Kohl's Corporation Sales Soar, While Bon-Ton Spirals Towards Bankruptcy

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Strong holiday sales reports from several leading department store chains indicate that the sector may be snapping out of its long-running sales funk. On Monday, Kohl's (NYSE: KSS) announced the best holiday sales performance by far among department stores, with comp sales up 6.9% year over year.

However, the 2017 holiday season wasn't kind to every department store. Instead, the strongest retailers appear to have won at the expense of their failing rivals. On Monday, Bon-Ton Stores (NASDAQ: BONT) -- one of those failing department stores -- reported disappointing sales results for the November-December period. This will probably force it to declare bankruptcy in the near future, which could lead to its ultimate demise.

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Kohl's sparkles during the holiday season

Kohl's started to see a sales turnaround in the third quarter despite unfavorable weather during September and early October. For the full quarter, comparable store sales inched up 0.1% year over year.

Furthermore, sales trends remained robust during November, based on several statements made by Kohl's CEO Kevin Mansell. Thanksgiving weekend was particularly strong, both in stores and online. However, Mansell didn't quantify any of his claims.

Kohl's holiday season sales performance turned out to be even better than investors had hoped. Even the most bullish analyst on Wall Street projected that sales would increase just 4.5% this quarter, with more than half of that gain coming from having an extra week in the period. Instead, comp sales surged 6.9% for November and December combined.

Even if Kohl's posts a comp sales decline in January -- which is quite possible because the company simply doesn't have much clearance inventory to sell -- it will end the quarter with its strongest comp sales increase in years. Furthermore, the company raised its full-year adjusted EPS guidance all the way from $3.60-$3.80 to $3.98-$4.08.

Bon-Ton crashes and burns -- again

Kohl's stellar holiday season performance stands in stark contrast to Bon-Ton's poor results. During the first three quarters of fiscal 2017, Bon-Ton's comparable store sales fell by more than 7%, while gross margin declined. Considering the company's already weak financial position, this puts Bon-Ton on a path toward bankruptcy.

However, Bon-Ton posted a high single-digit comp sales increase in the first few weeks of November, according to management. This suggested that the company might have a chance to save itself during the holiday season.

Unfortunately, this momentum didn't last. For the full month of November, comp sales rose just 3.1%. Even worse, comp sales for the combined November-December period declined by 2.9%, indicating that Bon-Ton returned to its losing ways last month.

In the midst of this upheaval, Bon-Ton missed an interest payment due on Dec. 15, and its CFO resigned last week. The company has a 30-day grace period to make the required interest payment, but it has already signaled that it wants to restructure its debt.

However, while it's true that Bon-Ton has too much debt, that isn't the root of its problems. Based on its poor holiday season sales performance, Bon-Ton is on pace to earn less than $100 million before interest, taxes, depreciation, and amortization in fiscal 2017. Even if the company cut its debt load in half, it wouldn't generate enough cash to pay for the investments needed to stay competitive. As a result, if Bon-Ton files for bankruptcy -- which now seems quite likely -- liquidation is a more realistic outcome than restructuring.

Another tailwind for Kohl's?

Kohl's strong holiday season sales performance puts it on track to post its first annual EPS increase since 2014. The recently passed tax reform bill will provide another big EPS boost in 2018. Nevertheless, for Kohl's stock to continue rallying, the company will need to show that the recent sales surge wasn't a fluke.

Fortunately, Kohl's may be able to capitalize on Bon-Ton's woes. Even if it manages to survive the year, Bon-Ton plans to close at least 40 stores (more than 15% of its store base) in 2018. Kohl's is well-positioned to pick up sales, as Bon-Ton and other mall-based department stores downsize, since Kohl's has a broad national footprint and is insulated from falling mall traffic because few of its stores are based in traditional malls.

After years of stagnant sales and steady margin erosion at Kohl's, a turnaround is finally brewing. If the company manages to capitalize on its growth opportunities in 2018 and beyond, Kohl's stock could continue to surge higher.

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Adam Levine-Weinberg owns shares of Kohl's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.