Kohl's (KSS) Q3 Earnings, Sales Beat Despite Weak Comps

Retailer Kohl’s Corporation (NYSE:KSS) delivered better-than-expected third-quarter fiscal 2016 results, wherein both earnings and revenues exceeded the consensus mark.

Kohl’s reported adjusted earnings of 80 cents per share, beating the Zacks Consensus Estimate of 67 cents by 19.4%. Earnings also increased 7% from the prior-year quarter, driven by better expense management. The performance of juniors and young men's categories was also encouraging.

Sales and Margins

Net sales of $4.33 billion beat the Zacks Consensus Estimate of $4.28 billion by 1.2%. Sales, however, declined 2.3% from the prior-year quarter due to a challenging sales environment and lower comparable store sales (comps).

Comps dropped 1.7% in the third quarter, narrower than the preceding quarter’s decline of 1.8%. Comps had increased 1.0% in the prior-year period. This signals that the company’s strategic initiative ‘Greatness Agenda’ is failing to deliver results.

The initiative, which commenced in first-quarter 2014, was designed to increase transactions per store and sales. Though the plan has helped the company to deliver positive comps in all the four quarters of fiscal 2015, the quarterly growth rates moderated gradually, thus posing a concern. Moreover, comps have declined in all the three quarters of fiscal 2016.

We note that Kohl’s has been struggling for the past many quarters to boost its sluggish top line. Lower spending on apparel and accessories and a general slowdown in consumer spending are hurting sales at department stores.

Kohl’s remains cautious about its fiscal 2016 results and plans to close 18 stores, due to retail uncertainty as well as careful spending by U.S. consumers.

Gross margin was almost flat at 37.1% in the reported quarter. Operating margin also remained flat at 7.0%. This was driven by the company’s inventory management initiatives.

Other Financial Details

As of Oct 29, 2016, Kohl’s had $597 million of cash and cash equivalents compared with $700 million as of Jul 30, 2016. The company ended the quarter with long-term debt of $2.79 billion -- flat sequentially.

On Nov 9, 2016, Kohl's board declared a quarterly cash dividend of 50 cents per share, which will be paid on Dec 21, 2016, to shareholders of record at the close of business on Dec 7.

Kohl's board also increased the company's outstanding share purchase authorization under its existing share repurchase program to $2.0 billion. The company expects to repurchase shares in open market transactions, subject to market conditions, over the next three years.

Kohl’s ended the quarter with 1,155 Kohl's stores, 12 FILA Outlet stores and three Off/Aisle clearance centers in 49 states, compared with 1,166 Kohl's stores in the year-ago period.

KOHLS CORP Price, Consensus and EPS Surprise

KOHLS CORP Price, Consensus and EPS Surprise | KOHLS CORP Quote

Other Update

In a separate development, the company announced that its chief financial officer, Wesley S. McDonald, plans to retire in late spring 2017 after 14 years of service with the company.

Outlook Reiterated

For fiscal 2016, management has reiterated its earnings guidance. The company continues to expect fiscal 2016 adjusted earnings in the range of $3.80−$4.00 per share.

Zacks Rank

Kohl’s has a Zacks Rank #4 (Sell).

Some better-ranked stocks in the retail sector are Francesca's Holdings Corp. (NASDAQ:FRAN) , Steven Madden, Ltd. (NASDAQ:SHOO) and Boot Barn Holdings, Inc. (NYSE:BOOT) . All these stocks hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While Francesca's Holdings carries an expected long-term earnings growth of 13.75%, Steven Madden and Boot Barn have an expected earnings growth of 13.5% and 14.5%, respectively, for the next three to five years.

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