Kohl's Meets Reduced Guidance

Earnings hit the level given at last week's warning, while sales were up 13%, but just under guidance.
By Troy Wolverton ,

Updated from 5:35 p.m. EDTUpdated from 4:43 p.m. EDTKohl's (KSS) - Get Report first quarter results met its lowered guidance, but the retailer's inventory situation could cast a pall over the second quarter.

On a year-over-year basis, Kohl's inventory grew 27.6% to $1.81 billion at the end of the quarter, outpacing the company's 13% annual sales growth in the quarter. On a per store basis, inventory grew at an 8.9% annual clip, far outrunning same-store sales results at the discount department store chain.

Given that the company increased its square footage by 18% on a year-over-year basis, including what are expected to be high-volume stores in the Los Angeles area, a large increase was to be expected. But considering the company posted a same-store sales decline in the quarter and forecast continued slow sales in the second quarter, it could well be looking at increased markdowns and substantially decreased margins. Kohl's opened 28 stores in the Los Angeles area, and 35 over all, in the first quarter.

Given the company's slow first-quarter sales, Kohl's inventory figures were "not as bad as we could have feared," said one fund manager, who asked not to be named. But he added, "They were not as good as could have hoped for, either."

For their part, company officials on a conference call downplayed the significance of the inventory increase. Most of the inventory increase was due to the company stocking up in summer apparel items that Kohl's plans to sell through in the second quarter and in basic apparel products that the company officials feels could give it a competitive advantage over other retailers, they said. Meanwhile, only a small portion of the inventory increase was in clearance items, company officials said.

"I realize there's a lot of concern about our inventory level today," said Kevin Mansell, Kohl's president. "Our inventory is higher than we would like it to be. But I am comfortable with our mix of inventory."

Still, company officials told investors that they planned to use price promotions to drive sales in the second quarter.

In its first quarter ended May 3, Kohl's earned $111.01 million, or 32 cents a share. The company's per share earnings were up 3.1% from the year-ago period, when Kohl's earned 31 cents a share.

Kohl's revenue grew to $2.12 billion in the first quarter, up from $1.87 billion in the same period last year.

The bottom-line results met Wall Street's updated projections, although Kohl's revenue came in lower than expected. Analysts were expecting Kohl's to earn 32 cents a share on $2.15 billion in sales, according to Thomson First Call.

Kohl's

warned last week that its earnings would come in below analysts' projections then and would miss its own guidance of 36 cents to 40 cents a share. The company's revised earnings target was 32 cents a share.

Both the overall economy and cool weather, which led to soft apparel sales, affected Kohl's results, company officials said. Still, they acknowledged that the quarter was disappointing.

"Our performance was not acceptable," said Larry Montgomery, the company's CEO, on the call.

The retail chain estimated that it would earn between 38 cents and 42 cents a share in the second quarter on comparable-store sales growth of flat to up 3%. Wall Street is expecting the company to earn 41 cents a share on $2.26 billion in sales, according to Thomson First Call.

Kohl's same-store sales, which compare the results of like outlets open more than one year, dropped 2.4% in the first quarter, including a 4.1% decline in April, the company reported last week. The company's sales increase resulted from an increase in store count. At the end of the quarter, Kohl's operated 492 stores, an increase of 72 stores, or 17%, from the end of the first quarter last year.

The company had previously said that its disappointing earnings were a result of its same-store sales decline.

But the retail chain also lost ground on its expenses. Kohl's gross profit margin, which is the difference between what a company charges for its goods and what it pays for them, declined 10 basis points on a year-over-year basis to 35% of sales, as its cost of goods sold increased faster than its sales.

Meanwhile, the company's sales, general and administrative expenses increased 37 basis points over the first quarter last year to 22.4% of revenue. Depreciation and amortization expenses also rose, coming in 20 basis points higher than the same period a year ago, to 2.6% of sales.

Company officials said they planned to cut corporate overhead in the second quarter, in part to give the company more flexibility to increase marketing and cut prices to drive sales. They declined to give details on planned cuts.

"We have adjusted our expenses," said company Chief Operating Officer Arlene Meier, on the call. "We looked at the right places to cut expenses."

Kohl's shares closed regular trading down 62 cents to $53.06. In after-hours trading on the Island ECN, the company's shares fell 65 cents to $52.41.

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