Kohl's Keeps Humming

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Specialty department store retailer Kohl's (NYSE: KSS) may have just reported its best quarterly results ever, with sales up 16.6% and earnings up a whopping 51.1%. Impressive indeed, but I'm becoming concerned the company could quickly become a victim of its success.

Things are clearly going well when a CEO can proudly proclaim that his company continues "to see consistency in all lines of business and all regions of the country." Indeed, same-store sales jumped an impressive 8.5% in third-quarter results announced Thursday night. Management sees this momentum continuing as it expands from 817 stores in 45 states.

My concern is how long the company can continue expanding at such a rapid clip. In fiscal 2006, Kohl's has opened 85 stores, accounting for more than 10% of the total, and somehow it opened 65 of them in October. And while it can probably continue opening new stores for years, same-store sales trends cannot be controlled as easily.

As a contrarian, I frequently try to take advantage of a comparable-store sales snafu to jump into a retailer. To use Kohl's as an example, it could be had for about $45 per share earlier in the year before the merchandise mix became favorable and its apparel and related products started jumping off the shelves. In fact, the shares have traded below $50 numerous times since 2003 as the company oscillated between fashion hits and misses.

In other words, now may not be the best time to consider an investment in Kohl's. Even with increased earnings guidance, the shares trade at a forward P/E of about 23. That's well above those of peers such as J.C. Penney (NYSE: JCP), Dillard's (NYSE: DDS), Federated (NYSE: FD), and Nordstrom (NYSE: JWN).

Company	Forward P/E
J.C. Penney	16.7
Dillard's	15.3
Federated	18.5
Nordstrom	18.6
Target	18.1
Wal-Mart	16.2

FY 2007 figures; data compiled by Capital IQ, a division of S&P.

That's even above two retailers that are growing nearly as fast as Kohl's: Target (NYSE: TGT) and Wal-Mart (NYSE: WMT). Overall, I think Kohl's is a well-run company with a bright future, but I'm willing to bet there will be better opportunities to scoop up the shares after the inevitable fashion faux pas hits its merchandise selection.

For related Foolishness:

• Thank You for Spending
• The Best Blue Chip for 2007: Wal-Mart
• Wal-Mart Shows Its Teeth
• Coming in From the Kohl's

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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.