Despite a tough macroeconomic environment, some retailers in the retail/wholesale sector are thriving in the sweet spot intersection of "off-price” boulevard and “trade down” street. Consumers are flocking to retailers embracing either or both of these trends, like TJX Companies Inc. (NYSE: TJX) and Ross Stores Inc. (NASDAQ: ROST). However, some discount retailers can't seem to get out of their way, instead spinning their wheels and digging themselves into a deeper hole. Kohl’s Co. (NYSE: KSS) falls into the latter category. Their recent third-quarter 2024 earnings report painted a gloomy picture as investors can only hope it was a kitchen sink quarter to help transition for another incoming CEO. Current CEO Tom Kingsbury is vacating the position after two years.
Ashley Buchanan is the former CEO of Michaels Companies, a large chain of arts and crafts superstores owned by private equity giant Apollo Global Management Inc. (NYSE: APO). Prior to that, Buchanan was a 13-year veteran of Walmart Inc. (NYSE: WMT) in the Sam’s Club division.
KSS shares have fallen to levels not seen since the 2020 pandemic lows again and 1997 before that.
Investors Hope This Was a Kitchen Sink Quarter
Kohl’s reported third-quarter 2024 EPS of 20 cents, missing analyst estimates of 28 cents by 8 cents. Net income was $22 million, down from $59 million in the year-ago period. Revenues fell 8.5% YoY to $3.71 billion, beating consensus estimates for $3.64 billion. Gross margin improved 20 bps to 39.1%. Operating income fell to $98 million, down from $157 million in the year-ago period. Inventory continues to fall 3% YoY to $4.1 billion. Operating cash flow was $195 million.
Outgoing CEO Tom Kingsbury set the tone: “We are not satisfied with our performance in 2024 and are taking aggressive action to reverse the sales declines. We must execute at a higher level and ensure we are putting the customer first in everything we do. We are approaching our financial outlook for the year more conservatively given the third quarter underperformance and our expectation for a highly competitive holiday season.”
Holiday Shopping Season: Forecast Calls For a Lump of Coal
Kohl's lowered its full-year 2024 forecast. The company sees EPS of $1.20 to $1.50 versus $1.81.
Full-year 2024 revenue is expected to fall 7% to 8%, down to $15.26 billion to $15.68 billion versus $15.68 billion consensus estimates.
Comp sales are expected to decrease between 6% and 7% YoY. Operating margin is expected between 3% and 3.2%. Capex is expected around $500 million.
The bar is being set low for the new incoming CEO.
The Silver Lining: 7 Key Factors to Remember
While the earnings report and guidance were gloomy, it’s not all doom and gloom. There is always hope that the new CEO coming over from Michael’s with a Walmart pedigree can turn things around. Here are seven critical factors to consider if buying the stock.
- The lowered EPS and revenue guidance set the bar low for easier comparable sales (comps) so that any uptick in its holiday sales can improve the sentiment and prop up the stock in its next earnings release.
- The company is still profitable despite shrinking revenue and margins from promotions.
- Kohl’s pays a generous 13.3% annual dividend yield.
- Most importantly, for value investors, Kohl's still owns an estimated $8 billion in real estate. Compare that to the $1.67 billion market capitalization; you are getting the business and most of the real estate for free.
- Tax-loss selling is undeniable as shares are trading down 47.8% year-to-date (YTD) as of Nov. 29, 2024. This means pain during the tax loss selling period in December but a potential rebound in January as sellers jump back into the stock after the 30-day wash rule.
- Buyout prospects rise as shares continue to fall. Remember, they had buyout offers of around $60 per share in 2021, but management turned them down.
- Kohl's stock has a whopping 34.8% short interest. Any good news or rumors of a takeover are equivalent to lighting a match in a kerosene-soaked warehouse, triggering a short squeeze.
These seven factors make the stock worth considering, especially as shares continue descending to lower price levels not seen in decades (prior to 2020).
KSS Stock Triggers a Weekly Descending Triangle Breakout
A descending triangle is a bearish chart pattern comprised of a descending upper trendline representing lower highs on bounces converging with a flat-bottom lower horizontal trendline representing a firm support at the apex point. The breakdown occurs when the stock collapses beneath the lower trendline support. A breakout can also be triggered if the stock surges through the upper trendline resistance.
KSS commenced the weekly descending trendline at the $29.65 swing high, converging with the flat-bottom horizontal lower trendline at $17.89, which formed a triple bottom. However, its ugly Q3 earnings results triggered the breakdown through the lower trendline, causing shares to fall 12% to the $14.70 Fib support level. The weekly anchored VWAP resistance is at $22.39. The weekly RSI fell to the 20-band. Fibonacci (Fib) pullback support levels are at $14.30, $12.39, $10.53, and $9.68.
KSS’s average consensus price target is $17.22, implying a 15.04% upside and its highest analyst price target is $25.00. It has one analyst's Buy rating, six Hold Ratings, and three Sell Ratings. The stock has a 34.8% short interest.
Actionable Options Strategies: Bullish investors can consider using cash-secured puts at the Fib pullback support levels to buy the dip. If assigned the shares, writing covered calls at upside Fib levels executes a wheel strategy for income on top of the hefty 13.4% annual dividend rate.
