Oh My, Kohl's, That Was Dreadful

The only good thing Kohl's (NYSE: KSS) can say about 2007 is that it's over. What began as a year filled with promise, ended in a wash-out. The fourth quarter was just the icing on the ... sorry, no cake this year for Kohl's.

Fourth-quarter sales inched up 0.7%, with comps falling 4%. But like most retailers, the fourth quarter in 2007 had an extra week that added $200 million to the company's total sales. An apples-to-apples comparison shows that sales actually rose approximately 4.5%.

To lure in customers to help boost sales, the company had to implement markdowns. Consequently, the gross margin dipped 110 basis points. That, coupled with expenses rising 90 basis points, resulted in earnings per share of $1.31. That represents an 11.5% decline from last year's fourth quarter, though a penny better than the consensus analyst estimate. Gross margin dipped 110 basis points, while expenses grew 90 basis points, but 10% worse than the low end of guidance from the end of the third quarter.

Management did offer cautious guidance for 2008 -- comps flat to down 3%, and first-quarter earnings per share of $0.50-$0.54. The stock is off 40% from its high 10 months ago; the company is in good company with fellow department store competitors J.C. Penney (NYSE: JCP), and Macy's (NYSE: M) in basically promising nothing for next year.

Call me a Fool (and many of you will), but I stand by my selection of Kohl's as a prime pick in retail at this point. I was very encouraged to see inventory levels back where they should be -- down 2.6% on a per-store basis compared to the ominous 17% bloat we saw at the end of the second quarter.

Think of it this way. The slowdown in apparel sales has come on very rapidly. Kohl's didn't see negative comps until August. By that time there was very little the company could do about the holiday season, orders for merchandise were already locked in. But management has reacted quickly, taken its markdown lumps, and is ready to move into the new season with its stocks (relatively) clean. 

Don't expect Kohl's, or other apparel retailers like Limited (NYSE: LTD) and Gap (NYSE: GPS) to make a quick run here. Prime stock picks rarely do. But I'll be surprised if this stock doesn't recover a healthy chunk of its prior P/E multiple in 2008.

Related Foolishness:

• Macy's is looking slim.
• Limited is too sexy.
• J.C. Penny is simply virtuous.