Did Kohl's rally on a short squeeze?

Its tempered outlook was still better than the Street's forecast.

By InvestorPlace Jul 6, 2012 10:46AM

By Dan Burrows

Kohl's (KSS) stock has been hammered since late May, when the company said first-quarter earnings fell 23%. On Thursday, the midprice retail chain delivered more bad news -- but apparently it wasn't bad enough for some traders.


Shares in Kohl's rallied sharply despite the poor June sales figures, probably because its disappointing quarterly outlook still remained ahead of Wall Street's even more pessimistic forecast.

Kohl's same-store sales, which compares receipts from locations open at least a year and is considered to be a key measure of a retailer's health, dropped 4.2% in June. That was substantially worse than analysts' expectations of a 3.2% decline.


The poor showing led Kohl's to tamp down its earnings guidance. The company said it now expects second-quarter earnings to come in at the low end of its May forecast of 96 cents to $1.02 a share. And perhaps that's what set off the pop in the stock -- because the Street's average estimate for second-quarter earnings stood at 95 cents.


True, Kohl's hardly came out with a chest-thumping outlook, but it was better than the analysts -- and perhaps the shorts -- were betting on.


Besides, it's not like lots of bad news hasn't already been baked in. Kohl's stock had plunged more than 12% since late May. Over the same period, the percentage of shares sold short hit 9%.


That's high. And although Kohl's had a bad June, it was hardly disastrous. At the same time, the company tempered its guidance, but didn't blow it. Shorts betting on far worse news might have found themselves squeezed.


After all, even after Thursday's rally, shares still trade at discounts to peers such as Target (TGT), Wal-Mart (WMT), Macy's (M) and J.C. Penney (JCP).


Heck, if anything, Kohl's said the Street's profit forecast may be a wee bit too low. That makes the forward price-to-earnings ratio of 9 look like a bargain -- especially if the company enjoys second-half stabilization or strength.


"Though June sales were again lower than expectations, we are encouraged by improved sales in the latter weeks of the month as we continued to build inventory levels," Chief Executive Kevin Mansell said in a statement.


Management's full-year earnings guidance still stands at $4.75 a share, making the stock look adequately discounted at current levels. By both forward and trailing earnings, Kohl's trades about 30% below its own five-year averages.


It also doesn't hurt that Kohl's dividend sports a yield of 2.9%.


The worst may already be behind Kohl's, and that very well may have ignited a short squeeze. Kohl's did see very heavy trading volume Thursday in an otherwise thin and quiet market. It's impossible to know for sure, but the name had been beaten up plenty ahead of Thursday. The latest news clearly surprised someone.


As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


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