Thursday brought some much-needed relief to Wall Street, as major market benchmarks were on the rise after a tough few days. The Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC) were solidly higher, with the Nasdaq leading the way higher.

Index

Percentage Change

Point Change

Dow

+0.55%

+188

S&P 500

+1.06%

+43

Nasdaq Composite

+1.77%

+236

Data source: Yahoo! Finance.

Yet the retail sector had a tough time keeping up with the rest of the market. In fact, department store company Kohl's (NYSE:KSS) was a major decliner, and it led several other retail stocks lower along with it. Below, we'll look more closely at why Kohl's fell so hard and what it means for the industry more broadly.

Kohl's gets cold

Shares of Kohl's were down more than 10% Thursday. The department store retailer reported first-quarter financial results that seemed to mimic upbeat earnings reports from giants like Walmart (NYSE:WMT) and Target (NYSE:TGT) earlier in the week.

On its face, the Kohl's report wasn't bad. Revenue surged almost 70% to $3.89 billion, recovering from a year-ago period during which many of its stores were closed for part of the time. Adjusted earnings of $1.05 per share reversed a loss of $3.22 per share in the first quarter of 2020.

Two people shopping in a clothing store with blazers, shirts, and accessories.

Image source: Getty Images.

Kohl's is also optimistic about the future. It raised its full-year guidance, now expecting sales to climb in the mid-to-high teens on a percentage basis. Adjusted earnings of $3.80 to $4.20 per share would be considerably higher than previous guidance for $2.45 to $2.95 per share. Kohl's has particularly high hopes about the launch of its partnership with cosmetics giant Sephora later this year.

Given that, it was somewhat surprising to see shareholders disappointed with the results. Yet with the stock's price having tripled just since October, one could argue that a substantial level of optimism was already reflected prior to the report.

Reining in expectations

The Kohl's report seemed to let some of the air out of the rest of the retail industry. Some notable movers included:

  • Nordstrom (NYSE:JWN), which finished the day down more than 6%.
  • Niche apparel retailers Abercrombie & Fitch (NYSE:ANF), Urban Outfitters (NASDAQ:URBN), and American Eagle Outfitters (NYSE:AEO), which lost 8%, 6.5%, and 6%, respectively.

In addition, Ralph Lauren (NYSE:RL) finished down 7% despite similarly solid earnings. Revenue inched higher from year-ago levels, and the fashion retailer reversed a year-ago loss with adjusted earnings of $0.38 per share. Yet even though those numbers were better than most had expected, shareholders seemed to want more.

Nordstrom, A&F, Urban Outfitters, and American Eagle all report their earnings within the next week. It'll be interesting to see how their businesses fare and how their stocks respond to the news.

The fear in the market is that share prices climbed to unsustainable heights based on expectations that were unrealistically high. If even good results lead to pullbacks in stocks, then it could prove problematic for a market that's trying to regain its momentum as the economy reopens.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.