Kohl's Exceeds, Ups Guidance

Kohl's Exceeds, Ups Guidance - Analyst Blog

Kohl’s Corporation (KSS) reported its operating earnings of 80 cents per share in the third-quarter 2011, beating the Zacks Consensus Estimate by a penny. The earnings, however, surpassed the prior-year quarter earnings by 40%.

Profits were largely driven by prudent expense management across many of Kohl’s stores. Besides, the improved access of the company’s brands and disciplined inventory management strengthen the quarter’s results. The launch of the Jennifer Lopez and Marc Anthony brands during the quarter also supported the sales plans.

Sales and Margins

Amid a challenging sales environment, net sales rose 3.8% to $4.4 billion, driven by a 2.1% increase in comparable store sales. The results were in-line with the Zacks Consensus Sales Estimates.

On November 3, 2011, Kohl’s reported that its same-store sales increased 3.9% for the four-week month ended October 29, 2011. Total sales also increased 5.6% for the same period.

The gross margin increased by 10 basis points to 38.6%, on the back of increased penetration of private and exclusive brands and disciplined inventory management. The operating margin also jumped 110 basis points to 9.5% of net sales.

Store Update

At the end of the quarter, Kohl’s added 31 stores to reach a total of 1,127 stores in 49 states, compared with 1,089 stores in the prior-year quarter. The company completed the remodel of 15 stores during the third quarter, bringing the total number of stores remodeled in 2011 to 100.

Other Financial Update

Kohl’s ended the quarter with cash and cash equivalents of $760 million, while its long-term debt and capital leases were $4.1 billion and shareholders’ equity was $6.5 billion at the end of October 29, 2011.

On September 28, 2011, Kohl's paid a quarterly cash dividend of 25 cents per share to its shareholders of record at the close of business on September 7, 2011.

Management Guided

Driven by strong profits in the third-quarter, Kohl’s now expects to increase its total sales forecast to range between 4% - 6%, and comparable store sales forecast to increase between 2% - 4% for the fourth quarter of 2011.

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 5% - 6%.

In addition, Kohl’s expects to repurchase approximately $300 million of shares in the fourth-quarter 2011, which is expected to result in earnings per share in the range of $1.93 - $2.04 per share for the fourth-quarter 2011.

For fiscal 2011, the company has further increased its earnings guidance from $4.34 - $4.49 per share to $4.41 - $4.52 per share.

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.