Even a beat on top and bottom line earnings estimates could not help Kohl's (KSS) avoid a rapid decline amid Tuesday's bearish conditions.
Shares of the Menomonee Falls, Wisconsin-based retailer fell 9.23% to $64.45 per share despite the strong report for its fiscal third quarter ended Nov. 3.
Pressure Points in the Print
Analysts were quick to pore through the print and rationalize the razed stock price.
"Placing shares under near-term pressure, $258 million in operating income missed our model by 9%," JPMorgan analyst Matthew Boss wrote in a note on Tuesday morning.
He noted that misses on these factors coupled with a minor guidance raise suggest the stock does indeed deserve the "penalty box."
"Importantly we note while inventories exited the quarter, we suspect this to have been negatively impacted by the retail calendar shift in line with peers," Boss added. "Recall, prior FY18 guidance embedded gross margin expansion of 25-30 basic points which would now imply flat fourth-quarter performance at the high-end of prior guidance remains unchanged."
The company's over 30% rise to this stage in the year makes it difficult to justify a continued surge as well and instead makes the retailer a prime target for profit taking amid a selloff in numerous sectors.
Reflecting Retail Sector Weakness
The pre-eminent concern around the retail sector is over whether the third quarter is simply as good as it gets. Even as the holiday shopping season looms, cycle concerns are lauding over share growth for many retailers.
"We do not think today's print will ease investors' concerns around the difficult set-up going forward and tough comp compare in 4Q despite management's bullish tone on the call around the Holiday season," Deutsche Bank analyst Paul Trussell explained.
He added that cyclical pressures into 2019 could leave growth relatively stagnant quarter over quarter and continue to slow progress into next year. The slowing trend is exacerbated by same store sales trends, which has posted positives for five straight quarters, but in smaller and smaller increments.
That trend could stand to worsen if Federal Reserve policy continues to favor tightening, which might restrict the purchasing power of the every-day Americans propping up Kohl's continued quarterly successes.
Bulls Buy on Weakness
That said, not all were ready to return the stock amid the slide.
"KSS remains a share gainer in the retail space, it's a leader in tech implementation, and the shares are cheap so we would buy today's pullback," Jefferies analyst Randy Korik wrote in a note on Tuesday. "We are buyers given traction in proprietary brands, share gains from peer closings, thoughtful traffic-driving partnerships, omni initiatives & favorable off-mall real estate."
He noted that the company's continued partnership with Amazon (AMZN) helps the retailer benefit from increased traffic as peers like Toys R Us, Bon-Ton (BONTQ) , and Sears (SHLD) shutter their doors. Essentially, its proximity to Bon Ton locations bodes well, while its connection to Amazon prevents e-commerce cannibalization.
Korik added that the company's stated plan to optimize real estate usage alongside partners offers it a competitive advantage over peers with oversized real estate footprints.
He set a "Buy" rating with a bullish $110 price target based on the aforementioned factors, which are bolstered by his continued margin expansion expectation and the company's low price to earnings ratio.
The company could be an attractive target ahead of a holiday season that bodes quite well for retail as well.
Jim Cramer's Action Alerts Plus team added that while they were disappointed by the release, a continued drop to around $61 per share would provide an attractive enough entry point to pick shares back up.
Shares continue to fall in post-market trading on Tuesday.