Kohl's (KSS) Q2 Earnings Beat; Outlook Cut On Weak Comps

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

Kohl’s reported earnings of $1.22 per share, beating the Zacks Consensus Estimate of $1.04 by 17.3%. Earnings also increased 14% from the prior-year quarter driven by higher gross margin and better expense management. The performance of juniors and young men's categories were also encouraging.

Sales and Margins

Net sales of $4.182 billion beat the Zacks Consensus Estimate of $4.158 billion by a marginal 0.6%. Sales however declined 2% from the prior-year quarter due to a challenging sales environment.

Comps declined 1.8% in the second quarter, narrower than the preceding quarter’s decline of 3.9%. Comps had increased 0.1% in the prior year period. This signals that the company’s strategic initiative ‘Greatness Agenda’ is failing to deliver results. The initiative, which began in the first quarter of 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 declined in the first two quarters of fiscal 2016.

We note that Kohl’s is struggling since 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 Corporation remains cautious about its fiscal 2016 results and plans to close 18 stores, due to retail uncertainty as well as careful spending by US consumers.

Gross margin expanded 59 basis points (bps) to 39.5%. This was driven by the company’s inventory management initiatives, which have helped it to achieve a strong increase in gross margin with ending inventory per store down significantly from last year. Operating margin also plunged 220 bps to 7.2%.

KOHLS CORP Price and Consensus

KOHLS CORP Price and Consensus | KOHLS CORP Quote

Other Financial Details

As of Jul 30, 2016, Kohl’s held $700 million of cash and cash equivalents compared with $423 million as of Apr 30, 2016. The company ended the quarter with long-term debt of $2.79 billion, flat sequentially.

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

Kohl’s ended the quarter with 1,150 Kohl's stores, 12 FILA Outlet stores, and three Off/Aisle clearance centers in 49 states, compared with 1,164 Kohl's stores at the same time last year.

Outlook Slashed

The company has slashed its earnings guidance due to sluggish comps and a difficult sales scenario. The company now expects its adjusted fiscal 2016 earnings in the range of $3.80 to $4.00, compared with the prior guidance of $4.05 to $4.25.

During the fourth quarter 2015 conference call, Kohl’s had stated that it will also close 18 underperforming stores in fiscal 2016, which are expected to generate annual SG&A savings of approximately $45 million and annual depreciation savings of approximately $10 million.

It expects sales in a range of (0.5%) to 0.5%, driven by comparable sales of 0% to 1.0%.

The company plans to repurchase shares worth $600 million at an average price of $50 per share.

Kohl’s has a Zacks Rank #4 (Sell).

Better-ranked companies in the broader retail sector include Dillard's Inc. (NYSE:DDS) , Wal-Mart Stores, Inc. (NYSE:WMT) and Dollar Tree, Inc. (NASDAQ:DLTR) . All of these hold a Zacks Rank #2 (Buy).