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Kohl's (KSS) Exhibits Bright Prospects, Headwinds Prevail

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Kohl's Corporation (KSS - Free Report) is well-poised for growth, courtesy of its strength in core businesses, robust customer base, effective management of inventory and focus on strengthening its balance sheet. However, high operating expenses and softness in its home products business remain concerning.

The Zacks Rank #3 (Hold) company has a market capitalization of $2.8 billion and belongs to the Zacks Retail - Regional Department Stores industry.

Factors Influencing the Company’s Performance

Kohl’s remains focused on its 2023 key priorities, which include simplifying value strategies, enhancing customers’ experiences and undertaking a disciplined approach toward inventory and expense management. A focus on these priorities aided the company’s first-quarter fiscal 2023 results, wherein both top and bottom lines surpassed the Zacks Consensus Estimate and the latter improved year over year. In the quarter, Kohl’s witnessed an expansion in margins and a 6% decline in inventory.

The company remains committed to creating an exciting in-store experience, driving digital growth and expanding its Sephora partnership. Management expects to have Sephora’s presence at more than 900 Kohl’s shops by the end of 2023, which includes 860 full-size and 50 small-format shop-in-shops. In regard to its value strategies, management remains focused on accelerating growth through simplified pricing, effective marketing initiatives and loyalty programs.

For fiscal 2023, KSS anticipates adjusted earnings per share to lie in the range of $2.10-$2.70 compared with loss of 15 cents per share reported in fiscal 2022. Its operating margin is expected to be about 4% in fiscal 2023, indicating an increase from 1.4% recorded in the previous fiscal year.

Kohl’s remains committed to offering a convenient customer shopping experience with great deals in 1,100 plus stores throughout the country as well as on Kohls.com. The leading omnichannel retailer is providing style-forward products at a great value with Kohl’s Card, Kohl’s Cash and Kohl’s Rewards program during the back-to-school season and otherwise.

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In the past three months, it has gained 7.2% against the industry’s decline of 1.1%.

Despite the positives, the company has been witnessing weakness in its home products business. This is because the company entered the year with leaner inventories in the home category, which received fewer benefits from Kohl’s clearance activities.

For fiscal 2023, Kohl’s anticipates net sales to decline 2-4%, reflecting the expected impact of macroeconomic headwinds on its business.

The company has been grappling with inflationary pressure for a while now. Product cost inflation and increased shrinkage have been affecting the company’s gross margin of late. In the fiscal second quarter, management expects the gross margin to decline year over year.

Key Picks

Some better-ranked stocks are Abercrombie & Fitch Co. (ANF - Free Report) , Fastenal Company (FAST - Free Report) and Arcos Dorados Holdings, Inc. (ARCO - Free Report) . While Abercrombie & Fitch sports a Zacks Rank #1 (Strong Buy), Fastenal and Arcos Dorados each carry a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Abercrombie & Fitch operates as a specialty retailer of premium, high-quality casual apparel for men, women and kids. The Zacks Consensus Estimate for Abercrombie & Fitch’s current financial-year sales suggests growth of 3.4%. Its earnings per share are expected to rise 732% from the corresponding year-ago reported figures. ANF has a trailing four-quarter earnings surprise of 480.6%, on average.

Fastenal specializes in the distribution of industrial and construction supplies in North America. The Zacks Consensus Estimate for Fastenal’s current financial-year sales and earnings per share suggests growth of 5.4% and 4.8%, respectively, from the corresponding year-ago reported figures. FAST has a trailing four-quarter earnings surprise of 3.2%, on average.

Arcos Dorados operates as a franchisee of McDonald's restaurants. The Zacks Consensus Estimate for ARCO’s current financial-year sales and earnings per share suggests growth of 13.4% and 4.4%, respectively, from the corresponding year-ago reported figures. The company has a trailing four-quarter earnings surprise of 23.5%, on average.

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