KSS are tumbling on Tuesday, with the stock down 25.1%, after dropping as much as 27.4% earlier in the day. The sharp decline follows a broader market downturn, as the S&P 500 slips 0.4% and the Nasdaq Composite dips 0.2%.
Earning Overview
The department store chain posted lackluster fourth-quarter results, reporting a 9.4% decline in revenue and a 6.7% drop in same-store sales year over year (YOY). Earnings per share (EPS) came in at $0.95—down significantly from $1.67 in the prior-year period—though it still surpassed Wall Street's estimate of $0.75. For the full year 2025, the company forecasts net sales will decline by 5% to 7%, with diluted earnings per share expected to range from 10 cents to 60 cents. Analysts had projected a slight sales increase of 0.2% year-over-year, with earnings expected to be around $1.22 per share.
Kohl's ongoing struggles have resulted in a staggering 65% loss in market value over the past year. The company’s market cap now hovers just above $1 billion, a far cry from the $9 billion acquisition offers it received in 2022.
Fundamental Analysis
Stock Decline: Kohl's stock has fallen by 65% over the past year, as investors have grown increasingly concerned about its future performance. As of now, its market capitalization hovers around $1 billion, down from a peak of about $9 billion in 2022, when the company received acquisition interest. Recent Volatility: The stock is subject to large swings in price, reflecting investor uncertainty about Kohl's ability to reverse its declining trends.
Sephora Shops Success: One of the few bright spots for Kohl's is its partnership with Sephora, with 1,000 Sephora shops within Kohl’s stores contributing $1.8 billion in sales last year. This is a key part of the company’s efforts to reimagine its in-store experience.
Leadership Change: CEO Ashley Buchanan, who took over in January 2023, has outlined plans to improve the store’s atmosphere, product assortment, and store renovations. However, analysts believe it may take time before these efforts yield meaningful results.
Guidance
Looking ahead, Kohl's provided a grim forecast for 2025. The retailer expects same-store sales to decline between 4% and 6%, a much steeper drop than the anticipated 0.55% decrease. Additionally, the company's EPS projection of $0.10 to $0.60 falls well below Wall Street’s expectation of $1.24.
In response to its struggles, Kohl’s CEO announced plans to cut about 10% of the corporate workforce and close 27 stores by April. However, given the company’s ongoing challenges, a meaningful turnaround seems unlikely in the near term.
Free Cash Flow
Declining Free Cash Flow: Given the declines in revenue and profitability, Kohl’s free cash flow has been under pressure. The reduction in dividends and relatively high capital expenditures on renovations and the Sephora partnership may place additional strain on the company’s FCF.
FCF Sustainability: If the retailer’s operational performance continues to lag, the sustainability of free cash flow could become a concern, especially given its heavy reliance on external financing for investments and store improvements.
Cash on Hand: Kohl’s has maintained a relatively healthy cash position, though this has been impacted by weaker sales and investments in growth initiatives. The company’s ability to manage liquidity effectively will be key to navigating future challenges.
Liquidity Management: Kohl’s liquidity management will continue to be crucial in managing short-term obligations, especially as it faces declining sales and an uncertain outlook for 2025.
Dividend
CEO Ashley Buchanan highlighted that the company’s priorities for the coming year include improving the in-store experience, value proposition, and product offerings. This marks the first effort toward a turnaround under Buchanan’s leadership, who took on the role in January.
However, analysts believe it will take time before these efforts begin to benefit shareholders.
“New leadership will aim to stabilize the business after several years of volatility, but the timeline for a turnaround with improved profitability remains uncertain, especially in the face of a challenging macro environment,” said Dana Telsey, CEO of Telsey Advisory Group, who rates the stock as Market Perform.
The board of directors declared a quarterly cash dividend of 12.5 cents per share, down from the previous dividend of 50 cents. The dividend will be paid on April 2 to shareholders of record as of March 21.
Risks and Challenges
Debt: Kohl's has relied on debt issuance in past years to bolster liquidity. This raises concerns about its debt levels and the company’s ability to service that debt if business performance continues to deteriorate.
Loss of Market Share: Kohl’s faces intense competition from major retailers like Target, Amazon, and Walmart, especially in its core product categories. Its failure to adapt quickly to changes in consumer shopping behavior, such as the growing importance of beauty sections and strong national brand partnerships, has put it at a disadvantage.
Once-popular in-house brands have lost ground to competitors like Target, which introduced its own successful discount brands. Kohl's also lagged behind in the beauty segment, which has become crucial in attracting shoppers to department stores. It only recently began addressing this by opening Sephora stores within its locations.
During Tuesday’s earnings call, CEO Ashley Buchanan acknowledged that the store atmosphere is lacking and that the product selection is limited. The company’s failure to invest in store renovations has left its locations with an outdated appearance. Additionally, its sparse inventory makes it vulnerable to shoppers who have plenty of other options, including major national brands like Nike, Under Armour, and Levi’s, which are available at other retailers.
Former CEO Michelle Gass, who left in 2022 to lead Levi Strauss, placed a big bet on store-branded activewear and jewelry, but this strategy has not paid off. While Buchanan didn’t provide specifics on how he plans to handle this investment, he acknowledged its potential drawbacks.
“While the intention of this strategy to engage a new customer has been important, it has also caused friction with our core customer,” Buchanan said.
However, Buchanan made it clear that he wants to build on the success of Sephora at Kohl's, one of the bright spots during Gass's tenure. There are now 1,000 Sephora locations inside Kohl's stores, and these “shop-in-shops” generated $1.8 billion in sales last year.
Kohl’s now finds itself at a crossroads. Buchanan needs to reinvent the brand and clearly communicate to shoppers why they should choose Kohl's over competitors like Target, Amazon, or Walmart. Failing to do so could lead to a decline similar to the one experienced by J.C. Penney and Sears a decade ago.
“What Kohl’s desperately needs to do is create a more compelling proposition that is properly targeted at its core shoppers,” said Neil Saunders, managing director of GlobalData. “However, it seems to have lost the ability to do this and has become a confusing, muddled retailer.”
Valuation
The broader economic environment also contributes to the negative sentiment. With inflation concerns, changing consumer spending habits, and supply chain challenges, retailers like Kohl’s are under pressure. The uncertain macroeconomic landscape has heightened risks for the company’s future performance.
Market sentiment
Analysts are generally cautious about Kohl’s future. While some see potential in its new strategies, many remain concerned about the company’s ability to regain lost ground, especially in a challenging macroeconomic environment.
The 2025 forecast issued by Kohl’s is also weak, with the company projecting a 5%-7% decline in net sales and an EPS range of $0.10 to $0.60, well below analyst expectations of $1.22. This outlook reinforces negative sentiment, as investors are concerned that the company’s struggles will continue into the foreseeable future.
The company announced a cut in its dividend from 50 cents to 12.5 cents per share, which is viewed as a sign of financial distress. This decision is often seen negatively by investors who rely on dividends as a source of income, further contributing to pessimism around the stock.
Conclusion
Overall, the market toward Kohl’s stock is largely negative, driven by weak financial performance, an uncertain future outlook, and concerns over competition. While there is potential for recovery through strategic changes, many investors and analysts are adopting a cautious stance, reflecting the belief that a significant turnaround will take time.
Kohl's cash flow is under pressure, primarily due to declining revenue and profitability. The company is focusing on investments to revitalize its business, but its ability to maintain strong operating and free cash flow is uncertain in the current environment. The reduced dividend and focus on conserving cash indicate that the company is taking a cautious approach to its financial situation, though the sustainability of its cash flow will depend heavily on its success in turning around its operations and improving profitability in the near future.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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