Will Sluggish Comps Dampen Kohl's (KSS) Earnings in Q4?

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Kohl's CorporationKSS is set to report fourth quarter of fiscal 2016 results on Feb 23 before the market opens. The question lingering oninvestors' minds is whether the company will be able to maintain its positive earnings surprise streak in the to-be-reported quarter. We note that the company has outpaced the Zacks Consensus Estimate in three of the trailing four quarters, with an average positive surprise of 6.19%.

Kohl's forms part of the Retail-Wholesale sector. Per the latest Zacks Earnings Preview , the above mentioned sector's earnings picture looks disappointing. Total earnings for the sector are estimated to decline 1.2%, while revenues are projected to improve 4.7%.

Let's delve deeper how things are shaping up for this announcement.

Which Way are Estimates Treading?

Let's look at earnings estimate revisions in order to get a clear idea of what analysts are thinking about the company right before the earnings release. The Zacks Consensus Estimate for the quarter under review has declined steeply over the past 30 days and is currently pegged at $1.32, down 16.3% from $1.58 delivered in the year-ago quarter. Analysts polled by Zacks expect revenues of $6.21 billion, down 2.8% from the prior-year period.

Kohl's Corporation Price, Consensus and EPS Surprise

Kohl's Corporation Price, Consensus and EPS Surprise | Kohl's Corporation Quote

What the Zacks Model Unveils?

Our proven model does not conclusively show that Kohl's is likely to beat earnings estimates this quarter. This is because a stock needs to have both a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP for this to happen. You may uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Kohl's has an Earnings ESP of -2.27% as the Most Accurate estimate of $1.29 is lower than the Zacks Consensus Estimate of $1.32. Further, it carries a Zacks Rank #5 (Strong Sell). It is to be noted that we caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Factors Influencing the Quarter

Kohl's has been struggling to boost its sluggish top line since the past many quarters. Sluggish comps and a difficult retail sales scenario are hurting sales at department stores.

The sluggish trend is also reflected in Kohl's share prices over the past three years due to a challenging sales environment and soft comparable store sales. Notably, in the said period the stock declined 19.1% as against the Zacks categorized Retail-Wholesale sector, which showcased growth of 22.6%.

The company has slashed its profit guidance for fiscal 2016 due to sluggish holiday sales. The company now expects adjusted earnings of $3.60-$3.65 per share for fiscal 2016. It had earlier expected earnings of $3.80 to $4.00 per diluted share. The lower than planned sales for the fourth quarter, due to volatile holiday sales, led to the cut in guidance. Despite experiencing strong sales on Black Friday and the week before Christmas, the retailer's comparable holiday sales fell 2.1% in the combined fiscal months of November and December in 2016. Total sales for the same period declined 2.7%.

Further, Kohl's expects gross margin to be lower than planned earlier due to the mix and timing of the sales and a competitive promotional environment. Inventories per store at the end of the fourth quarter are projected to decrease from prior-year levels in the mid-to-high single-digit range.

Despite Kohl's continuous efforts to improve its base business, its strategic initiative, 'Greatness Agenda' is failing to deliver positive results. This initiative, which commenced in the first quarter of fiscal 2014, was designed to increase transactions per store and sales. Though the plan has helped the company to deliver positive comps in all the four quarters of fiscal 2015, the quarterly growth rates moderated gradually, thus posing a concern. Moreover, comps declined in the first three quarters of fiscal 2016. This is raising concerns over the near term. The company is also witnessing lower spending on apparel and accessories, dwindling store traffic and competition from discount retailers, which are hurting sales at department stores. We believe the trend is not expected to improve in the to-be-reported quarter.

Stocks to Consider

Stocks in the broader retail sector that have both a positive Earnings ESP and a favorable Zacks Rank, and are therefore worth considering include:

SpartanNash Company SPTN with an Earnings ESP of +2.04% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

Fred's Inc. FRED with an Earnings ESP of +15.79% and a Zacks Rank #2.

Jack In The Box Inc. JACK with an Earnings ESP of +2.42% and a Zacks Rank #2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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