Don't Be Fooled by Strong January Sales at Kohl'shttp://www.fool.com/investing/general/2013/02/08/dont-be-fooled-by-strong-january-sales-at-kohls.aspx Adam Levine-Weinberg
February 8, 2013
On Thursday, Kohl's (NYSE: KSS) reported unexpectedly strong comparable-store sales growth for January. Comparable-store sales increased 13.3%, while total sales increased by 34.1% for the month due to the inclusion of an additional week in the company's fiscal year. Analysts had expected a comparable-store sales increase of just 3.1%.
However, investors should not get too excited about this accomplishment. January is one of the lightest-volume months of the year for department stores. Moreover, Kohl's achieved strong sales growth last month because of its underperformance during the holiday season. This left lots of clearance merchandise in the stores. However, clearance merchandise is sold at very low gross margin (and sometimes at a loss), which will put pressure on Kohl's profitability this quarter.
A good January is a small consolation
In this case, Kohl's performed very poorly during the critical holiday season, with comparable sales up just 0.1% in the combined November-December period. Even after the 13.3% increase in January comparable-store sales, total fourth-quarter comparable-store sales grew by just 1.9%. This was well below the company's initial guidance (issued in the third quarter earnings release) for a comparable-store sales increase of 3% to 4% in the fourth quarter.
Some of the underperformance can be attributed to the effects of Hurricane Sandy, which hit the East Coast around the beginning of "fiscal November" (Oct. 28, 2012). However, other chains, such as Macy's (NYSE: M), performed much better despite having at least as much exposure to the Northeast.
Late sales, low margins
Accordingly, Kohl's reduced its fourth-quarter EPS guidance to a range of $1.60 to $1.62 at that time, compared to a prior range of $2.00 to $2.08. Given that November and December sales were so weak, it is good that the company was able to clear its inventory in January. However, the earnings benefit of higher January sales was probably minimal, because clearance merchandise is sold at such a low gross margin.
By contrast, Macy's also achieved double-digit comparable-store sales growth in January, but did so through better supply of "fresh fashion goods" that were added to the assortment after the Christmas rush. While Macy's also saw weakness in the November-December period, it still managed to post comparable-store sales growth of 2.5% in that period. Macy's somewhat better sales performance in November and December, and its lower reliance on clearance merchandise in January, allowed it to reaffirm its original fourth-quarter EPS guidance of $1.94 to $1.99.
A worrisome trend