It's been two full years since Kohl's (NYSE:KSS) opened its doors to reveal fewer profits in a quarterly earnings report than analysts had expected. As we look forward to Thursday's Q2 report, our questions are twain, but related: How much longer can this company continue to excel? And when will the analysts wise up?

What analysts say:

  • Buy, sell, or waffle? Twenty-three analysts follow Kohl's, giving it 14 buy ratings and nine holds.
  • Revenue. On average, they're looking for 11% sales growth, to $3.65 billion.
  • Earnings. It is predicted that profits will leap 20% to $0.83 per share.

What management says:
Management gave us a sneak peek at its results last week, with its July, Q2, and past-26-week sales update. Same-store sales for July were flat against last year, so things appear to be slowing down as summer progresses (for the quarter, same-store sales rose 1.3%, and year to date the number is 2.5%). Then again, at least Kohl's sidestepped the sales slump that hurt same-store sales figures at clothiers such as Aeropostale (NYSE:ARO), Abercrombie & Fitch (NYSE:ANF), PacSun (NASDAQ:PSUN), and American Eagle (NYSE:AEO). Still, it failed to measure up to the comps gains at mega-retailers Target (NYSE:TGT) and Wal-Mart (NYSE:WMT).

Overall sales did quite a bit better, as 85 new stores added over the past year helped pick up the slack from lagging established locations -- but even here, the trend of slowing sales is evident. Year to date, sales were up 10.2%; for the quarter, up 8.7%; and for the month of July, up 7.7%.

What management does:
Yet there's still good news to report, and that's the fact that Kohl's has done a good job of extracting more and more pennies of profit from its sales. Over the past 18 months, we've seen margins steadily increasing at all three levels: gross, operating, and net.





























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Call me a pessimist, but when I see a corporate success story like that described above, I just can't help but dig into the balance sheet and see if the story holds water -- or whether there's trouble lurking below the surface. The way I do this is to compare the recent trend in sales (shown on the company's income statement) with its counterpart in inventories (shown on the balance sheet.) My theory being that if inventories are outgrowing sales, then at some point the retailer must sell down its inventories to rationalize them with its sales. This usually involves discounting -- and hurts margins.

No such (bad) luck at Kohl's, however, where inventories are matching sales step for step. In a remarkable demonstration of working capital management, the company has kept its inventory growth in check at about 15% year over year for the past six months -- roughly equal to sales growth during the same period.

All that remains to be seen is how management handles its inventories as sales growth slows.

Fools of a feather don't always flock together. For the opposite view of the stock, check out this Take from Lawrence Rothman: "Don't Get on the Kohl's Bus."

PacSun and American Eagle are Motley Fool Stock Advisor selections and Wal-Mart is an Inside Value recommendation. Talk stocks with other investors and our analysts when you give our newsletters a try.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool's disclosure policy is always a bargain, but never on closeout.