KSS Preview: Competitor Demise a Huge Boon

When Kohl's (KSS - commentary - Trade Now) reports third-quarter earnings on Thursday, actual results will be of little surprise, since management guided to 60 cents to 61 cents per share during its October comps report last week, which was well above the original EPS guidance of 40 cents to 44 cents when the second quarter was reported in August.

For the record, Thomson Reuters analyst consensus is looking for 61 cents in EPS on $4.03 billion in revenue, for year-over-year growth of 17% and 6%, respectively.

Management has done a superb job of cutting expenses, controlling inventory and boosting productivity in the last year. I don't think I'm out of line by saying that you'd have been stretched to find any retail management team to predict (in early 2009) that its company would grow earnings by 17% and revenue by 6% in its October quarter. Kohl's has definitely benefitted from the demise of two competitors, particularly in the Southwest region as Mervyns and Gottschalks went belly up. A note out of Thomas Weisel Partners states that the Southwest region was the company's best performing region again in October 2009, for just this reason. Kohl's is also gaining share in California, thanks to Mervyns demise.

That being said, the company's October comps were a little on the light side, the reported 1.4% gain being well shy of the 5% consensus. Cool weather and a drop off at Halloween were thought to be the culprits. The weak October comps were compared with a 9% drop in 2008. November's comp will be even easier since Kohl's saw a 17.5% drop in comps in November 2008.

Is the strong quarter already discounted in the price? That could be, but the current stock multiple seems relatively low, with the fiscal 2009 EPS estimate of $3.02 giving Kohl's a trading multiple of 18 times current estimates and the 2010 estimate of $3.44 giving the stock a trading multiple of 16 times current estimates, for expected growth of 13% next year. What is interesting is that the company's peak earnings, according to one analyst note we read, was $3.39 in 2007, so the 2011 estimate looks to have exceeded that previous peak.

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At the time of publication, Gilmartin had no positions in the stocks mentioned, although positions may change at any time.

Brian Gilmartin, CFA, founded Trinity Asset Management (TAM) in 1995, where he is currently a portfolio manager. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gilmartin appreciates your feedback; click here to send him an email.