Kohl’s did what few other retailers could last the quarter


Investors who closely watch retail stocks probably know Kohl’s (NYSE: KSS) posted impressive results for the third fiscal quarter on November 18. Sales of $ 4.6 billion beat estimates by just under $ 4.3 billion, while earnings per share of $ 1.65 beat expectations by just $ 0.64. The company also raised its guidance for the full year, stoking the bullish flames that initially pushed its shares up more than 10%.

Lost in all the noise of this earnings news, however, is an important step for investors looking at Kohl’s through a long-term lens. That is, Kohl’s gross profit margin remained remarkably high in an inflationary environment that reduced the overall profitability of competing retailers.

There is a reason.

Image source: Getty Images.

Weather the storm

It would have been easy to imagine the worst for last week’s quarterly report. Mega-retailer Walmart announced days earlier that cost of sales rose 4.7% year-over-year in its fiscal third quarter, while revenues were up only 4.1%. TargetGross margin slipped to 28.0% in its fiscal third quarter, from 30.6% in the prior year period.

Surprised shareholders lowered both stocks following their earnings reports, despite clear warnings that rising costs across the board are cause for concern. This inflation narrative is reinforced by last week’s Census Bureau report, which noted that consumer costs were 4.6% higher last month than they were a year ago in excluding the costs of food and energy, and up 6.2% including the price of food and gasoline. .

Kohl’s, however, continues to weather the storm. Its gross margin improved from 35.8% last year – at a time when other department store chains struggled to sell their products at any price – to 39.9% in last trimestre.

And if you think this improvement is simply the result of ignoring the effect of closures due to last year’s pandemic, you are wrong. The retailer’s gross margin for the third quarter of fiscal 2019 was below 36.3%. Kohl’s last quarter selling and administration costs were also in line with pre-COVID standards, suggesting the company is successfully navigating an employment environment marked by higher salary expectations.

Chart showing Kohl's gross margin rate which has been holding up since 2017 despite inflationary pressures.

Data source: Thomson Reuters. Chart by author.

Simply put, this chain of department stores continues to do well, especially when it comes to sourcing and selling inventory.

The final result ? The net operating margin for the last quarter reached a nine-year high of 8.4%.

Keeping it in-house means more control

If you are wondering how the department store chain has weathered a supply chain crisis and inflationary pressure that has challenged so many other players in the industry, there is a multi-faceted explanation. First, there’s the simple fact that Kohl’s is just really, really good at buying the right products and promoting them in the right way.

More than anything, however, its consistent margins are the result of the retailer’s self-sufficiency, built around a huge private label business. The company says just over a third of last year’s revenue came from internal brands, up from 39% in 2018 (possibly due to the pandemic).

Private label products are inventory designed and purchased by a retailer. Sometimes these items are meant to fill in gaps in a chain store’s assortment, although they are often offered side by side with similar items from nationally recognized brands. They are an attractive alternative for retailers, as profit margins are usually much higher on private label products than they usually are on branded products. They also circumvent many supply limitations imposed by national brands’ relationships with their own manufacturers. Croft & Borrow, Sonoma and FLX are just a few of Kohl’s internal labels.

Surprised that these brands belong to Kohl’s? That’s at least part of the point. This non-mall retailer does very well with private label products because they look a lot like national brand offerings. In that vein, the retailer predicts that the launch of its athleisure brand FLX last March will ultimately drive sportswear sales from 20% of its total business to 30%. It’s huge.

Reinforce the bullish thesis

The company’s private label program is obviously not the only reason Kohl’s is winning in an environment that is not easy to navigate for retailers. The department store chain also deserves a lot of credit for managing its expenses, including employee-related expenses. He uses all his resources well.

To the extent that a chain’s fiscal success begins with the right merchandise being in the right place at the right time at the right price, however, Kohl’s private label program gives it tighter control over all of these variables than its competitors may simply ‘not match.

This is another reason to own this great retail store compared to other choices in the industry.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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