Kohl's (KSS) could be a contrarian buying opportunity on Tuesday as the stock sells off mainly on macroeconomic concerns and a slowdown in same store sales.
With the back to school season in swing, weather issues rolling off, and management focused on tariff mitigation, the sharp decline in shares on Tuesday could be a key point to pull the trigger for more optimistic investors.
Why the Shock to Shares?
For investors looking at the headline profit beat, the share reaction on Tuesday may initially seem quizzical. The devil here is in the details.
Shares of the strip-mall retailer are tanking after reporting earnings on Tuesday, as problems in the print are compounded by cautious management commentary on tariff pressures ahead.
While CFO Bruce Besanko noted that tariffs are embedded into guidance and the company has indeed worked to reduce exposure to China, concerns remain on the company's ability to navigate the "fluid situation" at its smaller scale. Additionally, the company could not question the impacts it has already felt from even smaller scale trade tamps.
"We recognize there are uncertainties in the market given the impending tariff on apparel and footwear," CEO Michelle Gass acknowledged. "We know that our customers are driven by our value proposition, so we will ensure that our customers continue to receive the value they expect from Kohl's."
The issue with that commentary is that it implies a further impact on margins, which have already shown shrinking figures in recent quarterly reports.
Adding to that was the slowdown in same store sales that raised concerns on consumer behavior as spending remains strong.
Comparable sales fell nearly 3% in the quarter, missing analyst estimates that anticipated a 2.4% drop, and marking the second straight quarter of sharp declines.
Still, management has noted that many of these negative themes are passing problems and promoted the narrative that a few key catalysts can return the stock to gains.
"Comparable sales declined 2.9%, which was negatively impacted by weather. Unseasonably cool and wet weather beginning in May and persisting well into June suppressed demand for our spring seasonal goods, which are important trip driver for Kohl's customers during this time of year," Besanko explained. "Comparable sales progressively improved during the quarter driven by a significant rebound in spring seasonal demand."
Heading into the "Back to School" sales season, Besanko anticipated a quick pickup in comparable sales that should shift sentiment on the stock.
He added that digital sales are improving strongly, accelerating double digits. The key added factor on that end being that most orders are fulfilled in store. Coupled with the much touted Amazon (AMZN) returns program, the online aspect of the business should buoy store traffic and thus same store sales.
While the digital program requires significant investment, the trend in retail more broadly suggests it is a necessary step to growth, a growth that Kohl's is clearly recognizing.
Likewise, the share reaction to the tariff commentary could have been overdone, according to analysts that still see the stock story as firmly on track to turnaround.
"We view Kohl's as a compelling story and see opportunity on the horizon for improvement in key categories including private label, active, women's, beauty, and inventory management, Wedbush analyst Jen Redding advised clients. "Longer term, we favor the name on a macro basis and continue to see shares of US-focused retailers as good options in a year of a strong dollar, as bright US prospects fuel domestic spending in discretionary, and shares attract overseas investors seeking high dollar-denominated returns. "
Despite being sidelined as those catalysts approach, Redding raised her third quarter estimates, contrasting her look-ahead sharply with what the market is moving toward judging by the share reaction on the day.
"If it gets to $46 you should buy it," Action Alerts PLUS portfolio co-manager Jim Cramer said, possibly the most bulllish of all.With the stock trending below that level, now could be a key moment.