Inflation Is Hitting the Middle Class. It Could Hurt Kohl’s Stock Too.

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Kohl’s core consumer household has an income of about $80,000 to $110,000, Cowen said.

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Dustin Chambers/Bloomberg

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Kohl’s stock received a downgrade Thursday over concerns that inflationary pressures on the middle class could affect the department store’s ability to hit its profit target.

Cowen analyst Oliver Chen lowered his rating to Market Perform or a Neutral equivalent from Outperform. His price target is now $35, down from $60 earlier.

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The stock (ticker: KSS) fell 3.2% to $30 following the downgrade.

Chen said the store’s vulnerability to the middle-income consumer could weigh on its ability to achieve the 7% to 8% medium-term target for EBIT, or earnings before interest and taxes, margin.

Kohl’s core consumer household has an income of approximately $80,000 to $110,000 and “could begin to reduce spending within the apparel category as inflationary pressures in gas and food gain wallet share,” Chen said.

Kohl’s didn’t respond to Barron’s request for comments.

Out of all the consumers, women represent 27% of the store’s buyer mix and they could pose the largest challenge as management realigns inventory to dresses, Chen said.

To be sure, Chen doesn’t deny Kohl’s long-term potential. He likes the strong annual free cash flow of roughly $1 billion, which could support share repurchases, and highlights its recent partnership with Sephora.

But weakening trends in apparel concerned him. He cites Walmart‘s
second-quarter results as an example. Walmart issued a warning in July that its profit would come in lower than previously expected.

Kohl’s reports second-quarter earnings on Aug. 18.

Write to Karishma Vanjani at [email protected]


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