Insights

Why Kohl’s Stock Dropped This Week

What happened

Shares of Kohl’s (NYSE: KSS) lost ground to a surging market this week. The retailer’s stock fell 13% through Thursday trading, according to data provided by S&P Global Market Intelligence, compared to a 2.8% spike in the S&P 500. Kohl’s shares have had a volatile year so far, rising 25% through late April but declining by over 40% by late July.

This week’s slump came as investors grew more concerned about slowing consumer spending patterns, as well as a potential inventory glut on the way.

So what

Walmart said on Monday that it now expects lower earnings through the second half of 2022, mainly because inflation is impacting shoppers’ behavior. That announcement sent a shockwave through the retailing industry, helping push Kohl’s stock lower.

Kohl’s said in mid-May that the year started off on a bad note, with comparable-store sales declining 5%. Executives cited “macro headwinds” like inflation in explaining why revenue didn’t meet expectations. These challenges apparently accelerated in Q2, and so investors are worried that Kohl’s will lower its outlook again when the company announces its latest results on Aug. 18.

Now what

Sales trends will be a major focus in that update, but keep an eye on profitability as well. It is likely that Kohl’s will have to reduce prices if consumers become more cautious about spending, pushing gross profit margins lower.

Another key concern is that Kohl’s will enter the second half of 2022 with too much inventory on hand. Watch that inventory figure for signs of mounting pressure on the business heading into the key holiday shopping season. Executives had to make purchasing decisions months ago, and that lead time was lengthened due to supply chain issues.

Kohl’s, along with its retailing peers, may have to endure a period of weaker earnings ahead as a consequence of the sharp shift in consumer spending patterns impacting the industry today.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart Inc. The Motley Fool has a disclosure policy.

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