Kohl’s Corp. (KSS) shares experienced a sharp decline in premarket trading following the release of its underwhelming third-quarter earnings report. The department store chain’s performance fell short of analyst expectations across several key metrics, prompting concerns about its future trajectory and leading to a significant downward revision of its full-year outlook.
The company reported a net sales decrease of 8.8% year-over-year (YoY) to $3.507 billion, significantly missing the consensus estimate of $3.638 billion. Comparable sales mirrored this trend, declining by 9.3% YoY. While total revenue reached $3.710 billion, the underlying weakness in sales was a clear cause for concern. Gross margin did expand by 20 basis points to 39.1%, offering a small positive amidst the overall negative performance.
Profitability metrics also showed signs of strain. Operating income dropped to $98 million, a considerable decrease from $157 million in the same period last year. This translated to a 120 basis point year-over-year contraction in operating margin, settling at 2.7%. Although selling, general, and administrative (SG&A) expenses decreased by 5.1% YoY to $1.3 billion, the SG&A margin increased by 125 basis points to 34.8%, highlighting challenges in cost management despite the expense reduction. Earnings per share (EPS) landed at 20 cents, falling short of the analyst consensus estimate of 28 cents.
Inventory levels, while down 3% YoY to $4.1 billion, may still reflect challenges in managing stock to meet demand. The company held $174 million in cash and equivalents as of November 2nd, but operating cash flow showed a net use of $195 million, signaling potential financial pressures.
A further blow came with the announcement of CEO Tom Kingsbury’s resignation, effective January 15, 2025. While he will transition to an advisory role and remain on the board until his retirement in May 2025, the leadership change adds uncertainty during a period of already significant challenges. Ashley Buchanan has been appointed as the new CEO, effective January 15, 2025.
The revised outlook for fiscal year 2024 paints a bleak picture. Kohl’s lowered its EPS projection to $1.20 – $1.50, a substantial drop from the previous estimate of $1.75 – $2.25, and significantly below the Street’s expectation of $1.80. The company anticipates a sales decline of 7% – 8%, a worsening of the previous forecast of a 4% – 6% decline. This translates to a projected comparable sales decline of 6% to 7%, compared to the previous estimate of 3% to 5%. Operating margin is now projected to be 3.0% to 3.2%, down from the previous forecast of 3.4% to 3.8%. Capital expenditures are expected to remain around $500 million, focused on expanding the Sephora partnership and other store investments.
CEO Kingsbury attributed the disappointing results to softness in apparel and footwear sales, despite strong performance in key growth areas like Sephora, home decor, gifting, and impulse purchases, and the recent introduction of Babies “R” Us shops within 200 of its stores. He acknowledged the need for aggressive action to reverse the declining sales trend and a more conservative approach to financial projections given the competitive holiday season.
Investors seeking exposure to Kohl’s can do so through ETFs such as the WBI Power Factor High Dividend ETF (WBIY) and the Invesco S&P SmallCap Value with Momentum ETF (XSVM). However, given the significant premarket drop of 175% to $15.23, investors should proceed with caution. The company faces significant headwinds and needs to demonstrate a clear path to recovery to regain investor confidence.
