KSS Kohls Corporation

Kohl’s Corporation (KSS) reported its operating earnings of $1.09 per share in the second-quarter 2011, beating the Zacks Consensus Estimate by a penny. The earnings however, surpassed the prior-year quarter earnings by 30%.

Profits were largely driven by prudent expense management across many of Kohl’s stores. Besides, strong profitability in the credit card partnership with Capital One Financial Corp. (COF) helped as bad debt expenses declined significantly during the quarter over last year.

Sales and Margins

Amidst a challenging sales environment, net sales rose 3.6% to $4.2 billion, driven by a 1.9% increase in comparable store sales.

The gross margin increased by 40 basis points to 40.7%, on the back of increased penetration of private and exclusive brands and disciplined inventory management. The operating margin also jumped 110 basis points to 12.0% of net sales.

Store Update

At the end of the quarter, Kohl’s added 30 stores to reach a total of 1,097 stores in 49 states, compared with 1,067 stores in the prior-year quarter. The company expects to open an additional 31 stores and remodel an additional 15 stores in September.

Dividend Update

On August 9, 2011, Kohl's Board declared a quarterly cash dividend of 25 cents per share, payable on September 28, 2011 to shareholders of record at the close of business on September 7, 2011.

Other Financial Update

Kohl’s ended the quarter with cash and cash equivalents of $1.2 billion, up 53.6% from the prior-year quarter-end.

Long-term debt and capital leases were down 5.9% to $1.7 billion and shareholders’ equity also reduced 12.3% to $7.3 billion as of July 30, 2011.

Management Guided

Driven by strong profits in the second-quarter, Kohl’s now expects to increase its total sales forecast to range between 4% - 6%, and comparable store sales forecast to 2% - 4%.

The company also anticipates a gross margin in the range of down 10 basis points to up 10 basis points. Selling, general and administrative expenses are expected to increase in the range of 1.5% - 3%.

In addition, Kohl’s expects to repurchase approximately $500 million of shares in the third-quarter 2011, which is expected to result in earnings per share in the range of 76 - 82 cents for the third-quarter 2011.

For fiscal 2011, the company has further increased its earnings guidance from $4.25 - $4.40 per share to $4.45 - $4.60 per share, as a result of its strong second-quarter performance and its third-quarter share repurchase estimate.

Kohl’s has had a consistent merchandise mix over the past three years. In addition, the company’s pricing strategy and overall profitability culture is focused on maintaining a low-cost structure.

A strong balance sheet coupled with strong cash balances and attractive dividend yields makes the stock attractive.  However, some mid-priced retailers are struggling to combat rising input costs. Kohl’s also faces increased competition from Target Corp. (TGT), which is a concern.

Kohl’s holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Currently, we maintain a long term Neutral recommendation on the stock.

 
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