office and engagements, Gass was too sluggish to respond to the reopening. Michelle Gass, Kohl’s CEO and board member for four years, resigned on December 2, 2022, during the holiday season.

Within 18 months, she left Kohl’s to become CEO and board member of Levi Strauss & Co. (NASDAQ:LEVI), replacing Chip Bergh. Tom Kingsbury was appointed as the company’s new CEO, and optimism for a brighter future has boosted the stock since his appointment.

The Unpleasant Reality

Kohl’s revealed their fiscal fourth-quarter 2023 results for December 2022 on March 1, 2023. The company posted an adjusted EPS loss of ($2.46) excluding non-recurring items versus consensus analyst projections of $0.97, falling short by ($3.46). Revenues decreased (7.2%) year on year (YOY) to $5.78 billion, falling short of expert expectations of $6.03 billion by ($220.3 million). Gross margins declined (1,016 basis points) to 23% of net sales, owing to 750 basis points in clearance markdowns and a 200 basis point cost inflation impact.

Operational losses were ($302 million), compared to a profit of $450 million the previous year. Inventories increased 4% year on year at $3.2 billion. The corporation paid off $164 million in debt, including bonds due to mature in February 2023, and plans to pay off another $111 million in December 2023.

Full-Year 2023 Guidance Reduced

Kohl’s reduced its full-year 2023 earnings per share estimate from $3.20 to $2.10. Full-year sales are estimated to range between $16.51 billion and $16.86 billion, compared to the analyst average of $17.66 billion.

Turning the Page

With a quarter that was a complete disaster, the good news is that the worst may be behind us. On the earnings release, CEO Tom Kingsley reassured investors. “Our attempts to drive the business are well beginning,” he said. “We are refining our approach and re-establishing merchandise disciplines throughout the business with a customer-centric focus. I am optimistic that our efforts will result in greater and more consistent long-term sales and earnings performance.

Kohl’s initiatives to improve include opening 250 more Sephora stores within stores and launching a co-branded credit card with Capital One Financial Inc. (NYSE:COF). Inventory level growth has slowed from 48% YoY in Q2 2022 to 34% in Q3 2022 and 4% in Q4 2022. Kingsbury stated that it will support its clients’ return to normal wardrobe shopping behavior by extending women’s dress business wear and adding more career clothing.

Is it a good buy?

Kohl’s real estate assets range from $7 billion to $7.9 billion. Kohl’s operates over 1,150 stores and owns the real estate for 400 of them. Only half of the company’s properties have a market valuation of $3.3 billion. It also pays a dividend of 7.18% and trades at 11.5X forward earnings with a 17% short interest. With its appealing valuation and real estate holdings worth double its market cap, the substantial short interest might trigger a short squeeze. Kohl’s terrible Q4 2022 earnings could be a blessing in disguise for bargain investors.

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