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Kohl's Delivers The Goods But Fails To Inspire

By Natalie O'Reilly - Mar 2, 2014 at 9:25AM

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Kohl's fourth quarter and full year earnings satisfy expectations, but fails to inspire Wall Street due to stiff competition from Macy's and J.C. Penney.

It's no secret that U.S. retailers, particularly department stores, have become increasingly competitive in recent years. Not only are retailers being forced to discount their inventories more than ever, but many consumers have stopped shopping at once-popular store brands altogether. It is no surprise to Foolish readers that Macy's ( M -1.76% ) has continued to gain traction in the department-store space. The retailer has also started stealing longtime customers from stores like J.C. Penney ( JCPN.Q ) and Sears Holdings ( SHLDQ ).

Another retailer that has long succeeded where others like J.C. Penney have failed is Kohl's ( KSS -1.92% ) who reported fourth quarter and full year earnings for 2013 at market open on Thursday, Feb. 27. Kohl's has long held promotions to attract customers and had its competitive position solidified by other major retailers' continued discounting. While Kohl's beat earnings by a penny in the fourth quarter, sending its stock up 2.2% by late morning trading, its results are nothing to brag about.

Going into earnings week
Before its earnings release, Kohl's had already stated that its sales in the months of November and December increased by 0.8%while January sales were down by more than expected. According to the company, sales were affected by declines in consumer traffic along with a reduced amount of clearance items. Furthermore, Kohl's incurred more operating costs than expected on account of its online retail business, which led them to lower their earnings guidance for the fiscal year 2013.  Originally, Kohl's anticipated earnings of between $1.59 and $1.74 per share for the quarter, but lowered this guidance at the beginning of February to $1.53 per share whereas analysts estimated an EPS of $1.55 per share at best. In addition, Kohl's lowered its full-year earnings-per-share guidance to $4.03 from previous guidance of between $4.08 and $4.23 per share. Kohl's also made known to the public ahead of its earnings release that comparable sales declined by 2% in the fourth quarter, mostly due to weak sales in January. Despite Kohl's CEO and his senior management team announcing that they were "pleased" with their fourth quarter and full year earnings, the results overall were good but not great.

Fourth quarter and full year performance

Luckily for investors, Kohl's beat earnings by one penny, earning $1.56 per diluted share. Unfortunately, EPS for the department store retailer dropped by ten cents from the fourth quarter in 2012. That being said, Kohl's did beat estimates by a penny per share for the quarter which is likely the key takeaway from the release aside from boosting gross margin by 0.7% to 34% from 33.3% in the fourth quarter of FY 2012. As expected, revenue declined 3.8% to $6.099 billion in the quarter along with a fall of 11.6% in net income from $378 million to $334 million. As noted by the company ahead of earnings week, comparable sales did decline in the fourth quarter by 2%, which compares with a 1.9% increase in the same quarter a year prior. 

For the fiscal year 2013, net sales and net income also declined from the previous year. For instance, net sales dropped 1.3% from $19.279 billion in 2012 to $19.031 billion for 2013 while net income fell by 9.8% to $889 million for the year. To the company's dismay, comparable sales were down 1.2% for the year despite being up 0.3% the previous year. Thankfully, Kohl's full year earnings reached $4.05 a share, beating their latest guidance by two cents. While this was positive news for investors, the company's full year earnings fell 3% from a year ago when earnings totaled $4.17 a share. All in all, Kohl's reported a pretty solid performance despite a few shortfalls. 

Stacking up among its competitors
Kohl's along with other department store retailers such as Macy's, J.C. Penney, and Sears Holdings announced fourth quarter and full year earnings this week with Macy's posting the best results. Regardless, all of these retailers saw their share prices rise in response to their respective earnings releases as investors breathed with a sigh of relief that all were moving in the right direction, though, at different paces. Here's how the four retailers stacked up:

Company Name

4th Quarter Y oY Comp. Sales Growth

4th Quarter EPS 2013

YoY EPS growth

J.C. Penney












As detailed in the chart above, Macy's continues to dominate the retail space generating strong results in the face of a tough retail environment. J.C. Penney and Kohl's did relatively well but are not doing so on five years of strong results as is the case with Macy's. J.C. Penney itself may not be filing bankruptcy anytime soon, but its results, while an improvement, are nothing to get excited about. Kohl's continues to operate as it always has – offering quality products to the middle class via promotions and coupons. It seems that as its competitors begin discounting more readily, Kohl's may face trouble going forward.

Foolish takeaway

Foolish investors would be wise to hold off on investing in Kohl's. The company has competed against other national clothing retailers relatively well thanks to its competitive pricing structure but as more and more of its competitors discount, the main advantage held by Kohl's for years – loyal customers thanks to the companies generous promotions - may be eroding. No one said retail was easy and Kohl's needs to go on offense to fight off its stiff competition.

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.

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Stocks Mentioned

J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
Macy's, Inc. Stock Quote
Macy's, Inc.
$27.34 (-1.76%) $0.49
Sears Holdings Corporation Stock Quote
Sears Holdings Corporation
Kohl's Corporation Stock Quote
Kohl's Corporation
$51.12 (-1.92%) $-1.00

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