Kohl's shares press higher on bottom line beat; Will traders fade the pop?
AInvestWednesday, Aug 28, 2024 8:51 am ET
2min read
KSS --

Kohl's Corporation (KSS) reported its Q2 2024 results, with both revenue and earnings per share (EPS) presenting a mixed picture compared to analyst expectations. The company posted net sales of $3.53 billion, a decline of 4.2% year-over-year, which fell short of the expected $3.62 billion. However, Kohl's delivered a significant beat on the bottom line, reporting EPS of $0.59, surpassing the analyst consensus of $0.41 and improving from $0.52 in the same quarter last year. This earnings beat was primarily driven by effective cost management and margin expansion.

Comparable store sales were down 5.1% year-over-year, reflecting ongoing challenges in driving foot traffic and sales in a difficult retail environment. This decline in comps was a key contributor to the overall drop in net sales and fell below the already cautious expectations for the quarter. Despite the weaker top-line performance, Kohl's managed to expand its gross margin by 59 basis points to 39.6%, slightly above the expected 39.5%. This improvement was attributed to better inventory management and a favorable product mix.

Key metrics from the quarter also showed mixed results. Merchandise inventories were down 9% year-over-year to $3.15 billion, below the expected $3.24 billion, signaling effective inventory controls. Operating income came in at $166 million, ahead of the $143.3 million estimate, reflecting the company's focus on cost efficiency. Additionally, selling, general, and administrative (SG&A) expenses decreased by 4.2%, helping to offset the sales decline.

One of the critical drivers for Kohl's in the quarter was its gross margin expansion, despite the challenging sales environment. The company’s operational discipline in managing inventory and expenses allowed it to protect profitability even as sales volumes fell. However, the softness in core categories, including women’s and men’s sportswear and activewear, continued to weigh on overall performance. On the other hand, Kohl's key growth areas, such as the Sephora partnership, home decor, gifting, and impulse buys, showed strength, though not enough to offset the broader weakness.

Looking forward, Kohl's adjusted its full-year guidance, raising its EPS outlook to a range of $1.75 to $2.25, up from the previous range of $1.25 to $1.85. The company also slightly increased its operating margin forecast to 3.4% to 3.8%, compared to the prior forecast of 3% to 3.5%. However, Kohl's reduced its full-year net sales guidance, now expecting a decline of 4% to 6%, worse than the earlier forecast of a 2% to 4% decrease. This reflects the ongoing challenges in driving sales growth amid a tough consumer environment.

In terms of stock price action, Kohl's shares initially rose by 4.5% in early New York trading following the earnings release, reflecting investor optimism around the earnings beat and improved margin guidance. However, the stock has been under significant pressure this year, down 32% year-to-date as of Tuesday's close, underperforming the broader market as represented by the Russell 1000 Index, which is up 17% over the same period. This early pop in the stock price might face pressure as investors digest the weaker sales outlook and the continued softness in core business areas.

Overall, Kohl's Q2 results reflect a company navigating a challenging retail landscape with some success in protecting profitability but facing significant headwinds in driving top-line growth. The company's strategy of improving product offerings and expanding partnerships like Sephora continues, but the benefits are yet to fully materialize in reversing declining sales trends. Investors will be closely watching how these efforts translate into results in the coming quarters, especially as the broader consumer environment remains uncertain.

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