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Solid Comps Aid Kohl's to Grow 54% in a Year Amid Hurdles

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Kohl's Corporation (KSS - Free Report) is riding on solid inventory management efforts, expanding e-commerce operations and a strong brand portfolio. In fact, this renowned discount retailer’s well-chalked efforts to draw shoppers and improve sales have been consistently driving comparable store sales (comps) growth.

In fact,  the company’s stellar comps show combined with management’s raised outlook for fiscal 2018 is fueling investors’ optimism, evident from the stock’s surge of 53.5% in the past year compared with the industry’s rise of around 39%.

However, persistent increase in SG&A expenses is a worry. Let’s take a closer look at the aspects that are impacting the performance of this Zacks Rank #3 (Hold) company.

Efforts to Boost Sales & Margin Bodes Well

Kohl's is progressing well with efforts to achieve cleaner inventory levels. Impressively, the company has managed to deliver per store inventory reductions for 11 straight quarters. This in turn, is fueling gross margin performance as sustained inventory management efforts are aiding lower promotional markdowns.

Further, the company’s e-commerce operations are steadily expanding over the last few years. Markedly, digital sales witnessed a mid-teen increase during the third quarter of fiscal 2018, with more than 70% of digital traffic coming from mobile sales. Moreover, to improve online offerings, Kohl’s has been expanding e-commerce fulfillment centers. Additionally, it focuses on strengthening in-store pickups. In this regard, the company launched Buy-Online-Ship-to-Store (or BOSS) in July, which is being rolled out to more stores. Other efforts to bolster digital sales include Smart Cart, BOPIS, Your Price and personalized search.

To top these, Kohl’s gains from a solid portfolio that includes brands such as Levi’s, Columbia Sportswear (COLM - Free Report) , Reebok, Champion and KitchenAid. Exclusive brands such as Simply Vera by designer Vera Wang and Chaps by Polo Ralph Lauren have drawn customers to Kohl's stores. Moreover, in the active category, brands like Adidas, Under Armour and Nike (NKE - Free Report) have been doing well. Also, the company regularly introduces new brands to keep the inventory assortment fresh. Incidentally, the company launched a fresh apparel collection — POPSUGAR at Kohl’s — in September. Further, it plans to launch the iconic Nine West brand in 2019.

Moreover, to attract more customers, Kohl’s is strengthening ties with retail giant Amazon (AMZN - Free Report) . The company started accepting returns for Amazon customers on select products and it will also provide free packing and shipping services for the merchandise. This move followed Kohl's decision to sell Amazon devices, accessories and smart home devices in selected stores.

Such efforts to attract shoppers are yielding, evident from the company’s sturdy comps trend. Markedly, Kohl’s is delivering positive comps for five straight quarters. Comps in the third quarter rose 2.5%, on the back of strength in store and digital channels, while proprietary and national brands also displayed sturdy performances.

Can Efforts Counter Hurdles?

Kohl’s is experiencing rising selling, general and administrative (SG&A) expenses. SG&A expenses increased almost 2.6% during the third quarter of fiscal 2018. This was preceded by increases of 4% and 3.7% during the second and the first quarters, respectively. For this fiscal, management expects SG&A expenses to increase at the higher end of 1-2%. Surging SG&A expenses may affect the company’s profitability, unless cushioned by adequate revenues and gross profit growth.

Additionally, the risk of losing foot-traffic in brick-and-mortar stores, thanks to consumers’ shift toward online shopping, poses significant risks. Further, competition from other discount retailers is a viable threat.

Nevertheless, we expect Kohl’s robust revenue-driving initiatives to counter these headwinds and help the company sustain the robust momentum.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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