I spend a lot of time looking at the smaller retailers, given the roller coaster ride many of them have been on due to a multitude of factors. Changing consumer preferences and buying habits and the presumed death of brick-and-mortar stores have been hanging over the sector for years now, but the more recent trade wars and tariffs are adding fuel to the fire.
While my preferred hunting ground in the sector is the smaller, less-followed names that are sometimes hit harder than what is deserved and where the markets are far less efficient, we are again seeing damage done to some of the larger, more well-known names.
Take Kohl's Corp. (KSS) , which has all but fallen off a cliff the past six weeks, with shares down more than 30%. The stock had a huge day on April 23, rising 12% due to news of a partnership with Amazon.com Inc. (AMZN) where Kohl's will accept unpackaged returns beginning in July. Shares closed above $75 that day, but closed Tuesday at $47.95. Much of the recent damage occurred following the release of first-quarter results on May 21, when Kohl's reported lower-than-expected earnings (61 cents per share versus a 67-cent estimate), a 3.1% decline in same-store sales and lowered full-year guidance. (Kohl's is a holding of Jim Cramer's Action Alerts PLUS charitable trust.)
Kohl's now expects full-year EPS will be in the range $5.15 to $5.45, down from the previous range of $5.80 to $6.15, and that has not sat well with investors. The midpoint of guidance implies a price-to-earnings (P/E) ratio of just 9. Tariffs are one of the main issues putting pressure on retailers such as Kohl's to lower prices in order to compensate, a move that hurts the bottom line.
The question for Kohl's and the sector in general is whether the tariffs will be sticky. I, for one, don't believe they will. This is a temporary situation, one that is wreaking havoc on many sectors and on investor psychology at this point, but the issue will be resolved. As a student of and believer in free-market economics, I am not a fan of tariffs in general, but these are being used as a negotiating tool, one that I hope will be successful so that we can move on. If they do remain in place, however, all bets are off, and they will be very disruptive.
If you do buy the notion that tariffs are temporary, then ultimately there will be investment opportunities in names that are trading as though tariffs are more permanent. Kohl's would be a likely beneficiary, but it may be too soon to know how this will all end. In the interim, you've got a solid name trading at 9x this year's projected earnings that also yields 5.6%.