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Why Target, Costco, and Kohl's Stocks Got Pummeled This Week

Motley Fool - Fri May 20, 11:11AM CDT

What happened

The overall stock market has been struggling with the Dow Jones Industrial Average heading for its eighth straight losing week. For retail stocks including Target(NYSE: TGT), Costco Wholesale(NASDAQ: COST), and Kohl's(NYSE: KSS), this past week has been the worst of them all. As of Friday midmorning trading, Target shares had dropped a whopping 30% for the week. The stocks of Costco and Kohl's were both down about 16%, according to data provided by S&P Global Market Intelligence.

So what

These moves came after both Target and Kohl's reported first-quarter results this week. Both retailers badly missed expectations for bottom line net income. That came from a combination of rising costs and supply chain disruptions, along with a changing consumer environment.

Red stock chart with white arrow moving down.

Image source: Getty Images.

Now what

While Target reported sales increased 4% year over year, its net earnings plunged by 52%. In the company's earnings conference call with investors, Target CEO Brian Cornell said, "we saw a much higher than expected rate in transportation costs and a more dramatic change in our sales mix than we anticipated."

Cornell went on to say that caused the unexpected drop in earnings, and resulted in excess inventory. Kohl's CEO Michelle Gass commented that Kohl's also failed to produce results up to its own expectations partly due to an "inflationary consumer environment." An indication of that was that average purchases per visit were down, pointing to more hesitancy for consumers to spend on items that aren't absolutely necessary.

The report comes as Kohl's is in the process of selling its business. It said it already has non-binding bids as potential suitors do their due diligence. The company hopes to have fully financed final bids in the weeks to come. The current business results are something bidders will certainly consider as Kohl's lowered its outlook for net sales, operating margin, and earnings per share for the full year.

Target maintained its outlook for 2022 low- to mid-single digit revenue growth above 2021, but lowered its estimate to an operating margin rate of about 6%. The company previously said that would be at a level of at least 8%.

Investors lumped many retailers together this week after these results. Costco shares sank even though it has reported strong April sales growth of nearly 14% versus the prior-year period. Costco hasn't yet reported its full quarterly results. But Costco stock is already priced for strength in the business, with a price-to-earnings (P/E) ratio still above 30.

With the outlook being offered by multiple retailers, investors should be aware the entire sector is in the process of being repriced this week.

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Howard Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.