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Strategic Framework Aids Kohl's (KSS), Rising Inflation Ails

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Strength in omni-channel capabilities and strategic efforts are favoring Kohl’s Corporation (KSS - Free Report) . The leading omni-channel retailer’s focus on prudent partnerships is yielding. However, the company is battling rising inflationary pressure, which marred its third-quarter fiscal 2022 performance.

Let’s delve deeper.

Growth Efforts on Track

Kohl’s is benefiting from its strategic framework introduced in October 2020. The strategic plan focuses on four key areas — driving top-line growth, expanding operating margin, implementing disciplined capital management and undertaking an agile, accountable and inclusive culture. Under its driving top-line growth initiative, the company intends to become the most trusted retailer of choice for the active and casual lifestyle. Management is accelerating growth across the Active and Casual categories.

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In its last earnings call, management highlighted that its outdoor business continues to outperform with growth from Eddie Bauer and Land’s End. The company expects to reignite growth in the women’s business and build a significant size beauty business. This is likely to be aided by the alliance with Sephora. The company’s core women’s business outpaced Kohl’s average during the third quarter of fiscal 2022. Kohl's strives to elevate and modernize customer experience, refresh stores and lunch innovation zones.

Kohl’s is focused on growing its store portfolio and accelerating digital business growth. Given the need of the hour, management has been speeding up its digital marketing and enhancing its website to cater to customers’ needs. The company is on track to amplify its value messaging via a holiday brand campaign. Management is counting on its Kohl’s Cash and Kohl’s Rewards programs across key promotional events to provide value purchases to its customer during the holiday season.

To improve online offerings, Kohl’s has been expanding its e-commerce fulfillment centers and strengthening in-store pickups. The company’s Buy Online, Pickup In Store; Buy Online Ship to Store; curbside pickup and Amazon’s (AMZN - Free Report) Amazon returns initiatives are noteworthy. In the fiscal third quarter, digital contributed 29% to total sales. Although digital sales fell 8% year over year in the quarter, the same rose almost 20% from 2019’s level.

Strategic Partnerships Hold Promise

Kohl’s strengthened its ties with retail giant Amazon to drive traffic. The company has been benefiting from the rollout of its Amazon returns program nationwide. According to this program, Kohl’s stores accept free, unpackaged and easy returns for customers of Amazon. One of the prime objectives of this program is to convert more customers into loyal Kohl’s shoppers.

The Zacks Rank #3 (Hold) company's solid partnership with Sephora to create a new era of elevated Beauty at Kohl's is noteworthy and is generating impressive results. In its fiscal third-quarter earnings call, management highlighted that it continues to witness mid-to-high-single-digit percent sales growth across stores with Sephora compared with the balance of the chain. The company is optimistic about its partnership with Sephora and expects to aid in building Kohl’s to $2 billion in sales. Management expects to open 250 additional Sephora at Kohl’s shops in 2023, bringing the total to 850.

Hurdles on the Way

Kohl’s posted soft third-quarter fiscal 2022 results, with the top and the bottom line declining year over year and the former falling short of the Zacks Consensus Estimate. The company continued to witness a tough macroeconomic environment in the quarter. Rising inflationary pressure continued to hamper consumer spending and the business owing to exposure to discretionary categories, namely apparel and home goods. In the fiscal third quarter, management saw middle-income customers buy lesser products per trip and switch to value-oriented private brands.

The company’s quarterly gross margin contracted 263 basis points (bps) to 37.3%. The downside can be attributed to the persistent rise in freight costs, which hampered the margin by 150 bps and product cost inflation, which was a 50 bps headwind.  In addition, Kohl’s SG&A expenses have been rising for the last few quarters now. In the fiscal third quarter, SG&A expenses, as a percentage of total revenues, expanded 120 bps to 31.2%.

All said, let’s see if the aforementioned upsides can help Kohl’s stay afloat amid such hurdles

Shares of Kohl’s have dropped 8.5% in the past three months against the industry’s growth of 14.5%.

Eye These Solid Retail Picks

We have highlighted three better-ranked stocks, Dillard's, Inc. (DDS - Free Report) and Ross Stores (ROST - Free Report) .

Dillard's, a retail department store operator, currently sports a Zacks Rank #1 (Strong Buy). DDS has a trailing four-quarter earnings surprise of almost 144.2%, 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 and earnings per share (EPS) suggests growth of 6.2% and 4.5%, respectively, from the year-ago period’s tally.

Ross Stores, an off-price retailer of apparel and home accessories in the United States, currently sports a Zacks Rank #1. ROST has an expected EPS growth rate of 10.5% for three to five years.

The Zacks Consensus Estimate for Ross Stores’ current-year sales and EPS suggests declines of 1.6% and 11.7%, respectively, from the year-ago period’s reported figures. ROST has a trailing four-quarter earnings surprise of 10.5%, on average.

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