Kohl's Earnings: Improving Trends Lead to Earnings Beat

Source: Flickr/Mike Mozart

After two quarters of deteriorating results, department store operator Kohl's (KSS 2.83%) showed signs of progress in its second-quarter earnings report released this morning. Kohl's managed to beat analyst estimates for earnings while reversing a troubling comparable-store sales trend (though comps remain negative). With the all-important back-to-school season right around the quarter, the retailer is positioned to continue to improve results. Here is a deeper look at Kohl's second-quarter earnings.

Earnings rundown
Kohl's handily beat analyst estimates for EPS while coming up slightly short on revenue in the quarter ended Aug. 2. :

Operating income during the quarter was flat year-over-year thanks to a reduction in costs on par with the decline in revenue, and share buybacks allowed the diluted EPS to grow by 8.7%. Kohl's spent $392 million during the quarter on share buybacks, along with paying out $160 million in dividends.

Kohl's showed improvement during the quarter with respect to comparable-store sales growth, with a 1.3% decline being far better than the result from the previous two quarters.

Source: Kohl's

While this decline is a deterioration from the 0.9% rise during the second quarter of 2013, it is a vast improvement over both the holiday quarter and the first quarter of this year. Management said the "most dramatic" improvement in sales came during July, which notched positive comps.

Kohl's gross margin fell to 39% from 39.1% during the same period last year, but operating margin managed to rise to 10.6% from 10.5% thanks to a reduction in operating expenses as a percentage of revenue.

Not the only department store with problems
While Kohl's has been struggling recently, competitor Macy's (M 1.44%) has been largely immune from the issues facing other retailers. During the first quarter, Macy's managed 1.6% comparable-store sales growth, and this accelerated to 3.4% during the second quarter. However, Macy's lowered its guidance for the full year, and this, along with the company missing second-quarter estimates, sent the stock falling more than 5% after reporting earnings yesterday. Macy's now expects comparable store sales to increase by 1.5%-2% in 2014, down from previous guidance of 2.5%-3%.

Macy's management blamed the uncertain economic environment, claiming that customers are uncomfortable spending more. Part of Kohl's problems are certainly related to the economy, but a shift toward private label brands, one which the company is now working to undo, is also at fault. In 2007, roughly 30% of Kohl's sales were private label. This number rose to 54% in 2012, and the dearth of national brands drove some consumers away.

While Kohl's suffered from negative comps during its most recent quarter, the number is moving in the right direction. Kohl's has the benefit of being a far more value-orientated department store compared to Macy's, and this should help during uncertain economic times. If Macy's can continue to consistently grow comparable-store sales, there's no reason that Kohl's shouldn't be able to do so as well, and it seems that the company is starting to get past the issues which have stunted its growth over the past couple of years.

Key takeaway
For Kohl's, strong expense management coupled with improving comparable-store sales numbers led to an earnings beat that should please Kohl's investors. The upcoming two quarters, with the back-to-school season followed by the holidays, will be the real test, but with comps growing in July, Kohl's is positioned to have a strong second half.