(KSS) Kohl’s Stays at Neutral

We have maintained a Neutral rating on Kohl’s Corporation (KSS) with a target price of $51.00 following appraisal of first quarter 2012 results.

Kohl’s posted first quarter 2012 earnings of 63 cents per share, which exceeded the Zacks Consensus Estimate by 3 cents per share. The earnings, however, missed the prior-year quarter’s earnings of $0.69 per share, as management implemented lower pricing to provide value to customers. Lower pricing and rising costs of input due to commodity inflation contracted margins.

Nevertheless, sales increased 1.9% in the quarter, driven by accessories and home divisions along with positive response in mens items. Kohl’s same-store sales for the quarter ending April 28 increased 0.2%.

We are encouraged by the Kohl’s strong brand portfolio. The company offers moderately priced, exclusive and national brand apparel, shoes, accessories, beauty and home products to consumers. The company’s national brands include Dockers, Levi’s, Columbia Sportswear, Reebok, Champion, Oshkosh, Pfatzgraff, Krups and KitchenAid, each of which is focused on unique characteristics. Kohl’s also focuses on introducing new brands. In 2011, Kohl’s successfully introduced Jennifer Lopez, Marc Anthony, Rock & Republic, and Van Heusen targeting sportswear, dresses and other apparels; and also launched the ELLE brand focusing in fashion jewelry and beauty and Simply Vera Vera Wang brand in cosmetics. The successful launch of these brands is expected to drive growth in future.

Besides brands, the company has strengthened its e-commerce business, and increased its e-commerce sales by more than 50% in both 2009 and 2010. The company achieved its $1 billion revenue goal from e-commerce business in 2011, which added 150 basis points to the increase in comparable store sales. Further, Kohl’s has opened distribution centers to facilitate its online sales.

However, rising costs of inputs, especially cotton is consistently hurting the company’s margins. Cotton costs increased substantially in 2011 and the same is expected to persist in 2012. The company experienced a 10% – 15% increase in apparel costs, which subsequently leads to aggressively passing off these higher costs to the customers.

In addition, Kohl’s is vulnerable to a weak U.S. economy and declining consumer spending in the U.S. markets because the company has no stores outside of the U.S. and does not have an international presence to serve as a buffer to fluctuations in the U.S. economy. The company’s peer group Wal-Mart Stores, Inc (WMT), on the other hand, has strong international presence and is growing its clothing and home goods categories outside U.S.

We are encouraged by the company’s strong balance sheet and an attractive dividend yield. Besides, the prudent expense management across many of Kohl’s stores makes the stock attractive. However, we remain concerned about the ever-changing demands of the consumers, increased volatility in the financial markets and the overall uncertainty in the macroeconomic environment, which keep us on the sidelines with a Neutral rating.

KOHLS CORP (KSS): Free Stock Analysis Report

WAL-MART STORES (WMT): Free Stock Analysis Report

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