Kohl's Fantastic Journey May Soon Be Over

I've added a few short positions to take advantage of the pullback I expect in the market. Although I certainly expect to make money with these shorts, they're acting as a bit of a hedge to my mostly long portfolio. I'm shorting them simply because they're too expensive given their growth prospects.

One short that's starting to pan out is Kohl's (KSS - commentary - Cramer's Take). This retailer just reported some disappointing sales and gave an earnings warning. However, the stock hardly sold off as much as it should have, leaving investors an opportunity to place negative bets.

The department-store chain has had a phenomenal run, boosting sales and profits more than 20% annually over the past five years. This explains why shares trade for more than two times trailing sales, while all other department-store chains generally trade for one times sales or less.

But as we've seen with Gap (GPS - commentary - Cramer's Take), Home Depot (HD - commentary - Cramer's Take) and Wal-Mart (WMT - commentary - Cramer's Take), all successful retail concepts eventually reach maturity. It's simply the law of bigness. Geographical expansion can only be sustained until a company is in all parts of the country, and same-store sales -- even if they've risen at a phenomenal clip for a number of years -- eventually wane.

This is what appears to be happening at Kohl's. The company is about to make a push into California, which represents its final untapped large market opportunity. And same-store sales have now been well below management guidance in three of the last four months.

Hope Springs Eternal

A sense that same-store comps are again set to take off has helped shares rise roughly 25% in the last month. Analysts generally assume that the poor same-store sales comps are simply the result of a brutally cold and snowy winter.

While the weather has certainly dampened sales, I think the analysis excludes the newfound reality in the retail space: Consumer sentiment has sunk sharply of late. Although war concerns have undoubtedly added to the slump, there's real concern about demand for the remainder of the year. Many consumers appear too indebted and "shopped out."

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Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights and founder of the Web site InsiderInsights.com. At the time of publication, Moreland was short Kohl's, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland invites you to send comments on his column to [e-mail].