Quick Thoughts – KSS and WMT

nicklipinski

Both KSS ($0.60 versus consensus of $0.63) and WMT ($1.10 versus consensus of $1.15) reported weak EPS results and lackluster comps.  WMT is a name that remains among our least preferred, while KSS is a name that we haven’t commented on much, but is interesting on weakness toward $50 a share.

KSS’ EPS weakness was driven by disappointing sales, as comps declined -3.4% in the quarter, below both consensus and management’s plan.

  • However, there were some bright spots in the KSS quarter as gross margins improved year over year despite the sluggish top line;
  • Inventory appears to be well managed, growing only 1%;
  • Operating margin of 6.9% was below consensus due to SG&A deleverage on lower than expected sales, but total SG&A dollars appear to be well managed;
  • KSS management commentary was consistent with what M provided, that sales trends improved as the quarter progressed;
  • It is no secret that Q1 was a challenging quarter across consumer discretionary, and while we come down on the side of it was/is more than just the weather (see some of our recent macro work), the weather certainly had a dampening effect during the quarter.
  • KSS at $50 is admittedly more a valuation call than some insight into whether or not sales at are at inflection point, but with the company trading at 12.3x the low end of management’s guidance range ($4.05 – $4.45) and a robust FCF yield (10%+) we like the support for investors as they wait and see what unfolds in the balance of the year.  The risk reward makes sense to us at $50, as we see limited ($5 downside) and as much as $10 in upside should sales start moving in the right direction.

WMT’s top line was in line with consensus when adjusted by management’s commentary on the impact of weather, and commentary on recent sales trends was similarly bullish.

  • Having said that, Q2 guidance was disappointing versus consensus ($0.08 below at the midpoint) as incremental investments weigh on margins;
  • We think WMT’s core consumer continues to struggle (gasoline prices are now up versus ’13, for example) and with the company poised to make ongoing investments (in ecommerce, for example) during the year, we expect that results will remain muted for the balance of the year;
  • Stock will be down this morning, and may see buyers, but we are inclined to look for opportunities to re-short this name.
  • Admittedly, WMT’s multiple isn’t demanding at 14.1x ’14 consensus and with a dividend yield of ~2.4%, but we continue to see risk to 2014 estimates, so we see upside as likely limited and a risk/reward profile that, in the upper $70’s, is, at best, balanced.
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