Analysis: KSS M JWN AMZN PLNT

On Tuesday before the opening bell, Kohl's (KSS) reported a top and bottom line beat with its fourth quarter earnings result. Revenue of $6.82 billion (down 3.3% year over year) topped consensus of $6.58 billion, and earnings per share of $2.24 (up 20% year over year) exceeded consensus of $2.18

"The positive momentum we've had all year continued as we achieved a 1 percent comp sales increase for the fourth quarter, resulting in a 1.7 percent increase for the year," CEO Michelle Gass said in the company's press release. "Building on the exceptional holiday we had in 2017, we've now achieved a 7 percent increase in the fourth quarter on a two-year basis."

"With a clear focus on driving traffic and operating with discipline, the Company is delivering sales growth while also improving profitability. We are financially strong and our overall health in the business is positioning us well for continued success," Gass added. "I want to thank all of our Kohl's associates for another successful year of strong execution and great performance. Moreover, I thank them for their commitment to providing an engaging, enjoyable experience to our customers."

Digging deeper into the quarter, Kohl's delivered comparable sales, or "comps", on a shifted basis of +1%, and -1% on a fiscal basis, with the latter result being in-line with the -1% consensus view. Although the company was unable to "comp" 2018's fourth quarter's huge +6.3% figure like we once thought they could, the market began to price a negative result in when the company reported its holiday season sales numbers in early January (see our Alert here). Still, this outcome was far from a disappointment because when you extend out the timeline to a 2-year basis, fourth quarter comp sales increased over 7% and accelerated sequentially by 470 basis points. Management noted that the fourth quarter results were positively impacted by competitor store closures, like from Bon-Ton stores, which drove strong performance in the Mid-West region. Kohl's place as a market-share gainer in the department store industry has been a core reason why we have preferred this name over other names like Macy's (M) and Nordstrom (JWN) . 

Management also provided upside compared to analyst expectations with its 2019 forecast. They expect earnings per share in the range of $5.80 to $6.15, a strong result against a $5.75 consensus view. Meanwhile, the comparable sales change of 0% to +2.0% was in-line with the 0.9% consensus expectation. Taking a look at some other line items, gross margin as a percentage of sales increase is expected to be up 10 basis points year over year, while SG&A dollars excluding the impact of lease accounting are expected to increase 0.5% to 1.5%. Interest expense of $200 million will be lower than 2018's year thanks to efforts to pay down debt, and all the while, management expects to repurchase $400 million to $500 million worth of stock. We also note that last week, the Board of Directors announced a quarterly dividend of $0.67 per share, a 10% increase over its prior dividend.

This all said, management did note that the first quarter comps will be at the low end of the full year range due to some softness in February, and the first quarter gross margin rate will be flat to down slightly. This might explain why the stock gave up some of its early gains this morning, only until management provided a key update to its Amazon (AMZN) relationship. 

Speaking on Amazon, Gass opened with comments about how she is "encouraged" with the pilot program that is now in approximately 100 stores. As part of the relationship, Kohl's has been selling Amazon devices within their stores, both in traditional wholesale relationships and 30 stores. But now this relationship is about to get bigger. In conjunction with Amazon, Kohl's has decided to transition the program from stores within concept "to a more robust wholesale relationship with Amazon." As a result, Kohl's plans to double its efforts and expand the store count to over 200, up from current 100 rate. Even further, Kohl's plans to dedicate space in over 200 stores to Amazon devices - basically an Amazon store within a store. Meanwhile, the returns-based pilot program continues to keep customers happy, however future plans on this program are still undecided. All in, we continue to see this partnership as beneficial for Kohl's as it acts as an incremental driver of foot traffic, which in turn, they convert into sales. If you were watching the stock price and monitoring the conference call commentary, you would have seen a +3% move in KSS when this all was discussed.

In addition to the favorable Amazon news, Kohl's also announced an initial 10-store partnership with Planet Fitness (PLNT) . This partnership is an obvious fit for Kohl's and its Active brands strategy. 

Overall, it was a very solid quarter that was filled with market-share gains and successful initiatives. As we look towards 2019, the company is expected to have another successful year, though weather will be a headwind in the first quarter. That being said, Gass noted that the weather effects will likely create "pent up demand" and she feels "really good about the spring inventory". Furthermore, we are excited about the company's possibilities with Amazon and there is still plenty of room for additional expansion to this relationship. Shares are trading roughly +4.5% higher in reaction to the quarter, guidance, and initiative updates, and we reiterate our TWO rating.