In our previous report titled Kohl's at an inflection point, we had ascribed a BUY rating to the stock given the company is one of the best-positioned brands under the department store sector, expected to lead the industry. At the time of writing, the stock was trading at $17 levels, post which the stock topped $29 levels, a massive 70% rally since the recommendation price which even topped our target price of around $25. However, post that the stock petered off, although still holding above $22 mark. The company reported its results on August 18, and the stock fell a massive 17% post the announcement. Was that an overreaction? Is it a good entry point to enter right now? Let's delve in.

Earnings Corner

KSS reported a 23% decline in revenue in the quarter, which was much better than what most of the analysts had feared as the COVID-19 still forced a majority of the people to stay home. Shopping shifted online and the company's continued focus and investments in its direct platform reaped rewards as digital sales soared 58% compared to the previous quarter comprising 41% of the total sales for the quarter, up from 20% a year before. Shoppers stocked up on workout gear and cozy clothing such as pajamas as people continue to stay at home. Comparing with our assumptions in the previous report, the results surprised positively.

Gross margin declined 569 bps driven by ~295 basis points related to the increased promotional activity and mix as Home continued to outperform and ~275 basis points related to the cost of shipping due to increased digital sales penetration. SG&A expenses, however, declined 17% as a result of furloughs and other cost-containment measures. Inventory was down 27% for the quarter which bode well for the margins in the coming quarters. Adjusted non-GAAP EPS came to ($0.25) vs $1.55 in the previous quarter, topping analyst estimates at ($1.50). However, the company alluded to the fact that July experienced a deceleration attributed in certain COVID hotspots and a softer start to the back to school which sent the shares spiraling down 17%. Management also highlighted the fact that the cost of shipping would continue to be a headwind as the digital penetration continues to increase which can continue to put pressure on the margins.

Valuation

We trim our estimates and revise our sales forecasts by 3-5% for the coming two quarters and continue to expect the company to produce a net loss for the entire quarter. We trim our 2021E EPS estimates by 7-9% and expect the company to post FY2021E EPS at $3.20 per share. Assigning a multiple of 7x as highlighted in our previous report, we ascribe a target price of $22.5 (down from $25 previously) and recommend a HOLD rating on the stock. However, the current drop in the share price could be an opportunity for risk-tolerant investors to accumulate on dips as any positive surprise on holiday season would bode well for the company and also for the fact that we continue to believe KSS as one of the best-positioned brands within the sector.