What happened
Shares of Kohl’s (NYSE: KSS) was crushed on Tuesday after the company reported results for the second quarter of 2020. After the first report, the stock market was modestly up. But once holding their conference call to discuss their quarterly results, the stock market began to fall.
As of 11:30 a.m. EDT, Kohl’s stock was down 16%.
Image Source: Kohl’s.
So what
Kohl’s had a rough Q2 with all of its locations closed for at least some of the quarter. However, the company reported top- and bottom-line results ahead of analysts’ expectations. Revenue was ‘only’ down 23% year-over-year to $ 3.4 billion. Considering that it had 25% fewer working days than last year, this was actually relatively strong.
Furthermore, Kohl’s reported free cash flow of $ 196 million, compared to just $ 67 million in the second quarter last year. This also appears positive on the surface. But investors should consider their free cash flow as just a result of less spending. Specifically, the inventory does not replace quickly; inventory was down year or year by 26%. It also completed a sales leaseback transaction, giving the mid-cap company an infusion of cash.
Kohl’s demonstrated discipline by spending less than it made. But celebrating this kind of free cash flow is different than when the margin of a company expands.
Well what
All told, Kohl’s have survived the quarter and investors probably expected it to be the worst behind it, which is why stocks were initially the pre-market. However, in the call for earnings, management said new cases of coronavirus affected sales in July. Back to school were also down in July because parents were not 100% sure what back-to-school would look like.
Kohl’s management said sales have stabilized around 75% of their typical volume, and expect demand to remain lower for the rest of 2020. While today’s sales may be an overreaction, it’s not surprising to investors less than enthusiastic look over that view.
