The company promises “expect great things,” where are they?
I’ve been watching Kohl’s Corporation (NYSE:KSS) for over a year, and there is clearly something wrong with the company’s strategy. The stores are generally nice and well put together, most people enjoy shopping there when they go. As I was thinking about the company, there were two things that struck me.
First, Kohl’s online presence is virtually non-existent. I’m not suggesting they don’t offer online shopping, but they are one of the few retailers to say almost nothing about how their online sales are doing. I don’t remember the last time I heard of someone ordering something online from Kohl’s, and that’s probably not a good sign.
Second, I realized that the comments I’ve heard about Kohl’s Corporation (NYSE:KSS) are something along the lines of, “great sale prices.” My wife and pretty much everyone we know love Kohl’s sales, but without the sale, their deals aren’t that great. As proof that these are issues, consider that while the majority of Kohl’s peers are reporting same-store sales, the company is reporting declines. For a growing concept, this company isn’t growing like it should be.
I’m not sure Kohl’s management knows their competitive position
Kohl’s Corporation (NYSE:KSS) faces significant competition from both ends of the price spectrum. On the one hand, they compete with stores like Macy’s, Inc. (NYSE:M). Macy’s, Inc. (NYSE:M) has high margins, and is usually known for their service.
On the other hand, Kohl’s has to fend off companies like Target Corporation (NYSE:TGT) and Ross Stores (NASDAQ: ROST). Target offers shoppers groceries along with home goods and clothing. Ross offers deep discounts on clothes that might have been in Kohl’s at one point. For value conscious shoppers, Target and Ross are better destinations than Kohl’s.
One of the big problems facing Kohl’s Corporation (NYSE:KSS) is their same-store sales are declining faster than their peers. In the current quarter, the company’s same-store sales declined by 1.9%, which was worse than Target’s decline of 0.6%. This performance was also far worse than Ross’ same-store increase of 3%, or Macy’s increase of 3.8%.
Part of the reason for Kohl’s Corporation (NYSE:KSS) same-store sales challenges is their cost structure. This is the second issue facing the company;
they are spending too much on selling, general, and administrative expenses. Take a look at the difference in gross margin and SG&A expenses at the different chains:
| Name | Gross Margin | SG&A As Percentage Of Sales |
| Kohl’s | 36.39% | 23.74% |
| Macy’s | 38.8% | 31.96% |
| Ross | 29.18% | 14.25% |
| Target | 30.7% | 20.3% |
What I noticed is, Kohl’s has almost the same gross margin as Macy’s, Inc. (NYSE:M). The problem is, the shopping experience isn’t the same at the two stores. Macy’s is known for high-quality, high-service sales, Kohl’s is not.
A trip to Kohl’s involves walking in, getting a cart, shopping, standing in line, and checking out. This sounds a lot like Ross and Target, and not much like Macy’s. I believe Kohl’s is pricing themselves out of sales based on their gross margin. In the meantime, the company is spending too much on SG&A because they believe their experience requires it, when in reality they are just being inefficient.
Too slow and no flow
The two other big challenges facing Kohl’s Corporation (NYSE:KSS) are their high prices are hurting earnings growth, and their cash flow growth isn’t keeping up with their peers either. When it comes to earnings growth, Kohl’s ranks last with just a 7.9% expected growth rate in the next few years. By comparison, Target is expected to grow earnings by 11.6%, Ross is expected to grow by 12%, and Macy’s may grow by as much as 14%.
The difference is, these companies know their customer base and have prices to match. When it comes to cash flow, Kohl’s operating cash flow growth falls far behind most of their peers. Looking at just core operating cash flow (net income + depreciation), Kohl’s increased their cash flow by just 1.69% versus last year. Only Target saw worse growth, with an increase of just 0.86%. On the other hand, Macy’s increased their operating cash flow by more than 7%, and Ross reported an increase of better than 12%.
As you can see, Kohl’s is under-performing their peers. If Kohl’s management doesn’t realize that shoppers are going elsewhere, the current quarter could become the norm for the company. Kohl’s Corporation (NYSE:KSS) web site says, “it’s all on sale at Kohl’s,” if the company keeps this up, what will be on sale is their stock.
The article This Retailer Has 4 Major Problems originally appeared on Fool.com and is written by Chad Henage.
Chad Henage owns shares of Target. The Motley Fool has no position in any of the stocks mentioned. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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