Kohl’s Corporation: Call Options Poised for Gains on Increased Holiday Sales

U.S stocks continue their bullish ascent for the third day this week as the S&P 500 edges towards 2000 in a strong confirmation of the bullish momentum in the market. I am interested in exploring the possibilities in the options of Kohl’s Corporation (NYSE:KSS). Kohl’s with its market capitalization of $11.97B operate family-oriented department stores that sell apparel, footwear and accessories for women, men and children; soft home products, such as sheets and pillows, and housewares.

Kohl’s In Recent News

Kohl’s made headlines recently when it reported Q2 2014 earnings about a week ago. Kohl’s beat the Q2 analysts’ estimates but it was unable to meet analysts’ expectations on revenue. Nonetheless, the company remains strategically positioned to reward options traders going forward. Highlights of the second quarter earnings are presented below.

  • Q2 earnings was reported at $1.13 per share to beat the analysts’ consensus estimate by 5.6% and to mark a 9% increment over earnings that was reported in the same quarter last year.
  • Year-to-date EPS increased by 2% to $1.73, net income in the second quarter was $232M and Year-to-date net income is $357M.
  • Total sales decreased in the second quarter by 1.1% to $4.2B
  • Year-to-date comp sales was down 2.3% and total sales was down by 2.1% to $8.3B

As seen from the financial highlights above, Kohl’s delivered mixed results in the second quarter. The mixed result is in line with the general weakness being experienced in the retail sector. However, I strongly believe that Kohl’s has impressive fundamentals, a vibrant e-commerce business and exceptional brand recognition to deliver profits on KSS calls in the short term.

Strong Brand Portfolio

Kohl’s has a unique positioning and a strong brand image in its offers of moderately priced national brand and exclusive shoes, apparel, accessories, home and beauty products. In fact, you if you are not putting on something from Kohl’s today, you will surely see their products on many people around you. You can easily think of Kohl’s every time you see someone decked in Levi’s, Reebok, Docker’s, Oshkosh and Champion.

Another interesting point to note about Kohl’s strong brand identity is the offering of exclusive brands in its stores to draw in shoppers with more disposable income. For instance, the “Chaps” line made by Polo Ralph Lauren and “Simply Vera” by Vera Wang are sold exclusively in Kohl’s stores.

Vibrant E-Commerce Business

No retailer can survive in the current business dispensation without having a vibrant e-commerce business. Many people are shopping online these days and even those who go to brick and mortar stores to make purchases usually run some preliminary comparisons online before deciding on the store to visit.

Kohl’s e-commerce sales have been increasing by an annual growth rate of approximately 40% since 2009. In fiscal 2013, Kohl’s e-commerce sales increased by almost 20%. Early this year, Kohl’s announced the upgrading of its software platform with the e-Sign technology for the strengthening of its omni-channel platform.

Quoting CEO Kevin Mansell from the Q2 earnings call transcript, “we plan to grow E-Commerce 20% a year. So we underachieved that for a variety of reasons in the first quarter. We are going to overachieve that in July, August, September for sure, and then it should go back to a normalized 20% going forward.

How to Trade KSS Options

I have a $60 price target on Kohl’s Corporation by January 2015 in anticipation of increased holiday sales towards the end of this year. I will buy in-the-money KSS options KSS Jan 2015 57.500 call (KSS150117C00057500) at an asking price of $3.00.

— Daily Option Alerts

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