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Kohl's Space Getting More Cramped

Analysts continue to differ about the prospects for the off-mall, middle-market apparel retailer.
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was in focus Friday after several analysts weighed in on different sides of an ongoing debate about the apparel retailer's prospects for 2005 in a crowded field.

Shares of off-mall, middle-market Kohl's were recently down 50 cents, or 1%, to $47.40 after J.P. Morgan analyst Shari Schwartzman Eberts downgraded the stock to underweight, saying in a research note that the company's earnings, while in line with estimates for 2004, will likely come in well below consensus estimates in the new year.

Ebert forecasts earnings for the retailer of $2.38 a share for 2005, well below Thomson First Call's consensus estimate of $2.54. She expects same-store sales -- stores open at least a year -- to be up 1% to 3% with little to no gross margin expansion. Also, she said its costs will likely rise in line with its real estate growth, up around 15%.

"Competition in the moderate apparel space has also intensified," Eberts said. (She does not own a position in shares of Kohl's, but her firm does have a banking relationship with the company.) "

J.C. Penney's


gradual expansion off-the-mall will likely pose additional challenges for Kohl's over time, while an off-the-mall



would also hurt; improved apparel at



could also steal share over time."

On Monday, Moody's Investor Services predicted that Wal-Mart, the world's largest retailer, was in the process of setting its sights on the apparel segment the same way it set out to dominate the grocery business.

"Wal-Mart's growth in apparel could lead to a shakeout in that sector that eclipses by a wide margin the one in groceries when Wal-Mart's expanded in that area," wrote Charles O'Shea, Moody's senior analyst, in a research report.

In groceries, Wal-Mart has doubled its market share in the last three years to reach sales of $100 billion this year. Its success shook up the traditional food-selling sector, where grocery store chains across the country suffered large sales declines and heated labor disputes as they tried to compete with Wal-Mart's low-cost business model and supply-chain advantages.

Kohl's, and its department store peers, could face the same pressures if Wal-Mart is able to stage a repeat performance in their sector. However, the company is attracting some support with a rosier outlook for 2005.

SunTrust Robinson Humphrey analyst Patrick McKeever upgraded the stock Friday morning from neutral to buy, citing recent pressure on the stock, coupled with the firm's improving outlook for top-line growth this year.

"Kohl's is in the early stages of an aggressive product introduction cycle that should provide much better differentiation in the crowded middle-market of apparel retailing," wrote McKeever in a research note (he does not own shares in Kohl's, and his firm has no banking relationship with the company). "Lines that have already been introduced

like Daisy Fuentes and apt. 9 have been well received, and those forthcoming

like Chaps and Candies look promising."

Kohl's is currently trading at a premium to its peers based on its compelling growth prospects, despite the fact that its stock is down roughly 10% from its November high. The company has the unusual position in retail of being a turnaround play with long-term growth potential, as it remains on the comeback trail from missteps in 2003 related to inventory mismanagement.

In a year when retail performance is likely to be uneven overall, Kohl's growth prospects make it a potential winner, but investors seem to be waiting for reassurance about the strength of its sales growth.

"Investors want to see solid and consistent comp-store sales in addition to these margin moves and this has so far eluded the company," wrote Bernstein analyst Emme Kozloff in a research note Friday. (She has no position in shares of Kohl's, and Bernstein has no banking relationship with Kohl's.) "Kohl's has certainly been filling the stores and its pipeline full of solid new brand introductions. However, given it is an apparel turnaround, it is taking time for customers to recognize that the company has mended its sloppy ways and is back to competing at a high level with dynamic product."

In December, the retailer posted a 3.1% gain in same-store sales, which beat expectations.

"In our view, solid and consistent comp-store sales are in the cards for 2005 given the repositioning is now in place with respect to product, execution and financial reengineering of the merchandise buy/flow process," Kozloff said. "While we expect January to be weak, February should mark the beginning of a comp build for the company resulting in stock appreciation for patient investors in 2005."