Image source: Kohl's.

What happened

Shares of retailer Kohl's (NYSE:KSS) surged on Thursday following the company's third-quarter report. Kohl's beat analyst estimates for earnings, boosted its buyback authorization, and maintained its full-year guidance, enough good news to send the stock up 12% by 12:45 p.m. EST.

So what

Kohl's reported third-quarter revenue of $4.33 billion, down 2.3% year over year and about $10 million below the average analyst estimate. Comparable store sales slumped 1.7%, down from a gain of 1% during the prior-year period, but this weakness was expected. CEO Kevin Mansell pointed to a soft September following a strong back-to-school season as one driver of the decline.

Non-GAAP earnings (EPS), which excludes only one-time items, came in at $0.80, up from $0.75 during the prior-year period and $0.10 higher than analyst expectations. Non-GAAP net income declined slightly, but share buybacks were able to drive per-share earnings higher. The company managed to reduce operating expenses, helping to prevent a larger decline in net income. Both gross margin and operating margin were flat year over year, at 37.1% and 7%, respectively.

Kohl's also raised its buyback authorization to $2 billion, which the company plans to use over the next three years. Over the past nine months, Kohl's has spent $441 million on share buybacks. The company reaffirmed its earnings guidance for the full year. Non-GAAP EPS is expected between $3.80 and $4.00, in line with analyst expectations.

Now what

Kohl's ability to maintain its margins in a difficult environment was taken as a good sign by investors, who pushed the stock up on Thursday. With a market capitalization of just over $8 billion, the company's buyback program has the potential to reduce the share count substantially. That should continue to give a boost to per-share earnings.

The holidays will be a critical period for Kohl's, which has struggled with slumping comparable sales in recent quarters. Management sees positive trends going into the crucial period, and Kohl's success so far in keeping costs and inventory in check despite soft sales bodes well for the company. However, a weak holiday season could easily undo the stock's gains.

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