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Kohl's (KSS) Hurt by High SG&A Costs, Product Cost Inflation

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·4-min read
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Kohl's Corporation KSS appears to be in troubled waters. The company has been grappling with high SG&A costs and freight and product cost inflation. These downsides weighed on the company’s first-quarter fiscal 2022 results, which prompted management to lower its guidance for the fiscal.

The Zacks Consensus Estimate for the current fiscal year earnings per share or EPS has gone down from $7.20 to $6.71 over the past seven days. Shares of this Zacks Rank #5 (Strong Sell) company have slumped 34.3% in the past three months compared with the industry’s decline of 22.5%.

Let’s delve deeper.

Kohl's Corporation Price, Consensus and EPS Surprise

Kohl's Corporation Price, Consensus and EPS Surprise
Kohl's Corporation Price, Consensus and EPS Surprise

Kohl's Corporation price-consensus-eps-surprise-chart | Kohl's Corporation Quote

High Costs – a Key Concern

Kohl's gross margin contracted from 39% to 38.3% in the first quarter of fiscal 2022, mainly due to escalated freight costs. Further, the company’s SG&A expenses have been rising year over year for the last few quarters now. In the first quarter, Kohl’s SG&A expenses rose 10.5% to $1,293 million due to investments in the company’s core strategic efforts, such as support associated with the Sephora store opening and refreshes, along with high wages and transportation costs. As a percentage of the total revenues, SG&A expenses expanded by 470 basis points (bps) to 34.8%. The company reported an operating income of $82 million, lower than the year-ago quarter’s figure of $273 million.

Management expects SG&A costs to remain high in mid-to-high single digits in the second quarter and increase in the low single digits for the full year. Management plans to invest another $40 million in its strategic growth initiatives. Apart from this, supply-chain hiccups remain a deterrent. The gross margin is likely to decline by 100-125 bps in the full year due to freight and product cost inflation.

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Zacks Investment Research


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A Look at Q1 & Ahead

In the first quarter of fiscal 2022, the top and bottom lines declined year over year and fell short of the Zacks Consensus Estimate. While the quarter began on a solid note, sales significantly weakened in April as the company faced tough comparisons with the year-ago period, which benefited from a stimulus. Also, an inflationary consumer landscape in the quarter under review hurt sales.

Kohl's posted adjusted earnings of 11 cents per share, which plunged 90% from the $1.05 reported in the year-ago period. The bottom line missed the Zacks Consensus Estimate of 75 cents. Total revenues came in at $3,715 million, down 4.4% from the prior-year quarter’s levels. The metric fell short of the Zacks Consensus Estimate of $3,854 million. Net sales dipped 5.2% in the quarter to $3,471 million. Comps also decreased by 5.2%.

Management lowered its guidance for full-year 2022 considering first-quarter results and macroeconomic landscape. Management does not expect many headwinds, including inflation, to subside in the near term. It now expects net sales growth of flat to 1%. The operating margin is likely to be 7-7.2%. Kohl’s envisions EPS in the range of $7.45-$7.85 (excluding non-recurring charges). The company posted an adjusted EPS of $7.33 in full-year 2021. Earlier, management expected net sales to grow 2-3%. The operating margin was anticipated at 7.2-7.5% and the EPS was guided in the range of $7.00-$7.50 (excluding non-recurring charges).

3 Retail Stocks to Bet on

Here are three better-ranked stocks – Dillard's, Inc. DDS, The Kroger Co. KR and Abercrombie & Fitch Co. ANF.

Dillard's, which operates retail department stores, sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 224.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Dillard's current financial-year sales suggests growth of 6.1% from the year-ago period. DDS has an expected EPS growth rate of 14.6% for three to five years.

Kroger, a renowned supermarket company, carries a Zacks Rank #2 (Buy). The company has an expected EPS growth rate of 9.9% for three to five years.

The Zacks Consensus Estimate for Kroger’s current financial-year sales suggests growth of 3.2% from the year-ago period. KR has a trailing four-quarter earnings surprise of 22.1%, on average.

Abercrombie & Fitch, a specialty retailer, holds a Zacks Rank #2. Abercrombie & Fitch has a trailing four-quarter earnings surprise of 103.5%, on average.

The Zacks Consensus Estimate for ANF’s current financial-year sales suggests growth of 3.7% from the year-ago period.


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