Kohl's: Hot Is the New Cool

Fellow Fool Rich Smith recently wondered how long Kohl's (NYSE: KSS) can continue to grow rapidly. Judging by last evening's second-quarter earnings release, the company is a long way from cooling off, and Kohl's remains one of the few retailers investors can count on in a tough retailing environment.

Second-quarter sales increased 8.7%, as same-store sales improved a respectable 1.3%, which management said stemmed from a 2.5% increase in average transaction value and a 1.2% decrease in transactions per store, as sales moderated toward the end of its quarter. Overall though, in similar fashion to a revived J.C. Penney (NYSE: JCP), Kohl's is seeing a strong consumer response in its private label and exclusive brands initiatives.

For instance, the company is increasingly working with wedding gown designer Vera Wang, is expanding its Chaps line and relationship with Ralph Lauren (NYSE: RL), and is set to start an alliance with the Food Network. Management stated private and exclusive labels grew more than 320 basis points to 36.6% of total sales, allowing it to capture more profitability, as witnessed by the nice increase in gross margins and an impressive 20.3% jump in diluted earnings.

Though seasonal merchandise is struggling somewhat, the company still saw fit to bump up the lower end of its full-year earnings guidance to $3.77-$3.87 per share. That puts the forward P/E at a reasonable 16 times, given the long-term track record of double-digit sales, earnings, and cash flow growth.

With only 834 stores throughout the country, Kohl's has plenty of real estate to expand into, and plans 112 total new stores for fiscal 2007. The near-term trend could be getting more difficult, but the long-term outlook continues to favor it as it grows its off-mall locations. In any case, Kohl's overall trends are a welcome change from the dour results from the likes of Wal-Mart (NYSE: WMT), Macy's (NYSE: M), and other older-line retailers.

For related Foolishness:

• Foolish Forecast: Is Kohl's Cool?
• The Best Stocks for the Next 10 Years
• Why You Should Beat Wall Street

Wal-Mart is an Inside Value pick. See what other undervalued top-shelf stocks the newsletter has recommended with a free 30-day trial.

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.