The stock market has gotten off to a great start in 2017. The stock of department store Kohl's (KSS 41.78) has not. Shares of KSS are down 15.4% year-to-date, yet they look poised to make up some of that lost ground today following the retailer's fourth quarter report and outlook.
The quarterly results were nothing special.
Total sales of $6.21 billion were down 2.8% year-over-year, comparable store sales decreased 2.2%, and adjusted diluted earnings per share of $1.44 were down 9% from the year-ago period.
The upshot is that total sales were in-line with analysts' average expectation while the diluted earnings per share figure was actually comfortably above analysts' average -- and depressed -- expectations.
Those depressed expectations were a byproduct of the disappointing holiday sales update Kohl's provided in early January and a slate of sales/earnings warnings from other mall-based retailers decrying weak traffic and increased online competition.
Sure enough, Kohl's conceded its quarterly sales results were weak due to declines in brick-and-mortar traffic, which was offset somewhat by strength in online demand.
Kohl's lost some expense leverage due to the weak sales, so its net income took a hit, yet it still managed to increase its gross margin rate by 30 basis points to 33.4% as the cost of its merchandise sold decreased from the same period a year ago.
The latter was a highlight in the quarterly income statement and it stood out as a pleasant surprise. There were some other pleasant surprises, too, in the financial statements.
In particular, merchandise inventories were down 6.0% at the end of the fiscal year, exceeding the 2.7% decline in total sales for fiscal 2016 and creating some hope in the idea that Kohl's won't have to be uber-promotional to begin the new fiscal year. Its cash from operations, meanwhile, increased 46% in fiscal 2016 and its free cash flow surged 76%.
Fittingly, the Board of Directors approved a 10% increase in the quarterly dividend to $0.55 per share, which will be payable March 22, 2017, to shareholders of record at the close of business on March 8, 2017. At its current price, KSS sports an attractive dividend yield of 5.3%.
Companies that are stressed about their operations and financial outlook don't typically raise their dividend. Doing so provided some reassurance that Kohl's feels comfortable about its long-term earnings prospects despite the challenges the retail industry faces.
Kohl's reinforced that thinking with its fiscal 2017 guidance, which calls for total sales to be down 1.3% to up 0.7%, comparable store sales to be down 2% to flat, gross margin to increase 10 to 15 basis points over 2016, and earnings per diluted share to range from $3.50 to $3.80.
The midpoint of the earnings guidance range is 3% below the adjusted profit of $3.76 per diluted share the retailer reported for fiscal 2016, yet the overarching point is that Kohl's expects to remain solidly profitable.
At Wednesday's closing price, KSS trades at roughly 11.5x estimated fiscal 2017 earnings. It's a low multiple befitting a company that is expecting little to no earnings per share growth, but overall, we suspect Kohl's will find some valuation-based support on the belief that its prudent inventory management, increased dividend, and fiscal 2017 guidance hint at the notion that the worst of its earnings downturn is behind it.