Kohl's Reports Impressive Margin Gains

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

Kohl's (KSS - commentary - Trade Now) reported third-quarter earnings this morning of 63 cents per share vs. the 61-cent consensus estimate, for year-over-year growth of 6%. The value retailer's revenue came in at $4.051 billion vs. the consensus estimate of $4.03 billion, for year-over-year growth 7%.

One thing I'm always curious about: Kohl's raised EPS guidance with last week's comp to a range between 60 cents and 61 cents but came in at 63 cents this morning. According to my math, 2 cents a share on 308 million shares is just a tad over $6 million bucks. Did this show up with the morning paper? I understand conservative guidance in these times, but I wonder what the company found in between last Thursday's comp release and this morning's earnings release that it wasn't aware of last week.

Kohl's also reported a third-quarter comp of up 2.4%, even though October was a little weaker than expected.

The star of the quarter was the gross margin, which saw a 58-basis-point year-over-year increase, from 37.41% to 37.99%. And that will be followed by another gross-margin increase in the fourth quarter, per the conference call. The company is attributing the gains to better inventory management, less clearance pressure and higher penetration of private-label and exclusive brands.

In addition, SG&A expenses fell year over year from 25.81% to 25.35% of revenue. The company said that it was underinvested in payroll, so it sounds like Kohl's will add headcount in the fourth quarter. Nonetheless, the combination of higher gross margins and lower SG&A pushed the operating margin 90 basis points higher, to 8.4% from 7.5% in the year-ago quarter.

Kohl's also commented on the significant market share gains it has made since Mervyns and Gottschalks disappeared.

Management did guide EPS down to a midpoint of $1.19 for the fourth quarter vs. the $1.25 current estimate coming into the call, all due to SG&A and the aforementioned understaffing.

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At the time of publication, Gilmartin had no positions in the stocks mentioned, although positions may change at any time.

Brian Gilmartin, CFA, founded Trinity Asset Management (TAM) in 1995, where he is currently a portfolio manager. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gilmartin appreciates your feedback; click here to send him an email.