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I use the term "on the mend" in a review of Kohl's (NYSE: KSS ) second-quarter earnings with a bit of trepidation. The numbers can't be classified as good by anyone who follows retail closely. On the other hand, they definitely are an improvement from the dreadful results we saw for last year's holiday season, and again for the first quarter.
Top-line sales grew 3.8% and same-store sales were down 4.6% (making the fourth quarter in a row of negative comps), but the trend has improved from the 6.7% comps decline in the previous quarter. The past three months have been a comp sales roller coaster for Kohl's: down 7.2% in May, up 2.3% in June, and a washout in July -- down 10.4%.
But the July number is overstated on the down side because the company was up against very high clearance sales last year to pare down a bloated inventory of summer goods.
Kohl's ended the second quarter with inventories in much better shape, down 3% from last year in total dollars, but a whopping 15% lower on a per-store basis. Now that's beginning to get my attention.
The better inventory position, along with lower clearance sales, allowed the company to post an improvement of 70 basis points in the gross margin. However, operating expenses are still eating management's lunch -- up to 28.7% of sales this year compared with 26.5% last year. Earnings per share of $0.77 came in six cents below last year, but were well above analyst expectations of $0.73.
Kohl's isn't out of the woods yet. Stretched consumers are plunking down their dollars at mass discounters like Wal-Mart (NYSE: WMT ) and Costco (Nasdaq: COST ) these days. While a few apparel retailers like Aeropostale (NYSE: ARO ) and Urban Outfitters (Nasdaq: URBN ) seem to be defying gravity, the majority of the sector is still in the doldrums.
But in the press release, Kohl's management was willing to inch up earnings guidance for the third and fourth quarters. With its stock price at 16 times trailing-12-month earnings, I wouldn't call the company a screaming bargain. But Foolish investors who believe that lower oil prices (if they hold) will translate into more holiday cheer for the retail sector might consider nibbling on Kohl's.
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