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Why Kohl's Stock Was Falling Today

By Jeremy Bowman - Updated May 22, 2018 at 2:48PM

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Shares of the department store chain sold off in spite of a strong earnings report after management said sales growth would slow later in the year.

What happened

Shares of Kohl's (KSS 2.27%) were heading lower today as a warning from the department store chain about slowing sales growth in the second half overshadowed a strong first-quarter report. In fact, that response seemed to mirror the investor reaction to its fourth-quarter report. As of 2:51 p.m. EDT, the stock was trading down 6.4%.

So what 

Overall, it was a strong quarter for Kohl's as the retailer reported a 3.6% increase in comparable sales, which was boosted in part by the shift in its annual Friends & Family event, which the company said lifted comps by 320 basis points. It also said bad weather was a headwind of 100 basis points on comps. 

The exterior of a Kohl's store

Image source: Kohl's.

Net sales were up 3.7% to $3.95 billion, even with estimates, and gross margin increased 50 basis points to 36.9%. On the bottom line, adjusted earnings per share surged from $0.39 to $0.64, much better than estimates at $0.50, as the company was aided by a lower tax rate. CEO Michelle Gass called it a "strong start" to the year, and said, "We exceeded the high end of our margin expectations through continued focus on inventory management, while expenses were consistent with our expectations as we continue to make investments to ensure our long-term success." 

Now what 

In addition to those strong results, Kohl's also raised its guidance for the year, calling for adjusted earnings per share of $5.05-$5.50, above its previous range of $4.95-$5.45. In spite of beating earnings estimates and raising guidance, the stock sold off as Gass said comparable sales growth would ease in the second half of the year. The stock may also simply have been overdue for a correction after climbing 63% over the last year.

Either way, there's little for investors to worry about in today's report. Even if sales growth slows in the second half of the year, the company is still clearly moving in the right direction, and the stock looks cheap at a P/E of 11-12 based on this year's expected EPS.

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