Earnings Preview: Sears, Kohl's and Target Have Plenty to Prove to Investors

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Investors will be watching midprice and discount department stores this week for signs that they're ready to show some real sales and profit growth this year -- and not just through cost-cutting.

Wall Street will be poring over reports from Target (TGT) and Kohl's (KSS) for clues about new products and store improvements, and will be looking for signs of stability and new initiatives from Sears Holdings (SHLD) that aim to spur sales at its Sears and Kmart stores.Sales at discounters held up relatively better during the last year than at upscale department stores and luxury retailers as the middle class downsized its shopping. But now that the recession has passed its low point, investors are starting to take a second look at retailers to see if profits will begin to flowing from revitalized sales and not just from reducing expenses and inventories, as happened through most of last year.

Third Place Is Dangerous for Kmart and Sears

Sears Holdings needs to give investors some good news when it reports Tuesday. It did provide some hope in January, when it raised its guidance after reporting better-than-expected December sales. But for the full year, it's still on track to report down sales at Sears stores and most likely flat sales at Kmarts. Third place can be a dangerous spot in an environment where market share growth is a zero-sum game, and that's exactly where both of these chains are: Kmart is getting squeezed by both Target and Wal-Mart Stores (WMT), and Sears is losing ground to Kohl's and J.C. Penney (JCP).

After two losing quarters, Sears Holdings management has forecast it will post earnings between $3.36 and $4.06 per share for the fourth quarter and between $1.61 and $2.29 per share for the year. Analysts expect of $3.54 for the fourth quarter, up 20.4% from the year-ago period, according to Thomson Reuters.

Sears Holdings is now leveraging Sears's in-store brands -- which are still very popular with shoppers -- independently of its stores. Over the past month, it has announced deals to franchise its Sears Auto Centers, license the Diehard name for a line of battery accessories to be sold at stores nationwide, and just before its earnings report, Sears announced it would sell Craftsman tools at Ace Hardware stores beginning in May.

Sears Holdings CEO Edward Lampert had first raised the possibility of selling brands such as Crafstman, Diehard and Kenmore appliances through other retailers when he formed a new unit in charge of those brands nearly two years ago. Investors will want to know more about this strategy and about any future deals involving Kenmore, which is probably Sears's best-known brand and still a big draw in stores.

How Will Kohl's Try to Counterattack Penney?

Brands will also be top of mind when Kohl's reports results on Thursday morning, since rival Penney reported improving sales in the fourth quarter and plans to move from a defensive position to expansion mode this year. Investors will want to know what countermoves Kohl's has in store. The company has already announced it will step up store remodeling, expanding its home section and adding more brands in apparel this year.

Kohl's has been giving Penney a run for its money in the last year, thanks to an aggressive expansion in California, where it acquired stores vacated by the bankruptcy of Mervyn's. While Penney posted comparable-store sales (sales at stores open for a year or more) declines late last year, Kohl's consistently showed growth. After reporting better-than expected sales in January, it upped its fourth-quarter earnings guidance to $1.36 to $1.37 per share from its previous forecast of $1.28 to $1.30.

Analysts expect $1.37 per share, up 24.5% from $1.10 for the same period a year ago, according to Thomson Reuters consensus estimates. After posting eight quarters with no year-over-year earnings growth, this measure turned positive for Kohl's in the third quarter, as it got past the expense of opening the new California stores and the sales declines of 2008. That favorable comparison will also help the fourth-quarter results.

Target Execs Will Have to Hustle


Store remodeling will also be a topic at Target's conference call with analysts on Tuesday morning. In January, the discounter announced a $1 billion renovation program that includes tweaking existing stores to add or expand grocery selections, locating smaller stores in urban areas and opening stores abroad.

Target is expected to post healthy earnings growth for the fourth quarter of $1.16 per share, up 43.2%, according to Thomson Reuters. But its sales performance over the last year has been streaky. Home and apparel -- the areas where Target's "cheap chic" image has always set it apart -- got hurt as shoppers cut spending, while price deflation hit popular departments such as food and big-ticket electronics. Like rival Wal-Mart, Target sought to cut costs and keep prices low to compete, but Wal-Mart appears to be gaining. Wall Street will want to see Target's executives hustle to regain the lead in style and store experience this year.

Investors are far happier with Target and Kohl's than with Sears Holdings. Most analysts expect Sears Holdings to continue underperforming in the near future and rate the other two retailers a buy. Among recent reports, UBS upgraded Target to buy from neutral ahead of the earnings report and raised its price target to $57 per share from $55. And in January, Sterne Agee initiated coverage of Kohl's with a buy rating.

If Sears wants its stock to move off the markdown rack, it'll have to show that it's ready to wage some aggressive in-store competition during 2010. And Target and Kohl's will have to give investors clear indications that they won't yield any ground as the economy recovers.
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