Salesforce (CRM) and Kohl’s (KSS): Two Earnings, One Outlook

This morning, I am looking at two stocks that are showing big drops after earnings reports. Kohls (KSS) is down around 25% from yesterday’s close as I write, and Salesforce (CRM) is showing a 17% drop. Those are pretty healthy declines, and if you have been a regular reader of my musings over the last dozen years or so, you probably think you know what that means I will be saying here. 

Buying on big drops that are overreactions to news has been one of my favorite, and most profitable, trading strategies since I started in financial markets forty years ago, but I won’t be doing that in either of these two cases. Both KSS and CRM are reacting in the way they are for good reasons, and are best left alone, or could even be sold if you are stuck holding them.

Kohls was, on the surface, the worst of the two earnings reports. Wall Street was anticipating a $0.04 profit on the quarter, but the discount retailer reported a loss of $0.24. Losing money when a profit is expected is always bad news, but this also came with a revenue miss from a sales decline and lowered guidance. That is the unholy trinity of earnings, and KSS reacted accordingly.

Salesforce is at least making money. In fact, they beat expectations in terms of EPS and only missed on revenue by a small margin. What hit CRM stock was their adjusted earnings guidance of $2.34-$2.36 for the current quarter versus the consensus forecast for $2.40. That might not sound like too bad of a miss, but for a company whose stock is priced based on anticipated growth, any weakness in outlook has an exaggerated impact. CRM is certainly that, with a trailing P/E over 60.

The nature of the bad news was different in each case in other ways too. Kohls is attempting a turnaround, trying to boost sales by the inclusion of in-store Sephora branches, a strategy that they have announced they will extend by doing a similar thing with Babies-R-Us. These results suggest that maybe that is not working as intended. The retail sector generally this past earnings season has been mixed, with both winners and losers, and Kohls’ report puts them firmly among the losers. Theirs is a competitive problem, where they are losing out to others rather than suffering because of customers’ changing habits.

Salesforce, on the other hand, is being hit by changing conditions in their market. The software business is under pressure as businesses are becoming more cost conscious and focused only on projects that enhance their AI usage, or at least give the perception of doing so. Those are unlikely to be long-term changes to market conditions, but even if sales software does come back into vogue before too long, it will be a while before a P/E like Salesforce’s can be justified. A big adjustment in expectations is coming, and the stock will probably labor for some time as that adjustment takes place.

There is one short-term positive, I suppose. These moves are so big that a retracement of sorts in these stocks is almost inevitable. It may come later today or at some point over the next couple of trading days, but whenever it does, don’t be fooled. It will be purely a technical bounce based on a short-term oversold condition, but in neither case will the fundamentals have changed. Kohls is at a competitive disadvantage and struggling to increase their share of an at best static market, while Salesforce is a dominant force in their market, but it is one where growth is currently nowhere near what would be needed to justify the stock’s current levels.

Neither of those problems is going away quickly, and until they do, it will probably behoove investors to be wary of both KSS and CRM, despite the massive drops those stocks are showing today.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.