Kohl's Facing Stiff Competition, Margin Constraints

Kohl's Corporation (NYSE: KSS) shares may be up 27 percent year-to-date but an analyst said Thursday the company faces significant competition and constraints on its profit margin.

Argus Research's Christopher Graja maintained a Hold rating on the retailer and said he might raise his rating if same-store sales grew by more than 3 percent.

Kohl's shares were little changed recently at $77.51.

In February, Kohl's forecast full-year sales growth of between 1.5 percent and 2.5 percent on a comparable-store basis.

Fourth-quarter same-store sales grew 3.7 percent, but were down very slightly for the full year.

Graja said J C Penney Company Inc (NYSE: JCP)'s "louder promotional cadence" keeps pressure on Kohl's, while Macy's, Inc. (NYSE: M) has become a stronger competitor with its online strategy and in drawing in younger customers.

"Store traffic may continue to be soft," Graja said, adding that Kohl's gross margin will be held down by technology spending.

Graja trimmed a third off his five-year earnings growth forecast, to 8 percent, and based his estimate on average sales growth for the period of 3 percent.

Kohl's succeeds "when its stores appear to be a fun, convenient and less-expensive alternative to sometimes uninspiring mall-based department stores," Graja said.

The company is less successful, however, "when the stores appear to be more-expensive, and a clothing-heavy alternative" to Wal-Mart Stores, Inc. (NYSE: WMT) and Target Corporation (NYSE: TGT), according to Graja.