Image source: Kohl's.

What: Shares of department store Kohl's (NYSE:KSS) surged on Thursday following the company's second-quarter report. While sales declined and guidance was cut, Kohl's outperformed expectations, driving the stock 13% higher by 11:30 a.m. EDT.

So what: Kohl's reported second-quarter revenue of $4.18 billion, down 2% year over year, but about $20 million higher than analysts were expecting. Comparable-store sales dropped 1.8%, a disappointing result, but an improvement over the 3.9% decline during the first quarter.

While revenue declined, Kohl's managed to increase its earnings. EPS excluding one-time items came in at $1.22, up from $1.07 during the prior-year period, and $0.19 higher than the average analyst estimate. A 2% decline in SG&A costs during the quarter and a 53 basis point improvement in gross margin driven by inventory management initiatives helped boost Kohl's earnings. Inventory declined by 7.6% year over year, creating additional cash flow for the company.

Kohl's now expects to produce between $3.80 and $4.00 in EPS, excluding one-time items in 2016, down from previous guidance of $4.05 to $4.25. On a GAAP basis, EPS is expected between $3.12 and $3.32.

Now what: Thursday's jump in Kohl's stock price seems to be a case of the company not doing as badly as feared. Comparable sales declined, never a good thing for a retailer, and guidance was slashed, but profits held up far better than expected. The increase in gross margin was particularly surprising, given fears that heavy discounting would drive down profitability.

On an absolute basis, Kohl's second quarter wasn't particularly good. But investors found enough positives to push the stock to a double-digit gain.

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