Bank of America Turns Down on Kohl’s and Foot Locker Amid Supply Chain Turmoil

Bank of America downgraded its rating on Kohl’s to “Underperform” from “Buy” due to supply chain constraints while reverting its rating on Foot Locker to “Under Perform”, also citing supply chain issues as well as waning stimulus dollars.

In her note on Kohl’s, analyst Lorraine Hutchinson wrote that reduced revenue from supply chain issues could hamper Kohl’s sales recovery and offset active category dynamics, advancements on women and women. benefits of deploying Sephora stores in stores.

“Kohl’s Active companies and women’s private labels are at high risk of delay in delivery and out of stock,” Hutchinson said. “While lower revenue means less clearance, which is good for margins, we believe the headwind in sales will be difficult to offset.”

She noted that the asset has been a key growth engine for Kohl’s, with penetration of the category more than doubling in the past five years. In the second quarter, assets represented 24% of sales while increasing 40% year-over-year and 20% from 2019.

However, she noted that Kohl’s top performing active brands, including Nike, Under Armor, Adidas and Champion, all face supply chain constraints. She pointed to recent comments from Nike that it had lost ten weeks of production due to plant closures in Vietnam and transit times to the United States had doubled from 40 to 80 days. She added: “This issue is not unique to Nike and we expect delayed deliveries across the sports ecosystem. These slowdowns could hamper KSS’s ability to drive the disproportionate growth of Active that has offset declines in other areas.

She also noted that women have also been disproportionately affected by delays in receiving inventory due to its high private label penetration and faster than expected sales recovery.

The analyst reduced the earnings per share estimates for the year 2021 from $ 6.09 to $ 5.79 and the EPS estimates for the year 2022 from $ 6.47 to $ 5.36, noting that the Bigger risk to the consensus forecast is likely in the first half of 2022. It lowered its price target from $ 75 to $ 48.

“The stock is relatively cheap, but with declining estimates, we see a downside,” Hutchinson said. Kohl’s shares on Thursday when the report was released slipped from $ 6.57 to $ 47.09. The stock started the year at $ 40.69.

In his Foot Locker note, Hutchinson set a price target of $ 45. She said, “We believe supply chain issues and overlapping high levels of stimulus dollars are creating a difficult catalyst path for the stock.”

She said the Foot Locker customer was quick to spend tax refunds and stimulus checks on sneakers.

Supply chain concerns largely mirror Nike’s decision the previous week to cut its full-year sales forecast to an average single-digit growth rate, from a previous estimate of two-digit gains. figures due to plant closures in Vietnam linked to the pandemic and escalating transit time to ship product from Asia. Hutchinson said, “FL’s sales exposure to Nike is 70% to 75%, so we would expect these supply chain challenges to end up at FL. “

Hutchinson said Foot Locker would be helped somewhat by Nike’s increased focus on strategic accounts, which includes Foot Locker as well as Dick’s Sporting Goods, Academy Sports and Nordstrom in the United States.

Hutchinson said, “Nike continues to prioritize its differentiated wholesale accounts that share its digital vision and focus more on others in a more aggressive way. This will help FL get products during these challenges. That said, we believe no partner will be immune from the lack of supply, especially as NKE seeks to channel their inventory through its own higher margin e-commerce channel. We expect supply chain challenges to begin at the end of Q4, with most of it occurring in 1H22. “

She added that the recent acquisitions of WSS and Atmos are helping Foot Locker exploit new growth opportunities, but the combined transactions cost $ 1.1 billion and this reduces the likelihood of share buybacks returning to levels of. ‘before the pandemic over the next 12 months.

Hutchinson has set his EPS estimate for fiscal 2021/2022 at $ 6.93 and $ 5.86 respectively, which is 3% and 15% below Wall Street consensus targets. Hutchinson concluded: “The stock is relatively inexpensive, but with risky estimates we see a downside.”

Foot Locker’s shares on Thursday fell $ 3.73 to $ 45.66. The stock started the year at $ 40.44.

Photo courtesy of Kohl’s

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