It has been more than two years since Kohl's (NYSE:KSS) opened its doors to reveal shelves stocked with fewer profits than analysts had sought. As we look forward to Thursday's third-quarter report, we wonder: How much longer can this company continue to excel? And when will the analysts wise up?

What analysts say:

  • Buy, sell, or waffle? Twenty-five analysts follow Kohl's, giving it 18 buy ratings and seven holds.
  • Revenue. On average, they're looking for 6.5% sales growth, to $3.87 billion.
  • Earnings. Profits, in contrast, are predicted to fall 12% to $0.60 per share.

What management says:
With October marking the worst month of sales we've seen in 12 years, retailers like J.C. Penney (NYSE:JCP), Limited Brands (NYSE:LTD), and Gap (NYSE:GPS) all missed comps estimates. And Kohl's was no exception, as its same-store sales were down 3.8% for the month and 2.6% for the third quarter. However, rival Target (NYSE:TGT) boasted a 4.1% comps increase and TJX (NYSE:TJX) just released impressive Q3 results, including a 3% increase in same-store sales.

Kohl's CEO Larry Montgomery blamed sluggish sales on the weather. With an unseasonably warm fall, outerwear, fleece, and sweaters that didn't move contributed to the October sales shortfall. But the company has now posted three consecutive months of falling comps while its direct rivals have been experiencing rising comps; I can only wonder if Kohl's problems go beyond seasonal issues.

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

Margins

4/06

7/06

10/06

2/07

5/07

8/07

Gross

35.6%

35.8%

36.0%

36.4%

36.5%

36.9%

Operating

10.7%

10.8%

11.1%

11.7%

11.8%

12.0%

Net

6.4%

6.5%

6.8%

7.1%

7.2%

7.3%

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:
Seeing Kohl's Q3 guidance as much as 12% (to $0.59 or $0.60 per share) lower than Wall Street's estimates put my Foolish colleague Tim Otte in a defensive stance. He adopted a wait-and-see attitude "until we see how deep the abyss really is." Tim's wondering if the last three months of negative numbers for same-store sales will translate into goods piling up in Kohl's warehouse -- unsold goods that must be sold at some point, possibly at a discount, and if so, possibly imperiling the trend of rising margins you see above.

Well, guess what, Fools? The future is now -- or rather, the future is three months ago. No sooner had I praised Kohl's for keeping its inventory growth tightly tethered to sales gains back in our Q2 Foolish Forecast than out came a report: Inventory had increased 17% year over year for that quarter while sales crept up only 8.7%. Punching calculator keys, I see that over the past 12 months, Kohl's has grown its sales at about a 13.6% annualized rate -- as inventories grew 17%. Not good.

Unless Kohl's proves to us on Thursday that last quarter was an aberration, I'll have to join Tim -- and yet another bearish Fool avoiding the Kohl's bus, Lawrence Rothman -- in the bear camp on this retailer.

Limited Brands and Gap are Inside Value picks. Gap has also been recommended by Stock Advisor. Need new ideas for your money? 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 close-out.