Oh, the fickle vagaries of the retail clothing business. Remember when OP (that's Ocean Pacific) was hot? Remember when denim jackets were cool? Remember when teenage girls hairsprayed their bangs to 45-degree angles and put on their jellies before hitting the malls? Now imagine trying to be a retailer and figuring out what the next trend will be.
Not that long ago, Kohl's (NYSE:KSS) guessed wrong. Business suffered, and the company's shares fell from their lofty perch and took up a more mortal valuation. If the past couple of quarters are any indication, though, it appears that this mid-market department store chain has regained its merchandising touch -- just in time for the lucrative back-to-school and holiday seasons.
Sales in the second quarter climbed more than 15% as the company melded better-than-5% same-store sales growth with ongoing new-store expansion projects. Margins also improved, with some of the benefit coming from an accounting switch to FIFO (first in, first out) from LIFO (last in, first out) accounting.
Looking ahead, Kohl's management will be pushing hard to do better. The company is maintaining an aggressive store expansion plan and hopes to open 95 new stores within this fiscal year. In addition, the company will be more aggressive with its advertising to promote new lines like Chaps, Candies, and Quiksilver's (NYSE:ZQK) Tony Hawk line.
While the retail sector is filled to the gills with competing concepts, I like where Kohl's sits today. It's an appealing option for shoppers (particularly young shoppers) who want to go upmarket from Wal-Mart (NYSE:WMT) or Target (NYSE:TGT), but perhaps not as upmarket as Abercrombie & Fitch (NYSE:ANF). In other words, Kohl's is looking to fill that gap between $200 denim and discount denim.
Sure, the stock isn't cheap, shoppers are fickle, department stores are a dying concept, and the company doesn't generate much free cash flow. But predicting the demise of a retailing concept is tricky business. Once a retail turnaround gets under way, the momentum can be considerable, and it looks as though Kohl's is in turnaround mode today.
I'm not looking to buy these shares for myself any time soon, but I'm not about to dismiss the potential for better growth ahead. With a respectable balance sheet, good same-store sales trends, and promising new merchandise lines, Kohl's could still have room to run.
Further fashionable Foolishness:
- Time to Dig Up Fossil?
- Warnaco's Togs Deliver the Profits
- A Piece of Boston at New York & Co.
- Charming Shoppes Charms Investors
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
