Kohl's Is Still Floundering

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Mid-price department store Kohl's has been struggling just to maintain its profitability for more than a year now. On Thursday, it released yet another disappointing earnings report. Like many retailers that cater to working-class and middle-class customers, Kohl's has felt the pinch of a weak economic recovery and higher payroll taxes.

Kohl's is working on several initiatives designed to get sales and earnings moving in the right direction again. However, none of these are likely to reignite the rapid growth that Kohl's was known for prior to the Great Recession. As a result, I think that Macy's -- which trades for a similar earnings multiple but has been much more resilient -- is a better buy in the department store space.

Sales remain weak
In the third quarter, Kohl's revenue dropped 1% to $4.44 billion due to a 1.6% decline in comparable-store sales, partially offset by new store openings. The size of the comparable-store sales decline was exaggerated by a shift in the calendar; adjusting for that shift, the decline would have been just 0.2%.

Still, any decline in comparable-store sales is bad, as it means that operating expenses for each store are being spread over less revenue. Moreover, online sales -- which carry lower margins -- are growing, meaning that the decline in brick-and-mortar sales was actually steeper than the total that Kohl's reported.

The drop in sales surprised Kohl's executives. In August, Kohl's had projected that total revenue would grow 1% to 3% for the third quarter. However, the end of the August-September back-to-school season was weaker than expected, causing Kohl's to miss the bottom of that range by 2 full percentage points.

Kohl's is also underperforming other department stores, particularly Macy's. Third-quarter comparable-store sales rose 3.5% at Macy's, or 4.6% including sales in "licensed" departments (where another company operates a department in return for paying Macy's a portion of its sales). Macy's recently moved to a value-oriented marketing and merchandising message, and this may have convinced some shoppers to move up-market from Kohl's.

Dillard's also grew comparable-store sales in the third quarter, posting a more modest 1% increase. Even long-suffering J.C. Penney managed to post a comparable-store sales gain in the month of October, although it will still record a significant decline for the full quarter. In short, Kohl's appears to be losing market share, which is a dangerous trend.

Turning the ship around
The result of Kohl's poor sales performance last quarter was an earnings miss. EPS declined more than 10%, from $0.91 to $0.81. Kohl's also reduced its full-year earnings guidance range from $4.15-$4.35 to $4.08-$4.23.

On Kohl's earnings call, management discussed a number of efforts to return to sales growth. The company is adding new major national brands, such as IZOD, which should bring in new customers. Kohl's also made significant improvements to its website, which went live during the third quarter and is expected to drive long-term growth in e-commerce.

Lastly, Kohl's is revamping its marketing and customer engagement strategies under the leadership of Michelle Gass, a former Starbucks executive hired earlier this year. The top initiative here is building a loyalty program that customers can join without opening a Kohl's Charge account.

Waiting for signs of life
While I think some of Kohl's new strategies could be successful in the long run, the company has been stuck in a rut for quite a while now. This is not the first time that its leaders have thought they were turning a corner.

By contrast, Macy's continues to execute almost flawlessly, and like Kohl's, it trades for about 12 times forward earnings. There's really no incentive to invest in a struggling company like Kohl's when you can buy into a much stronger one for the same price. Until Kohl's starts providing tangible evidence that its initiatives are putting it back on the path to growth, I'm staying away.

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The article Kohl's Is Still Floundering originally appeared on Fool.com.

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Dillard's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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