Kohl’s Pops 12% On Surprise 3Q Earnings, Gordon Haskett Upgrades to Hold

Kohl’s shares surged 11.6% on Tuesday as the company posted an adjusted EPS of $0.01 for the third quarter of fiscal 2020 (ended Oct. 31), crushing analysts’ estimate of a loss per share of $0.43.

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However, the mid-tier department store’s 3Q adjusted EPS was down 99% year-over-year as revenue (net sales plus other revenue) declined 14% to $3.98 billion and expenses increased. Kohl’s (KSS) net sales fell 13.3% to $3.78 billion, falling behind analysts’ estimate of $3.86 billion.

Comparable sales fell 13.3% in the quarter, reflecting a steeper decline than analysts’ forecast of 11.4%. Retailers have been under pressure since the pandemic’s onset as consumers are spending more on essentials rather than discretionary items like apparel and footwear.

The impact of the pandemic on the back-to-school season hurt the company’s August sales, but the sales trend rebounded well in September and October. Kohl’s experienced strength in home, toys, activewear as well as beauty in the third quarter. Going forward, the company aims to grow its activewear sales from 20% to at least 30% of its business. Kohl’s also sees an opportunity in the beauty business.

Meanwhile, digital sales continued to be strong with a 25% growth, and accounted for 32% of the overall 3Q sales, compared to 22% in the prior-year quarter. (See KSS stock analysis on TipRanks)

Kohl’s did not provide any guidance for the holiday quarter due to pandemic-related uncertainty but said that it was “pleased with how the holiday has kicked off.” Meanwhile, the company plans to reinstate a dividend during the first half of 2021.

In reaction to the results, Gordon Haskett analyst Charles Grom upgraded Kohl’s to Hold from Sell with a $28 price target. Grom had downgraded the stock in August.

Also, Guggenheim analyst Robert Drbul increased his price target to $35 from $25 and reiterated a Buy rating, saying, “We believe shares offer attractive value today and warrant a premium valuation to current levels as we believe KSS will 1) be a survivor of the current environment considering its inventory and cost management strategies; 2) continue to gain market share with digital offerings; and 3) gain market share from competitive disruptions in the space (store closures).”

“We believe the company will benefit from its off-mall positioning and strong national brand offering over the long term as store closures (particularly mall-based) materialize in coming years due to COVID-19,” added Drubel.

Overall, the Street remains sidelined on Kohl’s. The Hold analyst consensus is based on 1 Buy, 6 Holds and 1 Sell. Shares have plunged 42.7% year-to-date and the average price target of $25.71 indicates further downside of about 12% over the coming year.