Kohl's Earnings Fall, but Beat Street
Updated from Feb. 26
After a sub-par 2003,
Kohl's
(KSS) - Get Report
addressed investors' concerns in a post-close conference call by promising a return to fast-paced earnings growth in 2004. The company also announced plans to slow down expansion beginning next year.
A persistent inventory overhang led to steep markdowns and depressed sales in 2003. But Kohl's officials said they have now cleaned up the problem, projecting the company's earnings per share will grow 25% to 28% this year -- a faster pace than Wall Street expects -- and 20% a year in the long term. Company officials project the long-term earnings growth will in part from cost savings as it cuts back on its expensive store expansion plan.
"2003 was a very difficult year for Kohl's. It clearly didn't meet our standards," company CEO Larry Montgomery said on the conference call with investors and analysts. "We've had over 10 years of very successful performance as a public company. We know what we need to do to get back on track."
Investors seemed willing to give Montgomery and Kohl's the benefit of the doubt. Early Friday, the company's shares were up $2.15, or 4.3%, to $52.65.
In the fourth quarter, the discount department store chain earned $246.8 million, or 72 cents a share, compared with $279 million, or 81 cents a share, in the year-ago period. The company previously reported that its sales increased 11.9% over the fourth quarter of 2002 to $3.56 billion.
Despite the year-over-year earnings slump, the company's bottom line topped its guidance and Wall Street's expectations. Analysts surveyed by Thomson First Call were expecting the company to earn 69 cents a share. Kohl's lowered its earnings estimate to 68 cents to 70 cents a share last month after reporting a sales slump in December. Previously, the company had projected it would earn 89 cents to 95 cents in the quarter.
In the first quarter, Kohl's expects to earn 32 cents to 34 cents a share on sales ranging from $2.44 billion to $2.48 billion, or 15% to 17% higher than last year. In the first quarter of 2003, the company earned 32 cents a share on sales of $2.12 billion.
Kohl's expects its earnings in the first quarter to be hit be a penny a share charge due to the adoption of an accounting change. Even taking that charge into account, the midpoint of the company's guidance, 34 cents, would still be below analysts' estimates. Analysts expect the company to earn 35 cents a share in the current quarter on $2.46 billion in sales.
But Kohl's officials expect to make up for that disappointment in the rest of the year. The company forecast earnings of $2.15 to $2.21 a share for the full year. Wall Street is looking for full-year earnings of $2.12 a share on sales of $12.11 billion.
The company's outlook for this year comes in the wake of a down year last year. In each of the previous seven years, the company's net earnings grew at an annual rate of at least 30%. But in fiscal 2003, the company's net earnings fell 8.8% to $591.2 million.
The earnings drop came as the company's sales slowed. In each of the previous four years, Kohl's sales had grown at least 21% annually. Last year, the company's sales grew just 12.7%. And on a same-store basis, which compares like stores open more than a year, they fell 1.6%.
The poor performance at Kohl's older stores continued in the fourth quarter. During the holiday period, the company's same-store sales declined 2.1% from the same period a year ago.
Stand and Deliver
Meanwhile, the company continued to have problems with its cost structure. Its gross profit margins fell 2.07 percentage points as a portion of sales during the quarter to 30.9%. Gross margin represents the difference between what a company charges customers for its products and its direct costs of acquiring and providing them. Arlene Meier, the company's chief operating officer, blamed the decline on the markdowns Kohl's took to clear inventory for spring.
Kohl's inventories are now back in shape and the company expects to return to a gross margin rate of around 34% in 2004, Meier said. "We will return to what's been successful in the past," she said.
But the company also faced problems in the fourth quarter and in all of 2003 with its operating expenses. The company's marketing, general and administrative costs increased 84 basis points to 17.39% of sales in the holiday quarter. Meier attributed that increase to costs related to the company's store expansion and to planned advertising expenses. The number of stores the company operates increased by 85 outlets, or 18.6% of its base, to 542 last year.
Kohl's plans to open another 95 stores, or 18% of its base, in 2004, said Montgomery. But it plans to slow its expansion to 15% a year in terms of stores and square footage growth in 2005. The company plans to continue that rate of square footage growth beyond that. In previous years, Kohl's square footage has grown by about 20% a year.
"We believe we can deliver 20%
earnings growth with lower square footage growth," Montgomery said. "We believe we can leverage our
operating costs on lower sales increases."