RealMoney Silver - KSS Holds Steady

KSS Holds Steady
By Ron Thomas
RealMoney Contributor
5/16/2008 9:51 AM EDT

Kohl's (KSS) reported EPS of 49 cents vs. a Street consensus of 42 cents and down 23% from last year's 64 cents. The 1.5% sales increase, to $3.6 billion, was on consensus.

Comparable-store sales declined 6.7%. Fashion, jewelry and beauty -- beauty is a probable trade-down market share gain from department stores -- were strong. Footwear and home were the weakest categories, with management seeing no hope for home goods soon. What sales strength there was came mostly in new, exclusive brands, with private labels now making up 42% of sales, up 400 basis points from last year. Daisy Fuentes, Tony Hawk and Chaps were up double digits, and twice management made implications that JCPenney's (JCP) American Living brand rollout had not affected them.

The other driver of the earnings beat was aggressive management of inventory, which was down 9% on a square footage basis vs. a 2.6% decline at the end of the fourth quarter.

So, gross margin dollars were up 1.3% and the percentage was 36.8%, down only 0.1%. SG&A expenses rose 7.5% and 1.5% as a percentage of sales because of sales weakness. Depreciation and amortization rose 0.7% to sales. Operating income declined 22% and was down 2.2% as a percentage of sales, to 7.5%. Net declined 27% after higher interest expense related to the 5% decrease in share count.

Fiscal 2009 guidance called for sales to be up 2% to 4%, comps of negative 3% to negative 5%, the gross margin to be up 20 basis points, SG&A up 8% to 9% and EPS at $2.95 to $3.15. Previous yearly guidance of $3.15 to $3.50 had been cut because the comp expectation fell from a previous 0 to negative 3%. Second-quarter guidance expects sales to be up 4% to 6%, comps of negative 3% to negative 5%, the gross margin up 10 basis points to 20 basis points, SG&A up 12% to 13% and EPS in a range of 70 cents to 72 cents. The Street is at 72 cents for the second quarter and $3.11 for the year, so guidance may be conservative for the year, or management is seeing more weakness than sell-siders.

May sales are to be below the quarterly average because of a strong comp last year, but inventories management is very aggressive in seasonal and fashion items.

New store productivity is now 63% vs. historically in the mid-60 percentile, and the company's store developers are in decent financial shape. None of the stores are at their minimum staffing levels, but management sees little room to cut staffing from here. New brands have to mean something to the consumer. Kohl's will not invent any in-house.

Inflation in cost of goods sold is not expected overall in 2008 or in the first quarter or half of next year as Li & Fung can help Kohl's shift production out of China to other low wage areas.

Credit expense was levered to sales in the quarter, with bad debt expense on its card still below 4% and fee price increases helping.

So, Kohl's continues to do a fine job managing the business. Unfortunately, the 1,400 potential store count is still held, but with management saying it will now take longer to get there because of slower growth through this consumer retrenchment, the risk that the company will hit a wall somewhere in the future is lessened. JCPenney's announced slower expected growth is a marginal positive, too.

While not of much consequence now, I am wondering about the growth of Kohl's new brands and who is buying them in the midst of all of consumer-land going downscale now. The normal KSS customer would seem to be as affected as others. Is the Chaps, Daisy Fuentes, etc. customer being drawn down from Macy's (M) or Dillard's (DDS) ? If so, is it on price, lack of promotions for brands at those stores or saving gasoline by not going to the mall? I think management said some time ago that there were new customers in the store. This will take on more meaning as we start looking at fiscal 2010 EPS when new brand introductions will have slowed.

For Thomas' preview heading into the Kohl's conference call, please click here.