On Tuesday, JPMorgan (NYSE:JPM) updated its outlook on Kohl's Corporation (NYSE:KSS), raising the stock price target to $21 from $20 while retaining a Neutral rating on the stock. The move reflects a nuanced view of the retailer's position and future prospects.
The firm noted Kohl's core customer demographic, with household incomes ranging from $75,000 to $80,000, and its off-mall store locations as favorable factors when compared to brick-and-mortar peers.
The retailer's balance sheet is expected to generate approximately $1.6 billion in annual free cash flow by fiscal years 2022/23, which could support a mid-single-digit dividend yield and a low-double-digit to mid-teens total return.
Yet, challenges remain as Kohl's faces intense competition that may necessitate more aggressive pricing and promotional activities to maintain market share. These strategies could potentially counteract the benefits of multi-year inventory management efforts. Ecommerce and digital operations are expected to exert a 20-30 basis point pressure on gross margins and operating income.
Management has provided guidance for fiscal year 2024, with adjusted earnings per share anticipated to be between $2.10 and $2.70, which is in line with JPMorgan's estimate of $2.27 and slightly below the Street's $2.67 consensus.
Expected net sales range from a decrease of 1.0% to an increase of 1.0%, and operating margins are projected to be between 3.6% and 4.1%. Notably, this outlook includes potential impacts from regulatory changes to credit card late fees in the second half of 2024.
For the near term, management expects first-quarter 2024 same-store sales at the lower end of the annual guidance, which equates to flat same-store sales compared to the Street's expectation of a 1% decline. This conservative outlook is attributed to the challenge of lapping a significant clearance event held in February, despite positive momentum from key initiatives like Valentine's Day sales.
Management anticipates easier comparisons in March and April, estimating over a 10-point improvement from February. This sets the stage for same-store-sales growth of roughly 1.3% from the second to fourth quarters, aligning with the midpoint of the full-year guidance. Kohl's plans to bolster the latter half of the year with merchandising initiatives across various departments, including the rollout of Babies "R" Us in the fall.
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