Zacks
0
All posts from Zacks
Zacks in Our Research. Your Success.,

Will Lower Margins Dampen Kohl's (KSS) Earnings in Q1?

Kohl’s Corporation KSS is set to report first quarter 2016 results before the opening bell on May 12. Last quarter, this specialty retailer posted a positive surprise of 1.94%.

Let’s see how things are shaping up prior to the announcement.

Factors to Consider

For the first quarter of 2016, the company expects a significant drop in gross margins as the company plans to aggressively clear excessive merchandise that resulted from lower-than-expected fourth quarter sales. SG&A expenses in the first quarter of fiscal 2016 are also expected to rise 3% to 4%, mainly due to higher advertising expenses.

Kohl’s remains cautious about its fiscal 2016 results and plans to close 18 stores after reporting weak fourth quarter fiscal 2015 results, due to retail uncertainty as well as cautious spending by US consumers. The company is witnessing lower spending on apparel and accessories. A general slowdown in consumer spending is also hurting sales at department stores.

Kohl’s Corporation’s turnaround initiative named “Greatness Agenda” is showing weakness of late. The initiative, which began in the first quarter of 2014, was designed to increase transactions per store and sales. Though the plan has helped the company to deliver positive comps in the last five consecutive quarters after persistent declines for more than a year; the quarterly growth rates have become successively smaller. This is raising concerns over the near term. Estimates are also declining for first quarter 2016 since the past 30 days.

Earnings Whispers?

Our proven model does not conclusively show that Kohl’s is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: ESP for Kohl’s is 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate stand at 37 cents per share.

Zacks Rank: Kohl’s carries a Zacks Rank #3 (Hold) which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

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

The Kroger Co. KR with an Earnings ESP of +1.45% and a Zacks Rank #2 (Buy).

The TJX Companies, Inc. TJX with an Earnings ESP of +1.43% and a Zacks Rank #2

The Wendy's Company WEN with an Earnings ESP of +16.67% and a Zacks Rank #2

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
TJX COS INC NEW (TJX): Free Stock Analysis Report
 
WENDYS CO/THE (WEN): Free Stock Analysis Report
 
KOHLS CORP (KSS): Free Stock Analysis Report
 
KROGER CO (KR): Free Stock Analysis Report
 
To read this article on Zacks.com click here.